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EX-12 - EX-12 - BOTTLING GROUP LLC | y80523exv12.htm |
EX-21 - EX-21 - BOTTLING GROUP LLC | y80523exv21.htm |
EX-31.1 - EX-31.1 - BOTTLING GROUP LLC | y80523exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - BOTTLING GROUP LLC | Financial_Report.xls |
EX-31.2 - EX-31.2 - BOTTLING GROUP LLC | y80523exv31w2.htm |
EX-32.1 - EX-32.1 - BOTTLING GROUP LLC | y80523exv32w1.htm |
EX-32.2 - EX-32.2 - BOTTLING GROUP LLC | y80523exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended December 26, 2009
or
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) |
For the transition period from to
Commission file number 333-80361-01
Bottling Group, LLC
(Exact name of Registrant as Specified in its Charter)
Organized in Delaware | 13-4042452 | |
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
One Pepsi Way, Somers, New York | 10589 | |
(Address of Principal Executive Offices) | (Zip code) |
Registrants telephone number, including area code: (914) 767-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of Bottling Group, LLC Capital Stock held by non-affiliates of
Bottling Group, LLC as of June 12, 2009 was $0.
Documents of Which Portions Are Incorporated by Reference | Parts of Form 10-K into Which Portion of Documents Are Incorporated | |
Annual Report on Form 10-K of The Pepsi Bottling Group, Inc. | III | |
For Fiscal Year Ended December 26, 2009 |
Table of Contents | Bottling Group, LLC Annual Report 2009 |
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EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
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Table of Contents
PART I
ITEM 1. | BUSINESS |
Introduction
Bottling Group, LLC (Bottling LLC) is the principal operating subsidiary of The Pepsi
Bottling Group, Inc. (PBG) and consists of substantially all of the operations and assets of PBG.
Bottling LLC, which is fully consolidated by PBG, consists of bottling operations located in the
United States, Canada, Spain, Greece, Russia, Turkey and Mexico. Prior to its formation, Bottling
LLC was an operating unit of PepsiCo, Inc. (PepsiCo). When used in this Report, Bottling LLC,
we, us, our and the Company each refers to Bottling Group, LLC and, where appropriate, its
subsidiaries.
PBG was incorporated in Delaware in January, 1999, as a wholly owned subsidiary of PepsiCo,
Inc. (PepsiCo) to effect the separation of most of PepsiCos company-owned bottling businesses.
PBG became a publicly traded company on March 31, 1999. As of January 22, 2010, PepsiCos
ownership represented 31.6% of the outstanding common stock and 100% of the outstanding Class B
common stock, together representing 38.6% of the voting power of all classes of PBGs voting stock.
PepsiCo and PBG contributed bottling businesses and assets used in the bottling business to
Bottling LLC in connection with the formation of Bottling LLC. As result of the contributions of
assets and other subsequent transactions, PBG owns 93.4% of Bottling LLC and PepsiCo owns the
remaining 6.6% as of December 26, 2009.
On August 3, 2009, PBG entered into a merger agreement with PepsiCo and Pepsi-Cola
Metropolitan Bottling Company, Inc., a wholly owned subsidiary of PepsiCo (Metro), pursuant to
which PBG will merge with and into Metro, with Metro continuing as the surviving company and a
wholly owned subsidiary of PepsiCo. Under the terms of the merger agreement, PepsiCo will acquire
all outstanding shares of PBG common stock it does not already own for the price of $36.50 in cash
or 0.6432 shares of PepsiCo common stock, subject to proration such that the aggregate
consideration to be paid to PBG shareholders shall be 50 percent in cash and 50 percent in PepsiCo
common stock. At a special meeting of PBGs shareholders held on February 17, 2010, PBG
shareholders adopted the merger agreement. The transaction is subject to certain regulatory
approvals and is expected to be finalized by the end of the first quarter of 2010. Following the
merger, we will be a wholly owned subsidiary of PepsiCo.
We operate in one industry, carbonated soft drinks and other ready-to-drink beverages, and all
of our segments derive revenue from these products. We conduct business in all or a portion of the
United States, Mexico, Canada, Spain, Russia, Greece and Turkey. Bottling LLC manages and reports
operating results through three reportable segments: U.S. & Canada, Europe (which includes Spain,
Russia, Greece and Turkey) and Mexico. Operationally, the Company is organized along geographic
lines with specific regional management teams having responsibility for the financial results in
each reportable segment.
In 2009, approximately 78% of our net revenues were generated in the U.S. & Canada, 13% of our
net revenues were generated in Europe, and the remaining 9% of our net revenues were generated in
Mexico. See Managements Discussion and Analysis of Financial Condition and Results of Operations
and Note 12 in the Notes to Consolidated Financial Statements for additional information regarding
the business and operating results of our reportable segments.
Principal Products
We are the worlds largest manufacturer, seller and distributor of Pepsi-Cola beverages. In
addition, in some of our territories we have the right to manufacture, sell and distribute soft
drink products of companies other than PepsiCo, including Dr Pepper, Crush and Squirt. We also have
the right in some of our territories to manufacture, sell and distribute beverages under trademarks
that we own, including Electropura,
e-pura and Garci Crespo. The majority of our volume is derived from brands licensed from PepsiCo or PepsiCo joint ventures.
e-pura and Garci Crespo. The majority of our volume is derived from brands licensed from PepsiCo or PepsiCo joint ventures.
We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or
a portion of 42 states and the District of Columbia in the United States, nine Canadian provinces,
Spain, Greece, Russia, Turkey and 23 states in Mexico.
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Table of Contents
In 2009, approximately 76% of our sales volume in the U.S. & Canada was derived from
carbonated soft drinks and the remaining 24% was derived from non-carbonated beverages, 69% of our
sales volume in Europe was derived from carbonated soft drinks and the remaining 31% was derived
from non-carbonated beverages, and 53% of our Mexico sales volume was derived from carbonated soft
drinks and the remaining 47% was derived from non-carbonated beverages. Our principal beverage
brands include the following:
U.S. & Canada | ||||
Pepsi
|
Sierra Mist | Lipton | ||
Diet Pepsi
|
Sierra Mist Free | SoBe | ||
Diet Pepsi Max
|
Aquafina | SoBe Adrenaline Rush | ||
Wild Cherry Pepsi
|
Aquafina FlavorSplash | SoBe Lifewater | ||
Pepsi Lime
|
G2 from Gatorade | Starbucks Frappuccino® | ||
Pepsi ONE
|
Propel | Dole | ||
Mountain Dew
|
Crush | Muscle Milk | ||
Diet Mountain Dew
|
Tropicana juice drinks | Rockstar | ||
Amp Energy
|
Mug Root Beer | |||
Mountain Dew Code Red
|
Trademark Dr Pepper |
Europe | ||||
Pepsi
|
Tropicana | Fruko | ||
Pepsi Light
|
Aqua Minerale | Yedigun | ||
Pepsi Max
|
Mirinda | Tamek | ||
7UP
|
IVI | Lipton | ||
KAS
|
Fiesta |
Mexico | ||||
Pepsi
|
Mirinda | Electropura | ||
Pepsi Light
|
Manzanita Sol | e-pura | ||
7UP
|
Squirt | Jarritos | ||
KAS
|
Garci Crespo | Lipton | ||
Belight
|
Aguas Frescas | Sangria Casera |
No individual customer accounted for 10% or more of our total revenues in 2009, except for
sales to Wal-Mart Stores, Inc. and its affiliated companies which accounted for 11% of our revenues
in 2009, primarily as a result of transactions in the U.S. & Canada segment. We have an extensive
direct store distribution system in the United States, Canada and Mexico. In Europe, we use a
combination of direct store distribution and distribution through wholesalers, depending on local
marketplace considerations.
Raw Materials and Other Supplies
We purchase the concentrates to manufacture Pepsi-Cola beverages and other beverage products
from PepsiCo and other beverage companies.
In addition to concentrates, we purchase various ingredients, packaging materials and energy
such as sweeteners, glass and plastic bottles, cans, closures, syrup containers, other packaging
materials, carbon dioxide, some finished goods, electricity, natural gas and motor fuel. We
generally purchase our raw materials, other than concentrates, from multiple suppliers. PepsiCo
acts as our agent for the purchase of such raw materials in the United States and Canada and, with
respect to some of our raw materials, in certain of our international markets. The Pepsi beverage
agreements, as described below, provide that, with respect to the beverage products of PepsiCo, all
authorized containers, closures, cases, cartons and other packages and labels may be purchased only
from manufacturers approved by PepsiCo. There are no materials or supplies used by PBG that are
currently in short supply. The supply or cost of specific materials could be adversely affected by
various factors, including price changes, economic conditions, strikes, weather conditions and
governmental controls.
Franchise and Venture Agreements
We conduct our business primarily under agreements with PepsiCo. Although Bottling LLC is not
a direct party to these agreements as the principal operating subsidiary of PBG, Bottling LLC
enjoys certain rights and is subject to certain obligations as described below. These agreements
give us the exclusive right to market, distribute, and produce beverage products of PepsiCo in
authorized containers and to use the related trade names and trademarks in specified territories.
Set forth below is a description of the Pepsi beverage agreements and other bottling
agreements from which we benefit and under which we are obligated as the principal operating
subsidiary.
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Table of Contents
Terms of the Master Bottling Agreement. The Master Bottling Agreement under which we
manufacture, package, sell and distribute the cola beverages bearing the Pepsi-Cola and Pepsi
trademarks in the United States was entered into in March of 1999. The Master Bottling Agreement
gives us the exclusive and perpetual right to distribute cola beverages for sale in specified
territories in authorized containers of the nature currently used by us. The Master Bottling
Agreement provides that we will purchase our entire requirements of concentrates for the cola
beverages from PepsiCo at prices, and on terms and conditions, determined from time to time by
PepsiCo. PepsiCo may determine from time to time what types of containers to authorize for use by
us. PepsiCo has no rights under the Master Bottling Agreement with respect to the prices at which
we sell our products.
Under the Master Bottling Agreement we are obligated to:
(1) | maintain such plant and equipment, staff, distribution facilities and vending equipment that are capable of manufacturing, packaging, and distributing the cola beverages in sufficient quantities to fully meet the demand for these beverages in our territories; | ||
(2) | undertake adequate quality control measures prescribed by PepsiCo; | ||
(3) | push vigorously the sale of the cola beverages in our territories; | ||
(4) | increase and fully meet the demand for the cola beverages in our territories; | ||
(5) | use all approved means and spend such funds on advertising and other forms of marketing beverages as may be reasonably required to push vigorously the sale of cola beverages in our territories; and | ||
(6) | maintain such financial capacity as may be reasonably necessary to assure performance under the Master Bottling Agreement by us. |
The Master Bottling Agreement requires us to meet annually with PepsiCo to discuss plans for
the ensuing year and the following two years. At such meetings, we are obligated to present plans
that set out in reasonable detail our marketing plan, our management plan and advertising plan with
respect to the cola beverages for the year. We must also present a financial plan showing that we
have the financial capacity to perform our duties and obligations under the Master Bottling
Agreement for that year, as well as sales, marketing, advertising and capital expenditure plans for
the two years following such year. PepsiCo has the right to approve such plans, which approval
shall not be unreasonably withheld. In 2009, PepsiCo approved our plans.
If we carry out our annual plan in all material respects, we will be deemed to have satisfied
our obligations to push vigorously the sale of the cola beverages, increase and fully meet the
demand for the cola beverages in our territories and maintain the financial capacity required under
the Master Bottling Agreement. Failure to present a plan or carry out approved plans in all
material respects would constitute an event of default that, if not cured within 120 days of notice
of the failure, would give PepsiCo the right to terminate the Master Bottling Agreement.
If we present a plan that PepsiCo does not approve, such failure shall constitute a primary
consideration for determining whether we have satisfied our obligations to maintain our financial
capacity, push vigorously the sale of the cola beverages and increase and fully meet the demand for
the cola beverages in our territories.
If we fail to carry out our annual plan in all material respects in any segment of our
territory, whether defined geographically or by type of market or outlet, and if such failure is
not cured within six months of notice of the failure, PepsiCo may reduce the territory covered by
the Master Bottling Agreement by eliminating the territory, market or outlet with respect to which
such failure has occurred.
PepsiCo has no obligation to participate with us in advertising and marketing spending, but it
may contribute to such expenditures and undertake independent advertising and marketing activities,
as well as cooperative advertising and sales promotion programs that would require our cooperation
and support. Although PepsiCo has advised us that it intends to continue to provide cooperative
advertising funds, it is not obligated to do so under the Master Bottling Agreement.
The Master Bottling Agreement provides that PepsiCo may in its sole discretion reformulate any
of the cola beverages or discontinue them, with some limitations, so long as all cola beverages are
not discontinued. PepsiCo may also introduce new beverages under the Pepsi-Cola trademarks or any
modification thereof. When that occurs, we are obligated to manufacture, package, distribute and
sell such new beverages with the same obligations as then exist with respect to other cola
beverages. We are prohibited from producing or handling cola products, other than those of PepsiCo,
or products or packages that imitate, infringe or cause
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Table of Contents
confusion with the products, containers or trademarks of PepsiCo. The Master Bottling
Agreement also imposes requirements with respect to the use of PepsiCos trademarks, authorized
containers, packaging and labeling.
If we acquire control, directly or indirectly, of any bottler of cola beverages, we must cause
the acquired bottler to amend its bottling appointments for the cola beverages to conform to the
terms of the Master Bottling Agreement. Under the Master Bottling Agreement, PepsiCo has agreed not
to withhold approval for any acquisition of rights to manufacture and sell Pepsi trademarked cola
beverages within a specific area currently representing approximately 10.3% of PepsiCos U.S.
bottling system in terms of volume if we have successfully negotiated the acquisition and, in
PepsiCos reasonable judgment, satisfactorily performed our obligations under the Master Bottling
Agreement. We have agreed not to acquire or attempt to acquire any rights to manufacture and sell
Pepsi trademarked cola beverages outside of that specific area without PepsiCos prior written
approval.
The Master Bottling Agreement is perpetual, but may be terminated by PepsiCo in the event of
our default. Events of default include:
(1) | PBGs insolvency, bankruptcy, dissolution, receivership or the like; | ||
(2) | any disposition of any voting securities of one of our bottling subsidiaries or substantially all of our bottling assets without the consent of PepsiCo; | ||
(3) | PBGs entry into any business other than the business of manufacturing, selling or distributing non-alcoholic beverages or any business which is directly related and incidental to such beverage business; and | ||
(4) | any material breach under the contract that remains uncured for 120 days after notice by PepsiCo. |
An event of default will also occur if any person or affiliated group acquires any contract,
option, conversion privilege, or other right to acquire, directly or indirectly, beneficial
ownership of more than 15% of any class or series of PBGs voting securities without the consent of
PepsiCo. As of February 12, 2010, to our knowledge, no shareholder of PBG, other than PepsiCo, held
more than 5% of PBGs common stock.
We are prohibited from assigning, transferring or pledging the Master Bottling Agreement, or
any interest therein, whether voluntarily, or by operation of law, including by merger or
liquidation, without the prior consent of PepsiCo.
The Master Bottling Agreement was entered into by PBG in the context of our separation from
PepsiCo and, therefore, its provisions were not the result of arms-length negotiations.
Consequently, the agreement contains provisions that are less favorable to us than the exclusive
bottling appointments for cola beverages currently in effect for independent bottlers in the United
States.
Terms of the Non-Cola Bottling Agreements. The beverage products covered by the non-cola
bottling agreements are beverages licensed to PBG by PepsiCo, including Mountain Dew, Aquafina,
Sierra Mist, Diet Mountain Dew, Mug Root Beer and Mountain Dew Code Red. The non-cola bottling
agreements contain provisions that are similar to those contained in the Master Bottling Agreement
with respect to pricing, territorial restrictions, authorized containers, planning, quality
control, transfer restrictions, term and related matters. PBGs non-cola bottling agreements will
terminate if PepsiCo terminates PBGs Master Bottling Agreement. The exclusivity provisions
contained in the non-cola bottling agreements would prevent us from manufacturing, selling or
distributing beverage products that imitate, infringe upon, or cause confusion with, the beverage
products covered by the non-cola bottling agreements. PepsiCo may also elect to discontinue the
manufacture, sale or distribution of a non-cola beverage and terminate the applicable non-cola
bottling agreement upon six months notice to us.
Terms of Certain Distribution Agreements. PBG also has agreements with PepsiCo granting us
exclusive rights to distribute AMP and Dole in all of PBGs territories, SoBe in certain specified
territories and Gatorade and G2 in certain specified channels. The distribution agreements contain
provisions generally similar to those in the Master Bottling Agreement as to use of trademarks,
trade names, approved containers and labels and causes for termination. PBG also has the right to
sell Tropicana juice drinks in the United States and Canada, Tropicana juices in Russia and Spain,
and Gatorade in Spain, Greece and Russia and in certain limited channels of distribution in the
United States and Canada. Some of these beverage agreements have limited terms and, in most
instances, prohibit us from dealing in similar beverage products.
Terms of the Master Syrup Agreement. The Master Syrup Agreement grants PBG the exclusive right
to manufacture, sell and distribute fountain syrup to local customers in PBGs territories. We have
agreed to act as a manufacturing and delivery agent for national accounts within PBGs territories
that specifically request direct delivery without using a middleman. In addition, PepsiCo may
appoint PBG to manufacture and deliver fountain syrup to national accounts that elect delivery
through independent distributors. Under the Master Syrup Agreement, PBG has the exclusive right to
service fountain equipment for all of the national account customers within PBGs territories. The
Master Syrup Agreement provides that the determination of whether an account is local or national
is at the sole discretion of PepsiCo.
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Table of Contents
The Master Syrup Agreement contains provisions that are similar to those contained in the
Master Bottling Agreement with respect to concentrate pricing, territorial restrictions with
respect to local customers and national customers electing direct-to-store delivery only, planning,
quality control, transfer restrictions and related matters. The Master Syrup Agreement had an
initial term of five years which expired in 2004 and has thereafter automatically renewed for two
additional five-year periods, including the most recent renewal in 2009. The Master Syrup
Agreement will automatically renew for additional five-year periods, unless PepsiCo terminates it
for cause. PepsiCo has the right to terminate the Master Syrup Agreement without cause at any time
upon twenty-four months notice. In the event PepsiCo terminates the Master Syrup Agreement without
cause, PepsiCo is required to pay PBG the fair market value of PBGs rights thereunder. Our Master
Syrup Agreement will terminate if PepsiCo terminates our Master Bottling Agreement.
Terms of Other U.S. Bottling Agreements. The bottling agreements between PBG and other
licensors of beverage products, including Dr Pepper Snapple Group for Dr Pepper, Crush, Schweppes,
Canada Dry, Hawaiian Punch and Squirt, the Pepsi/Lipton Tea Partnership for Lipton Brisk and Lipton
Iced Tea, and the North American Coffee Partnership for Starbucks Frappuccino®, contain
provisions generally similar to those in the Master Bottling Agreement as to use of trademarks,
trade names, approved containers and labels, sales of imitations and causes for termination. Some
of these beverage agreements have limited terms and, in most instances, prohibit us from dealing in
similar beverage products. The agreements with Dr Pepper Snapple Group contain a provision that
permits the Dr Pepper Snapple Group to terminate the agreements in the event of a sale of more than
10% of PBGs stock. Because the pending PepsiCo merger would trigger this provision, PepsiCo and
Dr Pepper Snapple Group have entered into new bottling agreements that will be effective upon
closing of the merger.
Terms of the Country-Specific Bottling Agreements. The country-specific bottling agreements
contain provisions generally similar to those contained in the Master Bottling Agreement and the
non-cola bottling agreements and, in Canada, the Master Syrup Agreement with respect to authorized
containers, planning, quality control, transfer restrictions, term, causes for termination and
related matters. These bottling agreements differ from the Master Bottling Agreement because,
except for Canada, they include both fountain syrup and non-fountain beverages. Certain of these
bottling agreements contain provisions that have been modified to reflect the laws and regulations
of the applicable country. For example, the bottling agreements in Spain do not contain a
restriction on the sale and shipment of Pepsi-Cola beverages into our territory by others in
response to unsolicited orders. In addition, in Mexico and Turkey we are restricted in our ability
to manufacture, sell and distribute beverages sold under non-PepsiCo trademarks.
Terms of the Russia Venture Agreement. In 2007, PBG together with PepsiCo formed PR Beverages
Limited (PR Beverages), a venture that enables us to strategically invest in Russia to accelerate
our growth. PBG contributed its business in Russia to PR Beverages, and PepsiCo entered into
bottling agreements with PR Beverages for PepsiCo beverage products sold in Russia on the same
terms as in effect for PBG immediately prior to the venture. PepsiCo also granted PR Beverages an
exclusive license to manufacture and sell the concentrate for such products.
Terms of Russia Snack Food Distribution Agreement. Effective January 2009, PR Beverages
entered into an agreement with Frito-Lay Manufacturing, LLC (FLM), a wholly owned subsidiary of
PepsiCo, pursuant to which PR Beverages purchases Frito-Lay snack products from FLM for sale and
distribution in the Russian Federation. This agreement provides FLM access to the infrastructure
of our distribution network in Russia and allows us to more effectively utilize some of our
distribution network assets. This agreement replaced a similar agreement, which expired on December
31, 2008.
Seasonality
Sales of our products are seasonal, particularly in our Europe segment, where sales volumes
tend to be more sensitive to weather conditions. Our peak season across all of our segments is the
warm summer months beginning in May and ending in September. More than 70% of our operating income
is typically earned during the second and third quarters and more
than 65% of cash flow from
operations is typically generated in the third and fourth quarters.
Competition
The carbonated soft drink market and the non-carbonated beverage market are highly
competitive. Our competitors in these markets include bottlers and distributors of nationally
advertised and marketed products, bottlers and distributors of regionally advertised and marketed
products, as well as bottlers of private label soft drinks sold in chain stores. Among our major
competitors are bottlers that distribute products from The Coca-Cola Company including Coca-Cola
Enterprises Inc., Coca-Cola Hellenic Bottling Company S.A., Coca-Cola FEMSA S.A. de C.V. and
Coca-Cola Bottling Co. Consolidated.
Our market share for carbonated soft drinks sold under trademarks owned by PepsiCo in our U.S.
territories ranges from approximately 23% to approximately 43%. Our market share for carbonated
soft drinks sold under trademarks owned by PepsiCo for each country outside the United States in
which we do business is as follows: Canada 46%; Russia 17%; Turkey 18%; Spain 10% and
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Greece 14% (including market share for our IVI brand). In addition, market share for our
territories and the territories of other Pepsi bottlers in Mexico is 16% for carbonated soft drinks
sold under trademarks owned by PepsiCo.
Our market share for liquid refreshment beverages sold under trademarks owned by PepsiCo in
our U.S. territories is approximately 26%. Our market share for liquid refreshment beverages sold
under trademarks owned by PepsiCo for each country outside the United States in which we do
business is as follows: Canada 23%; Russia 21%; Turkey 17%; Spain 7% and Greece 11% (including
market share for our IVI brand). In addition, market share for our territories and the territories
of other Pepsi bottlers in Mexico is 18% for liquid refreshment beverage sold under trademarks
owned by PepsiCo.
All market share figures are based on generally available data published by third parties.
Actions by our major competitors and others in the beverage industry, as well as the general
economic environment, could have an impact on our future market share.
We compete primarily on the basis of advertising and marketing programs to create brand
awareness, price and promotions, retail space management, customer service, consumer points of
access, new products, packaging innovations and distribution methods. We believe that brand
recognition, market place pricing, consumer value, customer service, availability and consumer and
customer goodwill are primary factors affecting our competitive position.
Governmental Regulation Applicable to Our Business
Our operations and properties are subject to regulation by various federal, state and local
governmental entities and agencies in the United States as well as foreign governmental entities
and agencies in Canada, Spain, Greece, Russia, Turkey and Mexico. As a producer of food products,
we are subject to production, packaging, quality, labeling and distribution standards in each of
the countries where we have operations, including, in the United States, those of the Federal Food,
Drug and Cosmetic Act and the Public Health Security and Bioterrorism Preparedness and Response
Act. The operations of our production and distribution facilities are subject to laws and
regulations relating to the protection of our employees health and safety and the environment in
the countries in which we do business. In the United States, we are subject to the laws and
regulations of various governmental entities, including the Department of Labor, the Environmental
Protection Agency and the Department of Transportation, and various federal, state and local
occupational, labor and employment and environmental laws. These laws and regulations include the
Occupational Safety and Health Act, the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability
Act, the Superfund Amendments and Reauthorization Act, the Federal Motor Carrier Safety Act and the
Fair Labor Standards Act.
We believe that our current legal, operational and environmental compliance programs are
adequate and that we are in substantial compliance with applicable laws and regulations of the
countries in which we do business. We do not anticipate making any material expenditures in
connection with environmental remediation and compliance. However, compliance with, or any
violation of, future laws or regulations could require material expenditures by us or otherwise
have a material adverse effect on our business, financial condition or results of operations.
Bottle and Can Legislation. Legislation has been enacted in certain U.S. states and Canadian
provinces where we operate that generally prohibits the sale of certain beverages in non-refillable
containers unless a deposit or levy is charged for the container. These include California,
Connecticut, Delaware, Hawaii, Iowa, Maine, Massachusetts, Michigan, New York, Oregon, British
Columbia, Alberta, Saskatchewan, Manitoba, New Brunswick, Nova Scotia and Quebec.
Connecticut, Massachusetts, Michigan and New York have statutes that require us to pay all or
a portion of unclaimed container deposits to the state. Hawaii and California impose a levy on
beverage containers to fund a waste recovery system.
In addition to the Canadian deposit legislation described above, Ontario, Canada currently has
a regulation requiring that at least 30% of all soft drinks sold in Ontario be bottled in
refillable containers.
The European Commission issued a packaging and packing waste directive that was incorporated
into the national legislation of most member states. This has resulted in targets being set for the
recovery and recycling of household, commercial and industrial packaging waste and imposes
substantial responsibilities upon bottlers and retailers for implementation. Similar legislation
has been enacted in Turkey.
Mexico adopted legislation regulating the disposal of solid waste products. In response to
this legislation, PBG Mexico maintains agreements with local and federal Mexican governmental
authorities as well as with civil associations, which require PBG Mexico, and other participating
bottlers, to provide for collection and recycling of certain minimum amounts of plastic bottles.
We are not aware of similar material legislation being enacted in any other areas served by
us. The recent economic downturn, however, has resulted in reduced tax revenue for many states and
has increased the need for some states to identify new
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revenue sources. Some states may pursue additional revenue through new or amended bottle and
can legislation. We are unable to predict, however, whether such legislation will be enacted or
what impact its enactment would have on our business, financial condition or results of operations.
Soft Drink Excise Tax Legislation. Specific soft drink excise taxes have been in place in
certain states for several years. The states in which we operate that currently impose such a tax
are West Virginia and Arkansas and, with respect to fountain syrup only, Washington.
Value-added taxes on soft drinks vary in our territories located in Canada, Spain, Greece,
Russia, Turkey and Mexico, but are consistent with the value-added tax rate for other consumer
products. In addition, there is a special consumption tax applicable to cola products in Turkey. In
Mexico, bottled water in containers over 10.1 liters are exempt from value-added tax, and we
obtained a tax exemption for containers holding less than 10.1 liters of water. The tax exemption
currently also applies to non-carbonated soft drinks.
We are not aware of any material soft drink taxes that have been enacted in any other market
served by us. The recent economic downturn, however, has resulted in reduced tax revenue for many
states and has increased the need for some states to identify new revenue sources. Some states may
pursue additional revenue through new or amended soft drink or similar excise tax legislation. We
are unable to predict, however, whether such legislation will be enacted or what impact its
enactment would have on our business, financial condition or results of operations.
New York State Governor David Paterson has included a recommendation in his 2011 proposed
budget that essentially would place a one cent per ounce tax on sweetened beverages sold in that
state. Whether such tax will be enacted is unknown at this point. A similar proposal was included
in the 2010 proposed budget, but was withdrawn before legislative consideration due to strong
public and political opposition.
Trade Regulation. As a manufacturer, seller and distributor of bottled and canned soft drink
products of PepsiCo and other soft drink manufacturers in exclusive territories in the United
States and internationally, we are subject to antitrust and competition laws. Under the Soft Drink
Interbrand Competition Act, soft drink bottlers operating in the United States, such as us, may
have an exclusive right to manufacture, distribute and sell a soft drink product in a geographic
territory if the soft drink product is in substantial and effective competition with other products
of the same class in the same market or markets. We believe that there is such substantial and
effective competition in each of the exclusive geographic territories in which we operate.
School Sales Legislation; Industry Guidelines. In 2004, the U.S. Congress passed the Child
Nutrition Act, which required school districts to implement a school wellness policy by July 2006.
In May 2006, members of the American Beverage Association, the Alliance for a Healthier Generation,
the American Heart Association and The William J. Clinton Foundation entered into a memorandum of
understanding that sets forth standards for what beverages can be sold in elementary, middle and
high schools in the United States (the ABA Policy). Also, the beverage associations in the
European Union and Canada have recently issued guidelines relating to the sale of beverages in
schools. We intend to comply fully with the ABA Policy and these guidelines. In addition,
legislation has been proposed in Mexico that would restrict the sale of certain high-calorie
products, including soft drinks, in schools and that would require these products to include a
label that warns consumers that consumption abuse may lead to obesity.
California Carcinogen and Reproductive Toxin Legislation. A California law requires that any
person who exposes another to a carcinogen or a reproductive toxin must provide a warning to that
effect. Because the law does not define quantitative thresholds below which a warning is not
required, virtually all manufacturers of food products are confronted with the possibility of
having to provide warnings due to the presence of trace amounts of defined substances. Regulations
implementing the law exempt manufacturers from providing the required warning if it can be
demonstrated that the defined substances occur naturally in the product or are present in municipal
water used to manufacture the product. We have assessed the impact of the law and its implementing
regulations on our beverage products and have concluded that none of our products currently
requires a warning under the law. We cannot predict whether or to what extent food industry efforts
to minimize the laws impact on food products will succeed. We also cannot predict what impact,
either in terms of direct costs or diminished sales, imposition of the law may have.
Mexican Water Regulation. In Mexico, we pump water from our own wells and we purchase water
directly from municipal water companies pursuant to concessions obtained from the Mexican
government on a plant-by-plant basis. The concessions are generally for ten-year terms and can
generally be renewed by us prior to expiration with minimal cost and effort. Our concessions may be
terminated if, among other things, (a) we use materially more water than permitted by the
concession, (b) we use materially less water than required by the concession, (c) we fail to pay
for the rights for water usage or (d) we carry out, without governmental authorization, any
material construction on or improvement to, our wells. Our concessions generally satisfy our
current water requirements and we believe that we are generally in compliance in all material
respects with the terms of our existing concessions.
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Employees
As of December 26, 2009, we employed approximately 64,900 workers, of whom approximately
32,500 were employed in the United States. Approximately 8,500 of our workers in the United States
are union members and approximately 15,100 of our workers outside the United States are union
members. We consider relations with our employees to be good and have not experienced significant
interruptions of operations due to labor disagreements.
Available Information
PBG has made available, free of charge, the following governance materials on its website at
www.pbg.com under Investor Relations
Company Information Corporate Governance: PBGs Certificate of Incorporation, PBGs Bylaws, PBGs Corporate Governance Principles and Practices, PBGs Worldwide Code of Conduct (including any amendment thereto), PBGs Director Independence Policy, PBGs Audit and Affiliated Transactions Committee Charter, PBGs Compensation and Management Development Committee Charter, PBGs Nominating and Corporate Governance Committee Charter, PBGs Disclosure Committee Charter and PBGs Policy and Procedures Governing Related-Person Transactions. These governance materials are available in print, free of charge, to any PBG shareholder upon request.
Company Information Corporate Governance: PBGs Certificate of Incorporation, PBGs Bylaws, PBGs Corporate Governance Principles and Practices, PBGs Worldwide Code of Conduct (including any amendment thereto), PBGs Director Independence Policy, PBGs Audit and Affiliated Transactions Committee Charter, PBGs Compensation and Management Development Committee Charter, PBGs Nominating and Corporate Governance Committee Charter, PBGs Disclosure Committee Charter and PBGs Policy and Procedures Governing Related-Person Transactions. These governance materials are available in print, free of charge, to any PBG shareholder upon request.
Financial Information on Industry Segments and Geographic Areas
We operate in one industry, carbonated soft drinks and other ready-to-drink beverages, and all
of our segments derive revenue from these products. We have three reportable segments: U.S. &
Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. Operationally, the
Company is organized along geographic lines with specific regional management teams having
responsibility for the financial results in each reportable segment.
For
additional information, see Note 12 in the Notes to Consolidated Financial Statements
included in Item 7 below.
ITEM 1A. | RISK FACTORS |
Our business and operations entail a variety of risks and uncertainties, including those
described below.
We may not be able to respond successfully to consumer trends related to carbonated and
non-carbonated beverages.
Consumer trends with respect to the products we sell are subject to change. Consumers are
seeking increased variety in their beverages, and there is a growing interest among the public
regarding the ingredients in our products, the attributes of those ingredients and health and
wellness issues generally. This interest has resulted in a decline in consumer demand for
carbonated soft drinks and an increase in consumer demand for products associated with health and
wellness, such as water, enhanced water, teas and certain other non-carbonated beverages. Consumer
preferences may change due to a variety of other factors, including the aging of the general
population, changes in social trends, the real or perceived impact the manufacturing of our
products has on the environment, changes in consumer demographics, changes in travel, vacation or
leisure activity patterns, a downturn in economic conditions or taxes specifically targeting the
consumption of our products. Any of these changes may reduce consumers demand for our products.
For example, the recent downturn in economic conditions has adversely impacted sales of certain of
our higher margin products, including our products sold for immediate consumption in restaurants.
Because we rely mainly on PepsiCo to provide us with the products we sell, if PepsiCo fails to
develop innovative products and packaging that respond to consumer trends, we could be put at a
competitive disadvantage in the marketplace and our business and financial results could be
adversely affected. In addition, PepsiCo is under no obligation to provide us distribution rights
to all of its products in all of the channels in which we operate. If we are unable to enter into
agreements with PepsiCo to distribute innovative products in all of these channels or otherwise
gain broad access to products that respond to consumer trends, we could be put at a competitive
disadvantage in the marketplace and our business and financial results could be adversely affected.
We may not be able to respond successfully to the demands of our largest customers.
Our retail customers are consolidating, leaving fewer customers with greater overall
purchasing power and, consequently, greater influence over our pricing, promotions and distribution
methods. Because we do not operate in all markets in which these customers operate, we must rely on
PepsiCo and other Pepsi bottlers to service such customers outside of our markets. The inability of
PepsiCo or Pepsi bottlers as a whole to meet the product, packaging and service demands of our
largest customers could lead to a loss or decrease in business from such customers and have a
material adverse effect on our business and financial results.
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Our business requires a significant supply of raw materials and energy, the limited availability or
increased costs of which could adversely affect our business and financial results.
The production and distribution of our beverage products is highly dependent on certain
ingredients, packaging materials, other raw materials, and energy. To produce our products, we
require significant amounts of ingredients, such as beverage concentrate and high fructose corn
syrup, as well as access to significant amounts of water. We also require significant amounts of
packaging materials, such as aluminum and plastic bottle components, such as resin (a
petroleum-based product). In addition, we use a significant amount of electricity, natural gas,
motor fuel and other energy sources to operate our fleet of trucks and our bottling plants.
If the suppliers of our ingredients, packaging materials, other raw materials or energy are
impacted by an increased demand for their products, business downturn, weather conditions
(including those related to climate change), natural disasters, governmental regulation, terrorism,
strikes or other events, and we are not able to effectively obtain the products from another
supplier, we could incur an interruption in the supply of such products or increased costs of such
products. Any sustained interruption in the supply of our ingredients, packaging materials, other
raw materials or energy, or increased costs thereof, could have a material adverse effect on our
business and financial results.
The prices of some of our ingredients, packaging materials, other raw materials and energy,
including aluminum, resin, high fructose corn syrup and motor fuel, have recently experienced
unprecedented volatility, which in turn can unpredictably and substantially alter our costs. We
have implemented a hedging strategy to better predict our costs of some of these products. In a
volatile market, however, such strategy includes a risk that, during a particular period of time,
market prices fall below our hedged price and we pay higher than market prices for certain
products. As a result, under certain circumstances, our hedging strategy may increase our overall
costs.
If there is a significant or sustained increase in the costs of our ingredients, packaging
materials, other raw materials or energy, and we are unable to pass effectively the increased costs
on to our customers in the form of higher prices, there could be a material adverse effect on our
business and financial results.
Changes in the legal and regulatory environment, including those related to climate change, could
increase our costs or liabilities or impact the sale of our products.
Our operations and properties are subject to regulation by various federal, state and local
governmental entities and agencies as well as foreign governmental entities. Such regulations
relate to, among other things, food and drug laws, competition laws, labor laws, taxation
requirements (including taxes specifically targeting the consumption of our products), bottle and
can legislation (see above under Governmental Regulation Applicable to Our Business), accounting
standards and environmental laws.
There is also growing support for the conclusion that emissions of greenhouse gases are linked
to global climate change, which may result in more regional, federal and/or global legal and
regulatory requirements to reduce or mitigate the effects of greenhouse gases. Until any such
requirements come into effect, it is difficult to predict their impact on our business or financial
results, including any impact on our supply chain costs. In the interim, we are working to improve
our systems to record baseline data and monitor our greenhouse gas emissions and, during the
process of developing our business strategies, we consider the impact our plans may have on the
environment.
We cannot assure you that we have been or will at all times be in compliance with all
regulatory requirements or that we will not incur material costs or liabilities in connection with
existing or new regulatory requirements, including those related to climate change.
PBGs pending merger with PepsiCo may cause disruption in our business and, if the pending merger
does not occur, we will have incurred significant expenses.
The announcement of PBGs pending merger with PepsiCo, whether or not consummated, may result
in a loss of key personnel and may disrupt our sales and operations, which may have an impact on
our financial performance. The merger agreement generally requires us to operate our business in
the ordinary course pending consummation of the merger, but includes certain contractual
restrictions on the conduct of our business that may affect our ability to execute on our business
strategies and attain our financial goals. Additionally, the announcement of the pending merger,
whether or not consummated, may impact our relationships with third parties.
The completion of the pending merger is subject to certain conditions, including, among others
(i) adoption of the merger agreement by PBG shareholders, (ii) the absence of certain legal
impediments to the consummation of the pending merger, (iii) the expiration or termination of the
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
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amended (the HSR Act), and obtaining antitrust approvals in certain other jurisdictions,
(iv) subject to certain materiality exceptions, the accuracy of the representations and warranties
made by PBG and PepsiCo, respectively, and compliance by PBG and PepsiCo with our and their
respective obligations under the merger agreement, (v) declaration of the effectiveness by the SEC
of the Registration Statement on Form S-4/A filed by PepsiCo on January 12, 2010, and (vi) the
non-occurrence of a Material Adverse Effect (as defined in the merger agreement) on PBG or PepsiCo.
As of February 22, 2010, some of these closing conditions, such as adoption of the merger
agreement by PBGs shareholders, obtaining antitrust approval in jurisdictions outside the United
States, and declaration of the effectiveness by the SEC of the Form S-4/A filed by PepsiCo, have
been satisfied. Other closing conditions, however, remained unsatisfied as of February 22, 2010,
including, but not limited to, the expiration or termination of the applicable waiting period under
the HSR Act.
If the merger agreement is terminated under certain circumstances, then PBG would be required
to pay PepsiCo a termination fee of approximately $165 million. On November 16, 2009, in
connection with the settlement of certain stockholder litigation, PepsiCo agreed, among other
things, to reduce the termination fee to $115 million. Upon approval of the merger agreement by
PBG shareholders on February 17, 2010, the circumstances under which PBG would be required to pay
PepsiCo a termination fee ceased to exist.
We cannot predict whether all of the closing conditions for the pending merger set forth in
the merger agreement will be satisfied. As a result, we cannot assure you that the pending merger
will be completed. If the closing conditions for the pending merger set forth in the merger
agreement are not satisfied or waived pursuant to the merger agreement, or if the transaction is
not completed for any other reason, the market price of our common stock may decline. In addition,
if the pending merger does not occur, we will nonetheless remain liable for significant expenses
that we have incurred related to the transaction.
Additionally, we and members of PBGs Board of Directors have been named in a number of
lawsuits relating to the pending merger. The parties to these lawsuits entered into a settlement
stipulation, which is subject to customary conditions, as more fully
described in Note 17
Contingencies to our Consolidated Financial Statements.
These matters, alone or in combination, could have a material adverse effect on our business
and financial results.
PepsiCos equity ownership of PBG could affect matters concerning us.
As of January 22, 2010, PepsiCo owned approximately 38.6% of the combined voting power of
PBGs voting stock (with the balance owned by the public). PepsiCo will be able to significantly
affect the outcome of PBGs shareholder votes, thereby affecting matters concerning us.
Because we depend upon PepsiCo to provide us with concentrate, certain funding and various
services, changes in our relationship with PepsiCo could adversely affect our business and
financial results.
We conduct our business primarily under beverage agreements with PepsiCo. If our beverage
agreements with PepsiCo are terminated for any reason, it would have a material adverse effect on
our business and financial results. These agreements provide that we must purchase all of the
concentrate for such beverages at prices and on other terms which are set by PepsiCo in its sole
discretion. Any significant concentrate price increases could materially affect our business and
financial results.
PepsiCo has also traditionally provided bottler incentives and funding to its bottling
operations. PepsiCo does not have to maintain or continue these incentives or funding. Termination
or decreases in bottler incentives or funding levels could materially affect our business and
financial results.
Under our shared services agreement, we obtain various services from PepsiCo, including
procurement of raw materials and certain administrative services. If any of the services under the
shared services agreement were terminated, we would have to obtain such services on our own. This
could result in a disruption of such services, and we might not be able to obtain these services on
terms, including cost, that are as favorable as those we receive through PepsiCo.
We may have potential conflicts of interest with PepsiCo, which could result in PepsiCos
objectives being favored over our objectives.
Our past and ongoing relationship with PepsiCo could give rise to conflicts of interests. In
addition, two members of PBGs Board of Directors are executive officers of PepsiCo, and one of the
three Managing Directors of Bottling LLC is an officer of PepsiCo, a situation which may create
conflicts of interest.
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These potential conflicts include balancing the objectives of increasing sales volume of
PepsiCo beverages and maintaining or increasing our profitability. Other possible conflicts could
relate to the nature, quality and pricing of services or products provided to us by PepsiCo or by
us to PepsiCo.
Conflicts could also arise in the context of our potential acquisition of bottling territories
and/or assets from PepsiCo or other independent Pepsi bottlers. Under our Master Bottling Agreement
with PepsiCo, we must obtain PepsiCos approval to acquire any independent Pepsi bottler. PepsiCo
has agreed not to withhold approval for any acquisition within agreed-upon U.S. territories if we
have successfully negotiated the acquisition and, in PepsiCos reasonable judgment, satisfactorily
performed our obligations under the Master Bottling Agreement. We have agreed not to attempt to
acquire any independent Pepsi bottler outside of those agreed-upon territories without PepsiCos
prior written approval.
In addition, we are subject to certain contractual restrictions on the conduct of our business
pursuant to the terms of the merger agreement between us and PepsiCo, as more fully described in
the risk factor above entitled PBGs pending merger with PepsiCo may cause disruption in our
business and, if the pending merger does not occur, we will have incurred significant expenses.
Our acquisition strategy may be limited by our ability to successfully integrate acquired
businesses into ours or our failure to realize our expected return on acquired businesses.
We intend to continue to pursue acquisitions of bottling assets and territories from PepsiCos
independent bottlers. The success of our acquisition strategy may be limited because of unforeseen
costs and complexities. We may not be able to acquire, integrate successfully or manage profitably
additional businesses without substantial costs, delays or other difficulties. Unforeseen costs and
complexities may also prevent us from realizing our expected rate of return on an acquired
business. Any of the foregoing could have a material adverse effect on our business and financial
results.
We may not be able to compete successfully within the highly competitive carbonated and
non-carbonated beverage markets.
The carbonated and non-carbonated beverage markets are highly competitive. Competitive
pressures in our markets could cause us to reduce prices or forego price increases required to
off-set increased costs of raw materials and fuel, increase capital and other expenditures, or lose
market share, any of which could have a material adverse effect on our business and financial
results.
If we are unable to fund our substantial capital requirements, it could cause us to reduce our
planned capital expenditures and could result in a material adverse effect on our business and
financial results.
We require substantial capital expenditures to implement our business plans. If we do not have
sufficient funds or if we are unable to obtain financing in the amounts desired or on acceptable
terms, we may have to reduce our planned capital expenditures, which could have a material adverse
effect on our business and financial results.
The level of our indebtedness could adversely affect our financial health.
The level of our indebtedness requires us to dedicate a substantial portion of our cash flow
from operations to payments on our debt. This could limit our flexibility in planning for, or
reacting to, changes in our business and place us at a competitive disadvantage compared to
competitors that have less debt. Our indebtedness also exposes us to interest rate fluctuations,
because the interest on some of our indebtedness is at variable rates, and makes us vulnerable to
general adverse economic and industry conditions. All of the above could make it more difficult for
us, or make us unable to satisfy our obligations with respect to all or a portion of such
indebtedness and could limit our ability to obtain additional financing for future working capital
expenditures, strategic acquisitions and other general corporate requirements.
Deterioration of economic conditions could harm our business.
Our business may be adversely affected by changes in national or global economic conditions,
including inflation, interest rates, availability of capital markets, consumer spending rates,
energy availability and costs (including fuel surcharges) and the effects of governmental
initiatives to manage economic conditions. Any such changes could adversely affect the demand for
our products or increase our costs, thereby negatively affecting our financial results.
The recent deterioration of economic conditions, could, among other things, make it more
difficult or costly for us to obtain financing for our operations or investments, adversely impact
the credit worthiness of our customers or suppliers, and decrease the value of our investments in
equity and debt securities, including our marketable debt securities and pension and other
postretirement plan assets.
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Our foreign operations are subject to social, political and economic risks and may be adversely
affected by foreign currency fluctuations.
In the fiscal year ended December 26, 2009, approximately 30% of our net revenues were
generated in territories outside the United States. Social, economic and political developments in
our international markets (including Russia, Mexico, Canada, Spain, Turkey and Greece) may
adversely affect our business and financial results. These developments may lead to new product
pricing, tax or other policies and monetary fluctuations that may adversely impact our business and
financial results. The overall risks to our international businesses also include changes in
foreign governmental policies. In addition, we are expanding our investment and sales and marketing
efforts in certain emerging markets, such as Russia. Expanding our business into emerging markets
may present additional risks beyond those associated with more developed international markets. For
example, Russia has been a significant source of our profit growth, but is now experiencing an
economic downturn, which if sustained may have a material adverse impact on our business and
financial results. Additionally, our cost of goods, our results of operations and the value of our
foreign assets are affected by fluctuations in foreign currency exchange rates. For example, the
recent weakening of foreign currencies negatively impacted our earnings in 2009 compared with the
prior year.
If we are unable to maintain brand image and product quality, or if we encounter other product
issues such as product recalls, our business may suffer.
Maintaining a good reputation globally is critical to our success. If we fail to maintain high
standards for product quality, or if we fail to maintain high ethical, social and environmental
standards for all of our operations and activities, our reputation could be jeopardized. In
addition, we may be liable if the consumption of any of our products causes injury or illness, and
we may be required to recall products if they become contaminated or are damaged or mislabeled. A
significant product liability or other product-related legal judgment against us or a widespread
recall of our products could have a material adverse effect on our business and financial results.
Our success depends on key members of our management, the loss of whom could disrupt our business
operations.
Our success depends largely on the efforts and abilities of key management employees. Key
management employees are not parties to employment agreements with us. The loss of the services of
key personnel could have a material adverse effect on our business and financial results.
If we are unable to renew collective bargaining agreements on satisfactory terms, or if we
experience strikes, work stoppages or labor unrest, our business may suffer.
Approximately 30% of our U.S. and Canadian employees are covered by collective bargaining
agreements. These agreements generally expire at various dates over the next five years. Our
inability to successfully renegotiate these agreements could cause work stoppages and
interruptions, which may adversely impact our operating results. The terms and conditions of
existing or renegotiated agreements could also increase our costs or otherwise affect our ability
to increase our operational efficiency.
Benefits cost increases could reduce our profitability or cash flow.
Our profitability and cash flow is substantially affected by the costs of pension,
postretirement medical and employee medical and other benefits. Recently, these costs have
increased significantly due to factors such as fluctuations in investment returns on pension
assets, changes in discount rates used to calculate pension and related liabilities, and increases
in health care costs. Although we actively seek to control increases, there can be no assurance
that we will succeed in limiting future cost increases, and continued upward pressure in these
costs could have a material adverse affect on our business and financial performance.
Our failure to effectively manage our information technology infrastructure could disrupt our
operations and negatively impact our business.
We rely on information technology systems to process, transmit, store and protect electronic
information. Additionally, a significant portion of the communications between our personnel,
customers, and suppliers depends on information technology. If we do not effectively manage our
information technology infrastructure, we could be subject to transaction errors, processing
inefficiencies, the loss of customers, business disruptions and data security breaches.
Adverse weather conditions could reduce the demand for our products.
Demand for our products is influenced to some extent by the weather conditions in the markets
in which we operate. Weather conditions in these markets, such as unseasonably cool temperatures,
could have a material adverse effect on our sales volume and financial results.
Catastrophic events in the markets in which we operate could have a material adverse effect on our
financial condition.
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Natural disasters, terrorism, pandemic, strikes or other catastrophic events could impair our
ability to manufacture or sell our products. Failure to take adequate steps to mitigate the
likelihood or potential impact of such events, or to manage such events effectively if they occur,
could adversely affect our sales volume, cost of raw materials, earnings and financial results.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
ITEM 2. | PROPERTIES |
Our corporate headquarters is located in leased property in Somers, New York. In addition, we
have a total of 590 manufacturing and distribution facilities, as follows:
U.S. & Canada | Europe | Mexico | ||||||||||
Manufacturing Facilities |
||||||||||||
Owned |
50 | 15 | 22 | |||||||||
Leased |
2 | | 3 | |||||||||
Other |
3 | | | |||||||||
Total |
55 | 15 | 25 | |||||||||
Distribution Facilities |
||||||||||||
Owned |
222 | 11 | 81 | |||||||||
Leased |
51 | 55 | 75 | |||||||||
Total |
273 | 66 | 156 | |||||||||
We also own or lease and operate approximately 37,100 vehicles, including delivery trucks,
delivery and transport tractors and trailers and other trucks and vans used in the sale and
distribution of our beverage products. We also own more than two million coolers, soft drink
dispensing fountains and vending machines.
With a few exceptions, leases of plants in the U.S. & Canada are on a long-term basis,
expiring at various times, with options to renew for additional periods. Our leased facilities in
Europe and Mexico are generally leased for varying and usually shorter periods, with or without
renewal options. We believe that our properties are in good operating condition and are adequate to
serve our current operational needs.
ITEM 3. | LEGAL PROCEEDINGS |
From time to time we are a party to various litigation proceedings arising in the ordinary
course of our business, none of which, in the opinion of management, is likely to have a material
adverse effect on our financial condition or results of operations.
For
further information about our legal proceedings see Note 17 in the Notes to Consolidated
Financial Statements, which discussion is incorporated herein by reference.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
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PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no established public trading market for the ownership of Bottling LLC.
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ITEM 6. | SELECTED FINANCIAL DATA |
SELECTED FINANCIAL AND OPERATING DATA
in millions
Fiscal years ended | 2009(1) | 2008(2) | 2007(3) | 2006(4) | 2005(5) | |||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Net revenues |
$ | 13,219 | $ | 13,796 | $ | 13,591 | $ | 12,730 | $ | 11,885 | ||||||||||
Cost of sales |
7,379 | 7,586 | 7,370 | 6,900 | 6,345 | |||||||||||||||
Gross profit |
5,840 | 6,210 | 6,221 | 5,830 | 5,540 | |||||||||||||||
Selling, delivery and administrative expenses |
4,777 | 5,171 | 5,167 | 4,842 | 4,533 | |||||||||||||||
Impairment charges |
| 412 | | | | |||||||||||||||
Operating income |
1,063 | 627 | 1,054 | 988 | 1,007 | |||||||||||||||
Interest expense |
255 | 244 | 232 | 227 | 187 | |||||||||||||||
Interest income |
108 | 162 | 222 | 174 | 77 | |||||||||||||||
Other non-operating (income) expenses, net |
(4 | ) | 24 | (5 | ) | 10 | 1 | |||||||||||||
Income before income taxes |
920 | 521 | 1,049 | 925 | 896 | |||||||||||||||
Income tax (benefit) expense (6)(7)(8) |
(26 | ) | (39 | ) | 27 | 3 | 24 | |||||||||||||
Net income |
946 | 560 | 1,022 | 922 | 872 | |||||||||||||||
Less: Net income (loss) attributable to
noncontrolling interests |
33 | 24 | 28 | (2 | ) | 1 | ||||||||||||||
Net income attributable to Bottling LLC |
$ | 913 | $ | 536 | $ | 994 | $ | 924 | $ | 871 | ||||||||||
Balance Sheet Data (at period end): |
||||||||||||||||||||
Total assets |
$ | 16,782 | $ | 16,495 | $ | 16,712 | $ | 14,955 | $ | 13,745 | ||||||||||
Long-term debt |
$ | 4,454 | $ | 3,789 | $ | 3,776 | $ | 3,759 | $ | 2,943 | ||||||||||
Noncontrolling interests |
$ | 753 | $ | 672 | $ | 379 | $ | 18 | $ | 3 | ||||||||||
Accumulated other comprehensive loss (9) |
$ | (879 | ) | $ | (1,373 | ) | $ | (189 | ) | $ | (589 | ) | $ | (395 | ) | |||||
Bottling LLC owners equity |
$ | 8,533 | $ | 7,534 | $ | 9,229 | $ | 8,092 | $ | 7,581 |
(1) | Our fiscal year 2009 results include a $24 million pre-tax charge related to restructuring charges. See Items Affecting Comparability of Our Financial Results in Item 7. | |
(2) | Our fiscal year 2008 results include $412 million in pre-tax non-cash impairment charges relating primarily to distribution rights and product brands in Mexico and an $83 million pre-tax charge related to restructuring charges. See Items Affecting Comparability of Our Financial Results in Item 7. | |
(3) | Our fiscal year 2007 results include a $30 million pre-tax charge related to restructuring charges and a $23 million pre-tax charge related to our asset disposal plan. See Items Affecting Comparability of Our Financial Results in Item 7. | |
(4) | In fiscal year 2006, we adopted accounting guidance related to share-based payments resulting in a $65 million decrease in operating income. Results for prior periods have not been restated as provided for under the modified prospective approach. | |
(5) | Our fiscal year 2005 results include an extra week of activity. The pre-tax income generated from the extra week was spent back in strategic initiatives within our selling, delivery and administrative expenses and, accordingly, had no impact on net income attributable to Bottling LLC. | |
(6) | Our fiscal year 2009 results include a non-cash tax benefit of $75 million due to tax audit settlements in our international jurisdictions, partially offset by a net non-cash tax charge of $65 million due to tax law changes in Canada and Mexico. See Items Affecting Comparability of Our Financial Results in Item 7. | |
(7) | Our fiscal year 2007 results include a net non-cash tax benefit of $13 million due to tax law changes in Canada and Mexico. See Items Affecting Comparability of Our Financial Results in Item 7. | |
(8) | Our fiscal year 2006 results include a tax benefit of $12 million from tax law changes in Canada, Turkey, and in certain U.S. jurisdictions. | |
(9) | In fiscal year 2006, we recorded a $278 million loss, net of taxes, to accumulated other comprehensive loss related to the adoption of new pension and postretirement rules, requiring the Company to record the funded status of each of our pension and postretirement plans. |
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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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MANAGEMENTS FINANCIAL REVIEW
Tabular dollars in millions
OUR BUSINESS
Bottling Group, LLC (referred to as Bottling LLC, we, our, us and the Company) is
the principal operating subsidiary of The Pepsi Bottling Group, Inc. (PBG) and consists of
substantially all of the operations and the assets of PBG. PBG is the worlds largest
manufacturer, seller and distributor of Pepsi-Cola beverages.
We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or
a portion of the U.S., Mexico, Canada, Spain, Russia, Greece and Turkey. Bottling LLC manages and
reports operating results through three reportable segments: U.S. & Canada, Europe (which includes
Spain, Russia, Greece and Turkey) and Mexico. As shown in the graph below, the U.S. & Canada
segment is the dominant driver of our results, generating 68 percent of our volume, 78 percent of
our net revenues and 84 percent of our operating income.
The majority of our volume is derived from brands licensed from PepsiCo, Inc. (PepsiCo) or
PepsiCo joint ventures. These brands are some of the most recognized in the world and consist of
carbonated soft drinks (CSDs) and non-carbonated beverages. Our CSDs include brands such as
Pepsi-Cola, Diet Pepsi, Diet Pepsi Max, Mountain Dew and Sierra Mist. Our non-carbonated
beverages portfolio includes brands with Starbucks Frapuccino in the ready-to-drink coffee
category; Amp Energy and SoBe Adrenaline Rush in the energy drink category; SoBe and Tropicana in
the juice and juice drinks category; Aquafina in the water category; and Lipton Iced Tea in the tea
category. We continue to strengthen our powerful portfolio highlighted by our focus on the
hydration category with SoBe Lifewater, Propel fitness water and G2 in the United States. In some
of our territories we have the right to manufacture, sell and distribute soft drink products of
companies other than PepsiCo, including Dr Pepper, Crush, Squirt and Rockstar. We also have the
right in some of our territories to manufacture, sell and distribute beverages under brands that we
own, including Electropura, e-pura and Garci Crespo. See Part I, Item 1 of this report for a
listing of our principal products by segment.
We sell our products through cold-drink and take-home channels. Our cold-drink channel
consists of chilled products sold in the retail and foodservice channels. We earn the highest
profit margins on a per-case basis in the cold-drink channel. Our take-home channel consists of
unchilled products that are sold in the retail, mass merchandiser and club store channels for
at-home consumption.
Our products are brought to market primarily through direct store delivery (DSD) or
third-party distribution, including foodservice and vending distribution networks. The hallmarks
of the Companys DSD system are customer service, speed to market, flexibility and reach. These
are all critical factors in bringing new products to market, adding accounts to our existing base
and meeting increasingly diverse volume demands.
Our customers range from large format accounts, including large chain foodstores,
supercenters, mass merchandisers, chain drug stores, club stores and military bases, to small
independently owned shops and foodservice businesses. Changes in consumer shopping trends and
current economic trends are shifting more of our
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volume to channels such as supercenters, club and
dollar stores. Retail consolidation continues to increase the strategic significance of our
large-volume customers. No individual customer accounted for 10 percent or more of our total
revenue in 2009, except for sales to Walmart Stores, Inc. and its affiliates which were 11 percent
of our revenue in 2009, primarily as a result of transactions in the U.S. & Canada segment. Sales
to our top five retail customers represented approximately 21 percent of our net revenues in 2009.
Bottling LLCs focus is on superior sales execution, customer service, merchandising and
operating excellence. Our goal is to help our customers grow their beverage business by making our
portfolio of brands readily available to consumers at every shopping occasion, using proven methods
to grow not only PepsiCo brand sales, but the overall beverage category. Our objective is to
ensure we have the right product in the right package to satisfy the ever changing needs of todays
consumers.
We measure our sales in terms of physical cases sold to our customers. Each package, as sold
to our customers, regardless of configuration or number of units within a package, represents one
physical case. Our net price and gross margin on a per-case basis are impacted by how much we
charge for the product, the mix of brands and packages we sell, and the channels through which the
product is sold. For example, we realize a higher net revenue and gross margin per case on a
20-ounce chilled bottle sold in a convenience store than on a 2-liter unchilled bottle sold in a
grocery store.
Our financial success is dependent on a number of factors, including: our strong partnership
with PepsiCo, the customer relationships we cultivate, the pricing we achieve in the marketplace,
our market execution, our ability to meet changing consumer preferences and the efficiencies we
achieve in manufacturing and distributing our products. Key indicators of our financial success
are: the number of physical cases we sell, the net price and gross margin we
achieve on a per-case basis, cash and capital management and our overall cost productivity
which reflects how well we manage our raw material, manufacturing, distribution and other overhead
costs.
The discussion and analysis throughout Managements Financial Review should be read in
conjunction with the Consolidated Financial Statements and the related accompanying notes. The
preparation of our Consolidated Financial Statements and the related accompanying notes in
conformity with accounting principles generally accepted in the U.S. (GAAP) requires us to make
estimates and assumptions that affect the reported amounts in our Consolidated Financial Statements
and the related accompanying notes, including various claims and contingencies related to lawsuits,
taxes, environmental and other matters arising out of the normal course of business. We apply our
best judgment, our knowledge of existing facts and circumstances and actions that we may undertake
in the future, in determining the estimates that affect our Consolidated Financial Statements. We
evaluate our estimates on an on-going basis using our historical experience as well as other
factors we believe appropriate under the circumstances, such as current economic conditions, and
adjust or revise our estimates as circumstances change. As future events and their effect cannot
be determined with precision, actual results may differ from these estimates.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are discussed in Note 2 in the Notes to Consolidated
Financial Statements. Management believes the following policies, which require the use of
estimates, assumptions and the application of judgment, to be the most critical to the portrayal of
Bottling LLCs results of operations and financial condition. We applied these accounting policies
and estimation methods consistently in all material respects and have discussed the selection of
these policies and related disclosures with the Audit and Affiliated Transactions Committee of
PBGs Board of Directors.
Other Intangible Assets, net and Goodwill
Our intangible assets consist primarily of franchise rights, distribution rights, licensing
rights, brands and goodwill and principally arise from the allocation of the purchase price of
businesses acquired. These intangible assets, other than goodwill, are classified as either
finite-lived intangibles or indefinite-lived intangibles.
The classification of intangible assets and the determination of the appropriate useful life
require substantial judgment. The determination of the expected life depends upon the use and
underlying characteristics of the intangible asset. In our evaluation of the expected life of these
intangible assets, we consider the nature and terms of the underlying agreements; our intent and
ability to use the specific asset; the age and market position of the products within the
territories in which we are entitled to sell; the historical and projected growth of those
products; and costs, if any, to renew the related agreement.
Intangible assets that are determined to have a finite life are amortized over their expected
useful life, which generally ranges from five to twenty years. For intangible assets with finite
lives, evaluations for impairment are performed only if facts and circumstances indicate that the
carrying value may not be recoverable.
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Intangible assets with indefinite lives and goodwill are not amortized; however, they are
evaluated for impairment at least annually or more frequently if facts and circumstances indicate
that the assets may be impaired.
We evaluate intangible assets with indefinite useful lives for impairment by comparing the
fair values of the assets with their carrying values. The fair value of our franchise rights and
distribution rights is measured using a multi-period excess earnings method that is based upon
estimated discounted future cash flows. The fair value of our brands and licensing rights is
measured using a multi-period royalty savings method, which reflects the savings realized by owning
the brand or licensing right and, therefore, not requiring payment of third party royalty fees.
We evaluate goodwill for impairment at the reporting unit level, which we determined to be the
countries in which we operate. We evaluate goodwill for impairment by comparing the fair value of
the reporting unit, as determined by its discounted cash flows, with its carrying value. If the
carrying value of a reporting unit exceeds its fair value, we compare the implied fair value of the
reporting units goodwill with its carrying amount to measure the amount of impairment loss.
Considerable management judgment is necessary to estimate discounted future cash flows in
conducting an impairment analysis for goodwill and other intangible assets. The cash flows may be
impacted by future actions taken by us and our competitors and the volatility of macroeconomic
conditions in the markets in which we conduct business. Assumptions used in our impairment
analysis, such as forecasted growth rates, cost of capital and additional risk premiums used in the
valuations, are based on the best available market information and are consistent with our
long-term strategic plans. An inability to achieve strategic business plan targets in a reporting
unit, a change in our discount rate or other assumptions could have a significant impact on the
fair value of our reporting units and other intangible assets, which could then result in a
material non-cash impairment charge to our
results of operations. The weakening of global macroeconomic conditions has had a negative
impact on our business results. If these conditions continue, the fair value of our intangible
assets could be adversely impacted.
In the third quarter of 2009, the Company completed its impairment test of goodwill and
indefinite lived assets and recorded no impairment charge. During 2008, the Company recorded $412
million in non-cash impairment charges relating primarily to distribution rights and brands for the
Electropura water business in Mexico. The impairment charge relating to these intangible assets
was based upon the findings of an extensive strategic review and the finalization of restructuring
plans for our Mexican business.
For further information about our goodwill and other intangible assets see Note 5 Other
Intangible Assets, net and Goodwill in the Notes to Consolidated Financial Statements.
Pension and Postretirement Medical Benefit Plans
We participate in PBG sponsored pension and other postretirement medical benefit plans in
various forms in the United States and similar pension plans in our international locations,
covering employees who meet specified eligibility requirements. The assets, liabilities and
expenses associated with our international plans were not significant to our worldwide results of
operations or financial position, and accordingly, assumptions, expenses, sensitivity analyses and
other data regarding these plans are not included in any of the discussions provided below.
In the U.S., the non-contributory defined benefit pension plans provide benefits to certain
full-time salaried and hourly employees. Benefits are generally based on years of service and
compensation, or stated amounts for each year of service. Effective January 1, 2007, newly hired
salaried and non-union hourly employees are not eligible to participate in these plans.
Additionally, effective April 1, 2009, benefits from these plans are no longer accrued for certain
salaried and non-union employees that did not meet specified age and service requirements. The
impact of these plan changes will significantly reduce the Companys future long-term pension
obligation, pension expense and cash contributions to the plans. Employees not eligible to
participate in these plans or employees whose benefits have been frozen are receiving additional
retirement contributions under PBGs defined contribution plans.
Substantially all of our U.S. employees meeting age and service requirements are eligible to
participate in PBGs postretirement medical benefit plans.
Assumptions
During 2008, the Company changed the measurement date for plan assets and benefit obligations
from September 30 to its fiscal year-end as required by the new pension accounting rules.
The determination of pension and postretirement medical benefit plan obligations and related
expenses requires the use of assumptions to estimate the amount of benefits that employees earn
while working, as well as the present value of those benefit obligations. Significant assumptions
include discount rate; expected return on plan assets; certain employee-related factors such as
retirement age, mortality, and turnover; rate of salary increases for plans where benefits are
based on earnings; and for retiree medical plans, health care cost trend rates.
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On an annual basis we evaluate these assumptions, which are based upon historical experience
of the plans and managements best judgment regarding future expectations. These assumptions may
differ materially from actual results due to changing market and economic conditions. A change in
the assumptions or economic events outside our control could have a material impact on the
measurement of our pension and postretirement medical benefit expenses and obligations as well as
related funding requirements.
The discount rates used in calculating the present value of our pension and postretirement
medical benefit plan obligations are developed based on a yield curve that is comprised of
high-quality, non-callable corporate bonds. These bonds are rated Aa or better by Moodys; have a
principal amount of at least $250 million; are denominated in U.S. dollars; and have maturity dates
ranging from six months to thirty years, which matches the timing of our expected benefit payments.
The expected rate of return on plan assets for a given fiscal year is based upon actual
historical returns and the long-term outlook on asset classes in the pension plans investment
portfolio. The current target asset allocation for the U.S. pension plans is 65 percent equity
investments, of which approximately half is to be invested in domestic equities and half is to be
invested in foreign equities. The remaining 35 percent is to be invested primarily in long-term
corporate bonds. Based on our asset allocation, historical returns and estimated future outlook of
the pension plans portfolio, we estimate the long-term rate of return on plan assets assumption to
be 8.0 percent in 2010.
Differences between the assumed rate of return and actual rate of return on plan assets are
deferred in accumulated other comprehensive loss (AOCL) in equity and amortized to earnings
utilizing the market-related value method. Under this method, differences between the assumed rate
of return and actual rate of return from any one year will be recognized over a five-year period to
determine the market-related value.
Differences between assumed and actual returns on plan assets and other gains and losses
resulting from changes in actuarial assumptions are determined at each measurement date and
deferred in AOCL in equity. To the extent the amount of all unrecognized gains and losses exceeds
10 percent of the larger of the benefit obligation or the market-related value of plan assets, such
amount is amortized to earnings over the average remaining service period of active participants.
The cost or benefit from benefit plan changes is also deferred in AOCL in equity and amortized
to earnings on a straight-line basis over the average remaining service period of the employees
expected to receive benefits.
Net unrecognized losses and unamortized prior service costs relating to the pension and
postretirement plans in the United States totaled $763 million and $969 million at December 26,
2009 and December 27, 2008, respectively.
The following tables provide the weighted-average assumptions for our 2010 and 2009 pension
and postretirement medical plans expense:
Pension | 2010 | 2009 | ||||||
Discount rate |
6.25 | % | 6.20 | % | ||||
Expected rate of return on plan assets (net of administrative expenses) |
8.00 | % | 8.00 | % | ||||
Rate of compensation increase |
3.04 | % | 3.53 | % |
Postretirement | 2010 | 2009 | ||||||
Discount rate |
5.75 | % | 6.50 | % | ||||
Rate of compensation increase |
3.43 | % | 3.53 | % | ||||
Health care cost trend rate |
8.00 | % | 8.75 | % |
During 2009, our ongoing defined benefit pension and postretirement medical plan expenses
totaled $98 million. In 2010, these expenses are expected to decrease by approximately $15 million
to $83 million as a result of the following factors:
| Funding to the pension trust will decrease 2010 pension expense by $16 million. |
| Recognition of net asset losses will increase our pension expense by $14 million. |
| An increase in our weighted-average discount rate for our pension expense from 6.20 percent to 6.25 percent, reflecting increases in the yields of long-term corporate bonds comprising the yield curve, will decrease our 2010 pension expense by approximately $3 million. |
| Other factors, including the full-year benefit of plan changes and improved health care experience, will decrease our 2010 defined benefit pension and postretirement medical expenses by approximately $10 million. |
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Sensitivity Analysis
It is unlikely that in any given year the actual rate of return will be the same as the
assumed long-term rate of return. The following table provides a summary for the last three years
of actual rates of return versus expected long-term rates of return for our pension plan assets:
2009 | 2008 | 2007 | ||||||||||
Expected rates of return on plan assets (net of administrative
expenses)
|
8.00 | % | 8.50 | % | 8.50 | % | ||||||
Actual rates of return on plan assets (net of administrative expenses)
|
25.3 | % | (28.50 | )% | 12.64 | % |
Sensitivity of changes in key assumptions for our pension and postretirement plans expense in
2010 are as follows:
| Discount rate A 25 basis point change in the discount rate would increase or decrease the 2010 expense for the pension and postretirement medical benefit plans by approximately $10 million. |
| Expected rate of return on plan assets A 25 basis point change in the expected return on plan assets would increase or decrease the 2010 expense for the pension plans by approximately $4 million. The postretirement medical benefit plans have no expected return on plan assets as they are funded from the general assets of the Company as the payments come due. |
| Contribution to the plan A $20 million decrease in planned contributions to the plan for 2010 will increase our pension expense by $1 million. |
Funding
We make contributions to the pension trust to provide plan benefits for certain pension plans.
Generally, we do not fund the pension plans if current contributions would not be tax deductible.
Effective in 2008, under the Pension Protection Act, funding requirements are more stringent and
require companies to make minimum contributions equal to their service cost plus amortization of
their deficit over a seven year period. Failure to achieve appropriate funding levels will result
in restrictions on employee benefits. Failure to contribute the minimum required contributions
will result in excise taxes for the Company and an obligation to report to the regulatory agencies.
During 2009, the Company contributed $229 million to its funded pension trusts. The Company
expects to contribute an additional $132 million to its funded pension trusts in 2010. These
amounts exclude $30 million of contributions and $26 million of expected contributions to the
unfunded plans for the years ended December 26, 2009 and December 25, 2010, respectively.
For further information about PBGs pension and postretirement plans see Note 10 Pension and
Postretirement Medical Benefit Plans in the Notes to Consolidated Financial Statements.
Income Taxes
We are a limited liability company, classified as a partnership for U.S. tax purposes and, as
such, generally will pay limited U.S. federal, state and local income taxes. Our federal and state
distributive shares of income, deductions and credits are allocated to our owners based on their
percentage of ownership. However, certain domestic and foreign affiliates pay taxes in their
respective jurisdictions and record related deferred income tax assets and liabilities.
Our effective tax rate is based on pre-tax income, statutory tax rates, tax laws and
regulations and tax planning strategies available to us in the various jurisdictions in which we
operate. Significant management judgment is required in evaluating our tax positions and in
determining our effective tax rate.
Our deferred tax assets and liabilities reflect our best estimate of the tax benefits and
costs we expect to realize in the future. We establish valuation allowances to reduce our deferred
tax assets to an amount that will more likely than not be realized.
We recognize the impact of our tax positions in our financial statements if those positions
will more likely than not be sustained on audit, based on the technical merits of the position. A
number of years may elapse before an uncertain tax position for which we have established a tax
reserve is audited and finally resolved, and the number of years for which we have audits that are
open varies depending on the tax jurisdiction. While it is often difficult to predict the final
outcome or the timing of the resolution of an audit, we believe that our reserves for uncertain tax
benefits reflect the outcome of tax positions that is more likely than not to occur. Nevertheless,
it is possible that tax authorities may disagree with our tax positions, which could have a
significant impact on our results of operations, financial position and cash flows. The resolution
of a tax position could be recognized as an adjustment to our provision for income taxes and our
deferred taxes in the period of resolution, and may also require the use of cash.
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For further information about our income taxes see Income Tax Expense in the Results of
Operations and Note 11 Income Taxes in the Notes to Consolidated Financial Statements.
RELATIONSHIP WITH PEPSICO AND PBG
PepsiCo is a related party due to the nature of our franchise relationship and its ownership
interest in our company. More than 80 percent of our volume is derived from the sale of PepsiCo or
PepsiCo joint venture brands. At December 26, 2009, PepsiCo owned 6.6 percent of our equity.
While we manage all phases of our operations, including pricing of our products, we exchange
production, marketing and distribution information with PepsiCo, which benefits both companies
respective efforts to lower costs, improve quality and productivity and increase product sales. We
have a significant ongoing relationship with PepsiCo and enter into various transactions and
agreements with them. We purchase concentrate, pay royalties related to Aquafina products, and
manufacture, package, sell and distribute cola and non-cola beverages under various bottling and
fountain syrup agreements with PepsiCo. These agreements give us the right to manufacture, sell
and distribute beverage products of PepsiCo in both bottles and cans, as well as fountain syrup in
specified territories. PepsiCo has the right under these agreements to set prices of beverage
concentrate, as well as the terms of payment and other terms and conditions under which we purchase
concentrate. PepsiCo also provides us with bottler funding to support a variety of trade and
consumer programs such as consumer incentives, advertising support, new product support and vending
and cooler equipment placement. The nature and type of programs, as well as the level of funding,
vary annually. Additionally, under a shared services agreement, we obtain various services from
PepsiCo, which include services for information technology maintenance and procurement of raw
materials. We also provide services to PepsiCo, including facility and credit and collection
support. Because we depend on PepsiCo to provide us with concentrate, bottler incentives and
various services, changes in our relationship with PepsiCo could have a material adverse effect on
our business and financial results.
We also enter into various transactions with joint ventures in which PepsiCo holds an equity
interest. In particular, we purchase tea concentrate and finished beverage products from the
Pepsi/Lipton Tea Partnership, a joint venture between PepsiCo and Unilever, in which PepsiCo holds
a 50 percent interest. We also purchase finished beverage products from the North American Coffee
Partnership, a joint venture between PepsiCo and Starbucks Corporation in which PepsiCo holds a 50
percent interest.
PepsiCo owns 40 percent of PR Beverages Limited (PR Beverages), a consolidated venture for
our Russian operations, which was formed on March 1, 2007. PR Beverages has an exclusive license
to manufacture and sell PepsiCo concentrate for beverage products sold in Russia. PR Beverages has
also entered into a Russian Snack Food Distribution Agreement with Frito Lay, Inc., a subsidiary of
PepsiCo, to sell and distribute their snack products in the Russian Federation.
PBG is a related party as Bottling LLC is the principal operating subsidiary of PBG and
consists of substantially all of the operations and the assets of PBG. At December 26, 2009, PBG
owned approximately 93.4 percent of our equity. We have various loans in place with PBG that have
enabled PBG to make payments for interest, taxes, dividends, share repurchases and acquisitions.
Additionally, we make pro rata distributions to PBG and PepsiCo to fund PBGs cash needs. PBG also
provides insurance and risk management services to us pursuant to a contractual agreement.
We guarantee PBGs credit facilities which are used to support PBGs commercial paper program
and our working capital requirements. PBG has a committed credit facility of $1.2 billion and an
uncommitted credit facility of $500 million and had no outstanding commercial paper at December 26, 2009 and December 27, 2008, respectively. Additionally, we guarantee PBGs $1 billion of seven
percent senior notes due in 2029.
For further information about our relationship with PBG, PepsiCo and its affiliates see Note
13 Related Party Transactions in the Notes to Consolidated Financial Statements.
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ITEMS AFFECTING COMPARABILITY OF OUR FINANCIAL RESULTS
The year-over-year comparisons of our financial results are affected by the following items
included in our reported results:
December 26, | December 27, | December 29, | ||||||||||
Income/(Expense) | 2009 | 2008 | 2007 | |||||||||
Operating Income |
||||||||||||
Mark-to-Market Net Impact |
$ | 12 | $ | | $ | | ||||||
Impairment Charges |
| (412 | ) | | ||||||||
2008 Restructuring Actions |
(24 | ) | (83 | ) | | |||||||
2007 Restructuring Actions |
| (3 | ) | (30 | ) | |||||||
Asset Disposal Charges |
| (2 | ) | (23 | ) | |||||||
Operating Income Impact |
$ | (12 | ) | $ | (500 | ) | $ | (53 | ) | |||
Net Income attributable to Bottling LLC(1) |
||||||||||||
Mark-to-Market Net Impact(2) |
$ | 10 | $ | | $ | | ||||||
Impairment Charges(3) |
| (297 | ) | | ||||||||
2008 Restructuring Actions(4) |
(21 | ) | (83 | ) | | |||||||
2007 Restructuring Actions |
| (3 | ) | (30 | ) | |||||||
Asset Disposal Charges |
| (2 | ) | (23 | ) | |||||||
Tax Audit Settlements(5) |
72 | | | |||||||||
Tax Law Changes |
(65 | ) | | 13 | ||||||||
Net Income attributable to Bottling LLC Impact |
$ | (4 | ) | $ | (385 | ) | $ | (40 | ) | |||
(1) | Represents items net of taxes and noncontrolling interests. Taxes have been calculated based on the tax rate of the tax jurisdiction in which the item was recorded. Noncontrolling interests has been calculated based upon the ownership structure within the entity in which the item was recorded. | |
(2) | Net of taxes of $2 million. | |
(3) | Net of taxes of $115 million. | |
(4) | Net of taxes of $3 million in 2009. | |
(5) | Net of noncontrolling interests of $3 million. |
Mark-to-Market Net Impact
The Companys corporate headquarters centrally manages commodity derivatives on behalf of our
segments. During 2009, we expanded our hedging program to mitigate price changes associated with
certain commodities utilized in our production process. These derivatives hedge the underlying
price risk associated with the commodity and are not entered into for speculative purposes.
Certain commodity derivatives do not qualify for hedge accounting treatment. Others receive hedge
accounting treatment but may have some element of ineffectiveness based on the accounting standard.
These commodity derivatives are marked-to-market each period until settlement, resulting in gains
and losses being reflected in corporate headquarters results. The gains and losses are
subsequently reflected in the segment results when the underlying commoditys cost is recognized.
Therefore, segment results reflect the contract purchase price of these commodities. During 2009,
the Company recognized a net gain of $12 million related to these commodity derivatives. The
Company did not have any comparable activity in prior years.
Impairment Charges
During the fourth quarter of 2008, the Company recorded $412 million in non-cash impairment
charges relating primarily to distribution rights and brands for the Electropura water business in
Mexico. For further information about the impairment charges see Note 5 Other Intangibles, net and
Goodwill in the Notes to Consolidated Financial Statements.
2008 Restructuring Actions
In the fourth quarter of 2008, we announced a restructuring program to enhance the Companys
operating capabilities in each of our reportable segments. The program was substantially complete
in December of 2009 and certain restructuring actions previously planned for 2010 have been
cancelled as a result of the pending merger with PepsiCo.
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The program will result in annual pre-tax savings of approximately $110 million. The Company
recorded pre-tax charges of $107 million over the course of the
restructuring program, which were recorded in selling, delivery and
administrative (SD&A) expenses. These
charges were primarily for severance and related benefits, pension and other employee-related costs
and other charges, including employee relocation and asset disposal costs. In 2009, we recorded
pre-tax charges of $24 million of which $10 million was recorded in the U.S. & Canada segment and
$14 million was recorded in the Mexico segment.
As part of the restructuring program, approximately 4,000 positions were eliminated including
600 positions in the U.S. & Canada, 500 positions in Europe and 2,900 positions in Mexico.
The Company expects to incur approximately $80 million in pre-tax cash expenditures from these
restructuring actions, of which $75 million has been paid since the inception of the program, with
the balance expected to occur in 2010. During 2009, we paid $62 million in pre-tax cash
expenditures for these restructuring actions.
For further information about our restructuring charges see Note 14 Restructuring Charges in
the Notes to Consolidated Financial Statements.
2007 Restructuring Actions
In the third quarter of 2007, we announced a restructuring program to realign the Companys
organization to adapt to changes in the marketplace, improve operating efficiencies and enhance the
growth potential of the Companys product portfolio. We completed the organizational realignment
during the first quarter of 2008, which resulted in the elimination of approximately 800 positions.
Annual cost savings from this restructuring program are approximately $30 million. Over the
course of the program we incurred a pre-tax charge of approximately $29 million, which was recorded
in SD&A expenses. During 2007, we recorded pre-tax
charges of $26 million, of which $18 million was recorded in the U.S. & Canada segment and the
remaining $8 million was recorded in the Europe segment. During the first half of 2008, we
recorded an additional $3 million of pre-tax charges primarily relating to relocation expenses in
our U.S. & Canada segment. We made approximately $24 million of after-tax cash payments associated
with these restructuring charges.
In the fourth quarter of 2007, we implemented and completed an additional phase of
restructuring actions to improve operating efficiencies. In addition to the amounts discussed
above, we recorded a pre-tax charge of approximately $4 million in SD&A expenses, primarily related
to employee termination costs in Mexico, where an additional 800 positions were eliminated as a
result of this phase of the restructuring. Annual cost savings from this restructuring program are
approximately $7 million.
Asset Disposal Charges
In the fourth quarter of 2007, we adopted a Full Service Vending (FSV) Rationalization plan
to rationalize our vending asset base in our U.S. & Canada segment by disposing of older
underperforming assets and redeploying certain assets to higher return accounts. Our FSV business
portfolio consists of accounts where we stock and service vending equipment. This plan, which we
completed in the second quarter of 2008, was part of the Companys broader initiative to improve
operating income margins of our FSV business.
Over the course of the FSV Rationalization plan, we incurred a pre-tax asset disposal charge
of approximately $25 million, the majority of which was non-cash. The charge included costs
associated with the removal of these assets from service, disposal costs and redeployment expenses.
Of this amount, we recorded a pre-tax charge of approximately $23 million in 2007, with the
remainder being recorded in 2008. This charge is recorded in SD&A expenses.
Tax Audit Settlements
In 2009, our tax provision was reduced by the reversal of tax reserves, net of noncontrolling
interests, of approximately $72 million, from the resolution of tax audits and the expiration of
statute of limitations in our international jurisdictions.
For further information about our tax audit settlements see Note 11 Income Taxes in the Notes
to Consolidated Financial Statements.
Tax Law Changes
In the fourth quarter of 2009, there was a significant tax law change in Mexico which required
us to re-measure our deferred tax assets and liabilities resulting in a net provision expense of
$72 million. Certain aspects of the tax law change in Mexico are still subject to clarification
with the tax authorities and may require that we revise our deferred taxes in the future as new
information becomes available. There was also a tax law change in Canada which reduced certain
provincial tax rates and which resulted in a tax provision benefit of $7 million.
During 2007, tax law changes were enacted in Canada and Mexico which required us to re-measure
our deferred tax assets and liabilities. The impact of the tax law change in Canada was partially
offset by the tax law
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change in Mexico, decreasing our income tax expense on a net basis. As a result of these
changes, net income attributable to Bottling LLC increased approximately $13 million.
FINANCIAL PERFORMANCE SUMMARY AND WORLDWIDE FINANCIAL HIGHLIGHTS FOR FISCAL YEAR 2009
% Change | ||||||||||||
December 26, | December 27, | Better/ | ||||||||||
2009 | 2008 | (Worse) | ||||||||||
Net revenues |
$ | 13,219 | $ | 13,796 | (4 | )% | ||||||
Gross profit |
5,840 | 6,210 | (6 | )% | ||||||||
Selling, delivery and administrative expenses |
4,777 | 5,171 | 8 | % | ||||||||
Operating income |
||||||||||||
U.S. & Canada |
$ | 883 | $ | 864 | 2 | % | ||||||
Europe |
112 | 101 | 11 | % | ||||||||
Mexico |
56 | (338 | ) | 116 | % | |||||||
Total segments |
1,051 | 627 | 68 | % | ||||||||
Corporate net impact of mark-to-market
on commodity hedges |
12 | | NM | |||||||||
Total operating income |
$ | 1,063 | $ | 627 | 70 | % | ||||||
Net income attributable to Bottling LLC |
$ | 913 | $ | 536 | 70 | % |
NM | | Not meaningful |
Reported net revenues decreased four percent versus the prior year driven by volume
declines and the negative impact from foreign currency translation. This impact was partially
offset by increases in rate per case in each of our reportable segments.
On a currency neutral basis*, net revenues increased one percent and net revenue per case
increased four percent versus the prior year, reflecting the solid execution of our revenue and
margin management strategy in a challenging economic environment. Reported net revenue per case
declined one percent, which includes the negative impact from foreign currency translation of five
percentage points.
Reported gross profit declined six percent versus the prior year, driven by the negative
impact of foreign currency translation and volume declines. This impact was partially offset by a
two percent increase in gross profit per case on a currency neutral basis, as rate gains from the
Companys global pricing strategy and savings from productivity initiatives more than offset higher
raw material costs. Reported gross profit per case declined three percent, which includes the
negative impact from foreign currency translation of five percentage points.
Reported SD&A declined eight percent versus the prior year, driven by lower operating costs
due to continued productivity improvements across all segments coupled with the favorable impact of
foreign currency translation. Foreign currency translation contributed five percentage points to
the decline in SD&A growth.
Reported operating income increased 70 percent versus the prior year. Items impacting
comparability** in the current and prior year contributed 74 percent to the operating income growth
for the year. The remaining four percent decrease in operating income growth for the year was
impacted by the negative impact of foreign currency translation of four percentage points and
volume declines. This impact was partially offset by increases in currency neutral gross profit
per case, cost and productivity improvements and the positive impact from acquisitions.
Net income attributable to Bottling LLC increased 70 percent versus the prior year to $913
million. Items impacting comparability in the current and prior year contributed 70 percentage
points to the growth rate for the year. The remaining flat growth for the year was driven by
operating income decline, higher interest expense on third party loans and lower interest income generated from loans made to
PBG. This was offset by lower taxes and the impact
from foreign currency transactional losses which occurred in the prior year.
* | Currency neutral results are calculated using prior years exchange rates when calculating foreign currency translation effects. | |
** | See section entitled Items Affecting Comparability of our Financial Results for further information about these items. |
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RESULTS OF OPERATIONS BY SEGMENT
Except where noted, tables and discussion are presented as compared to the prior fiscal year.
Growth rates are rounded to the nearest whole percentage.
Volume
2009 vs. 2008
U.S. & | ||||||||||||||||
Worldwide | Canada | Europe | Mexico | |||||||||||||
Base volume |
(4 | )% | (4 | )% | (8 | )% | (4 | )% | ||||||||
Acquisitions |
1 | 1 | | | ||||||||||||
Total Volume Change |
(3 | )% | (2) | %* | (8 | )% | (4 | )% | ||||||||
* | Does not add due to rounding to the whole percent. |
U.S. & Canada
In our U.S. & Canada segment, base volume, which excludes the impact of acquisitions,
decreased four percent for the year due primarily to the macroeconomic factors negatively impacting
the liquid refreshment beverage category. Our newly acquired rights to distribute Crush, Rockstar
and Muscle Milk in the U.S. contributed three percentage points to our base volume for the year.
Take-home and cold-drink channels declined by three percent and six percent, respectively,
versus last year. The decline in the take-home channel was driven primarily by our small format
stores as changes in consumer shopping trends are shifting more of our volume to channels such as
supercenters, club and dollar stores due to the economic downturn. Declines in our cold-drink
channel were mainly driven by our foodservice channel, including restaurants, travel and leisure,
education and workplace, which have been particularly impacted by the economic downturn in the
United States.
Europe
In our Europe segment, volume declined by eight percent versus the prior year. Soft volume
performance reflected the overall weak macroeconomic environment and category softness throughout
Europe, driven by double digit declines in Russia.
Mexico
In our Mexico segment, volume decreased four percent versus the prior year. Volume declines
were driven by difficult macroeconomic conditions and category softness, coupled with pricing
actions taken by the Company to drive improved margins across its portfolio.
2008 vs. 2007
U.S. & | ||||||||||||||||
Worldwide | Canada | Europe | Mexico | |||||||||||||
Total Volume Change |
(4 | )% | (4 | )% | (3 | )% | (5 | )% | ||||||||
U.S. & Canada
In our U.S. & Canada segment, volume decreased four percent due to declining consumer
confidence and spending, which has negatively impacted the liquid refreshment beverage category.
Cold-drink and take-home channels both declined by four percent versus last year. The decline in
the take-home channel was driven primarily by our large format stores, which was impacted by the
overall declines in the liquid refreshment beverage category as well as pricing actions taken to
improve profitability in our take-home packages including our unflavored water business. Decline
in the cold-drink channel was driven by our foodservice channel, including restaurants, travel and
leisure and workplace, which has been particularly impacted by the economic downturn in the United
States.
Europe
In our Europe segment, volume declined by three percent resulting from a soft volume
performance in the second half of the year. Results reflect overall weak macroeconomic
environments throughout Europe with high single digit declines in Spain and flat volume growth in
Russia. Despite the slowing growth in Russia, we showed improvements in our energy and tea
categories, partially offset by declines in the CSD category. In Spain, there were declines across
all channels due to a weakening economy and our continued focus on improving revenue and gross
profit growth.
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Mexico
In our Mexico segment, volume decreased five percent driven by slower economic growth coupled
with pricing actions taken by the Company to drive improved margins across its portfolio. This
drove single digit declines in our jug water and multi-serve packages, which were partially offset
by one percent improvement in our bottled water package.
Net Revenues
2009 vs. 2008
U.S. & | ||||||||||||||||
Worldwide | Canada | Europe | Mexico | |||||||||||||
2009 Net revenues |
$ | 13,219 | $ | 10,315 | $ | 1,755 | $ | 1,149 | ||||||||
2008 Net revenues |
$ | 13,796 | $ | 10,300 | $ | 2,115 | $ | 1,381 | ||||||||
% Impact of: |
||||||||||||||||
Volume |
(4 | )% | (4 | )% | (8 | )% | (4 | )% | ||||||||
Net price impact (rate/mix) |
4 | 3 | 6 | 6 | ||||||||||||
Acquisitions |
1 | 1 | | | ||||||||||||
Currency translation |
(5 | ) | (1 | ) | (16 | ) | (19 | ) | ||||||||
Total Net Revenues Change |
(4 | )% | | %* | (17) | %* | (17 | )% | ||||||||
* | Does not add due to rounding to the whole percent. |
U.S. & Canada
In our U.S. & Canada segment, net revenues were flat for the year. The results reflect
improvements in net pricing, partially offset by volume declines and the negative impact of foreign
currency translation. Net revenue per case on a currency neutral basis improved by three percent,
driven by rate increases. Reported net revenue per case increased two percent, which includes the
negative impact from foreign currency translation of one percentage point.
Europe
In our Europe segment, net revenues declined 17 percent, due primarily to the negative impact
of foreign currency translation and volume declines. This was offset by growth in net revenue per
case on a currency neutral basis of seven percent driven primarily by rate actions and disciplined
promotional spending. Europes reported net revenue per case declined 10 percent, which includes
the negative impact from foreign currency translation of 17 percentage points.
Mexico
In our Mexico segment, declines in net revenues of 17 percent reflected the negative impact of
foreign currency translation and volume declines, partially offset by improvements in currency
neutral net revenue per case. Net revenue per case on a currency neutral basis grew six percent,
primarily due to rate increases to drive margin improvement. Mexicos reported net revenue per
case declined 14 percent, which includes a 20 percentage point negative impact from foreign
currency translation.
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2008 vs. 2007
U.S. & | ||||||||||||||||
Worldwide | Canada | Europe | Mexico | |||||||||||||
2008 Net revenues |
$ | 13,796 | $ | 10,300 | $ | 2,115 | $ | 1,381 | ||||||||
2007 Net revenues |
$ | 13,591 | $ | 10,336 | $ | 1,872 | $ | 1,383 | ||||||||
% Impact of: |
||||||||||||||||
Volume |
(4 | )% | (4 | )% | (3 | )% | (5 | )% | ||||||||
Net price impact (rate/mix) |
5 | 4 | 10 | 6 | ||||||||||||
Currency translation |
1 | | 6 | (1 | ) | |||||||||||
Total Net Revenues Change |
2 | % | | % | 13 | % | | % | ||||||||
U.S. & Canada
In our U.S. & Canada segment, net revenues were flat versus the prior year driven by net price
per case improvement offset by volume declines. The four percent improvement in net price per case
was primarily driven by rate increases taken to offset rising raw material costs and to improve
profitability in our take-home packages, including our unflavored water business.
Europe
In our Europe segment, growth in net revenues for the year reflects an increase in net price
per case and the positive impact of foreign currency translation, partially offset by volume
declines. Net revenue per case grew in every country in Europe led by double-digit growth in
Russia and Turkey due mainly to rate increases.
Mexico
In our Mexico segment, net revenues were flat versus the prior year reflecting increases in
net price per case offset by declines in volume and the negative impact of foreign currency
translation. Growth in net price per case was primarily due to rate increases taken within our
multi-serve CSDs, jugs and bottled water packages.
Operating Income
2009 vs. 2008
U.S. & | ||||||||||||||||||||
Worldwide | Canada | Europe | Mexico | Corporate | ||||||||||||||||
2009 Operating income |
$ | 1,063 | $ | 883 | $ | 112 | $ | 56 | $ | 12 | ||||||||||
2008 Operating income (loss) |
$ | 627 | $ | 864 | $ | 101 | $ | (338 | ) | $ | | |||||||||
% Impact of: |
||||||||||||||||||||
Operating activities |
(4 | )% | (4 | )% | (12 | )% | 17 | % | | % | ||||||||||
Mark-to-market net impact |
2 | | | | NM | |||||||||||||||
Impairment charges |
63 | | 2 | 125 | | |||||||||||||||
2008 Restructuring actions |
8 | 5 | 23 | (3 | ) | | ||||||||||||||
2007 Restructuring actions |
1 | 1 | | | | |||||||||||||||
Asset disposal charges |
| | | | | |||||||||||||||
Acquisitions |
3 | 2 | 14 | | | |||||||||||||||
Currency translation |
(4 | ) | (1 | ) | (17 | ) | (23 | ) | | |||||||||||
Total operating income change |
70 | %* | 2 | %* | 11 | %* | 116 | % | NM | % | ||||||||||
* | Does not add due to rounding to the whole percent. | |
NM | | Not meaningful |
U.S. & Canada
In our U.S. & Canada segment, operating income increased two percent versus the prior year,
driven by the favorable impact of acquisitions and items impacting comparability listed above,
partially offset by a decline in operating activities. Decreases in operating activities were
driven by volume declines, partially offset by an improvement in gross profit per case and cost and
productivity savings.
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Reported gross profit per case increased one percent, which includes the negative impact from
foreign currency translation of one percentage point for the year. Gross profit per case on a
currency neutral basis increased two percent for the year driven by growth in net revenue per case
and savings from productivity initiatives, which more than offset higher raw material costs.
SD&A improved two percent for the year. The decrease in SD&A expenses for the year reflects
lower costs resulting from productivity initiatives and volume declines coupled with a favorable
impact from foreign currency translation of one percentage point, partially offset by higher
pension and employee related costs.
Europe
In our Europe segment, operating income increased 11 percent driven primarily by the impact of
restructuring and other charges taken in the prior year and additional income from our newly
acquired equity investment in Russia, partially offset by decreases in volume and the negative
impact of foreign currency.
Reported gross profit per case in Europe declined 14 percent for the year, which includes the
negative impact from foreign currency translation of 15 percentage points. Gross profit per case
on a currency neutral basis increased one percent driven by strong rate increases which offset
higher raw material costs resulting from the foreign currency transactional impact for U.S. dollar
denominated purchases.
SD&A in Europe improved 24 percent for the year, which includes a benefit from foreign
currency translation of 13 percentage points. The remaining improvement in SD&A was driven by
volume declines, restructuring and other customer related charges taken in the prior year, lower
costs resulting from productivity initiatives throughout Europe and income generated from our
equity investment in Russia.
Mexico
In our Mexico segment, operating income increased 116 percent versus the prior year.
Impairment and restructuring charges contributed 122 percent to the growth, which was partially
offset by foreign currency translation of 23 percent. The remaining 17 percent of growth for the
year was driven primarily by improved pricing actions and lower costs resulting from productivity
initiatives.
Reported gross profit per case declined 15 percent for the year, which includes the negative
impact from foreign currency translation of 19 percentage points. Gross profit per case on a
currency neutral basis increased four percent, reflecting solid margin management and cost savings
from productivity initiatives, which offset rising raw material costs. Higher raw material costs
were driven by the negative impact of foreign currency transactional costs resulting from U.S.
dollar denominated purchases.
SD&A improved 18 percent for the year, which includes an 18 percentage point benefit from
foreign currency translation. Restructuring charges increased SD&A by two percentage points. The
remaining decrease in SD&A growth was driven by improved route and cost productivity initiatives.
Corporate
Corporate reflects a net gain of $12 million for the year related to the mark-to-market of
commodity derivatives used to hedge against price changes associated with certain commodities
utilized primarily in our U.S. and Canada production processes. The Company did not have any
comparable mark-to-market commodity derivative activity in prior years.
2008 vs. 2007
U.S. & | ||||||||||||||||
Worldwide | Canada | Europe | Mexico | |||||||||||||
2008 Operating income (loss) |
$ | 627 | $ | 864 | $ | 101 | $ | (338 | ) | |||||||
2007 Operating income |
$ | 1,054 | $ | 876 | $ | 106 | $ | 72 | ||||||||
% Impact of: |
||||||||||||||||
Operating activities |
1 | % | 1 | % | 2 | % | (3 | )% | ||||||||
Impairment charges |
(39 | ) | | (3 | ) | (571 | ) | |||||||||
2008 Restructuring charges |
(8 | ) | (6 | ) | (25 | ) | (4 | ) | ||||||||
2007 Restructuring charges |
3 | 2 | 8 | 4 | ||||||||||||
Asset disposal charges |
2 | 2 | | | ||||||||||||
Currency translation |
1 | | 12 | 2 | ||||||||||||
Total Operating Income Change |
(41) | %* | (1 | )% | (5) | %* | (572 | )% | ||||||||
* | Does not add due to rounding to the whole percent. |
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U.S. & Canada
In our U.S. & Canada segment, operating income was $864 million in 2008, decreasing one
percent versus the prior year. Restructuring and asset disposal charges taken in the current and
prior year together contributed a decrease of two percentage points to the operating income
decline. The remaining one percentage point of growth includes increases in gross profit per case
and lower operating costs, partially offset by lower volume in the United States.
Gross profit per case improved two percent versus the prior year in our U.S. & Canada segment.
This includes growth in net revenue per case, which was partially offset by a six percent increase
in cost of sales per case. Growth in cost of sales per case includes higher concentrate, sweetener
and packaging costs.
SD&A expenses improved three percent versus the prior year in our U.S. & Canada segment due to
lower volume and pension costs and cost productivity initiatives. These productivity initiatives
reflect a combination of headcount savings, reduced discretionary spending and leveraged
manufacturing and logistics benefits. Results also include one percentage point of growth due to
restructuring and asset disposal charges taken in the current and prior year.
Europe
In our Europe segment, operating income was $101 million in 2008, decreasing five percent
versus the prior year. The net impact of restructuring and impairment charges contributed 20
percentage points to the decline for the year. The remaining 14 percentage point increase in
operating income growth for the year reflects improvements in gross profit per case and the
positive impact from foreign currency translation, partially offset by higher SD&A expenses.
Gross profit per case in Europe increased 16 percent versus the prior year due to net price
per case increases and foreign currency translation, partially offset by higher sweetener and
packaging costs. Foreign currency contributed six percentage points of growth to gross profit for
the year.
SD&A expenses in Europe increased 16 percent due to additional operating costs associated with
our investments in Europe coupled with charges in Russia due to softening volume and weakening
economic conditions in the fourth quarter. Foreign currency contributed five percentage points to
SD&A growth. Restructuring charges taken in the current and prior year contributed approximately
two percentage points of growth to SD&A expenses for the year.
Mexico
In our Mexico segment, we had an operating loss of $338 million in 2008 driven primarily by
impairment and restructuring charges taken in the current and prior years. The remaining one
percent decrease in operating income growth for the year was driven by volume declines, partially
offset by increases in gross profit per case and the positive impact from foreign currency
translation.
Gross profit per case improved six percent versus the prior year driven by improvements in net
revenue per case, as we continue to improve our segment profitability in our jug water and
multi-serve packages. Cost of sales per case in Mexico increased five percent due primarily to
rising packaging costs.
SD&A remained flat versus the prior year driven by lower volume and reduced operating costs as
we focus on route productivity, partially offset by cost inflation.
Interest Expense
2009 vs. 2008
Interest expense increased by $11 million largely due to higher debt levels, proceeds of which
were utilized to fund our acquisitions, coupled with the pre-funding of our $1.3 billion debt that
matured in February 2009.
2008 vs. 2007
Interest expense increased by $12 million largely due to higher average debt balances
throughout the year and our treasury rate locks that were settled in the fourth quarter. These
increases were partially offset by lower effective interest rates from interest rate swaps which
convert our fixed-rate debt to variable-rate debt.
Interest Income
2009 vs. 2008
Interest income decreased by $54 million largely due to lower effective interest rates on
loans made to PBG.
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2008 vs. 2007
Interest income decreased by $60 million largely due to lower effective interest rates on
loans made to PBG.
Other Non-Operating (Income) Expenses, net
2009 vs. 2008
Other net non-operating income was $4 million in 2009 as compared to $24 million of net
non-operating expenses in 2008 reflecting the transactional impact of U.S. dollar and euro
purchases in Mexico and Europe. The positive change versus the prior year reflects the
stabilization of the Mexican peso and Russian ruble during 2009.
2008 vs. 2007
Other net non-operating expenses were $24 million in 2008 as compared to $5 million of net
non-operating income in 2007. Foreign currency transactional losses in 2008 resulted primarily
from our U.S. dollar and euro purchases in Mexico and Russia, reflecting the impact of the
weakening peso and ruble during the second half of 2008.
Net Income Attributable to Noncontrolling Interests
2009 vs. 2008
Net income attributable to noncontrolling interests primarily reflects PepsiCos 40 percent
ownership in the PR Beverages venture in Russia. The $9 million increase versus the prior year was
primarily driven by higher income generated by the PR Beverages venture.
2008 vs. 2007
The $4 million decrease versus the prior year was primarily driven by lower income generated
by the PR Beverages venture.
Income Tax Expense
Bottling LLC is a limited liability company, classified as a partnership for U.S. tax purposes
and, as such, generally will pay limited U.S. federal, state and local income taxes. The federal
and state distributive shares of income, deductions and credits of Bottling LLC are allocated to
Bottling LLCs owners based on their percentage of ownership in Bottling LLC. However, certain
domestic and foreign affiliates pay taxes in their respective jurisdictions. Such amounts are
reflected in our Consolidated Statements of Operations.
2009 vs. 2008
Our effective tax rate was a benefit of 2.8 percent in 2009 and a benefit of 7.4 percent in
2008. The change in our effective tax rate is due primarily to the year-over-year comparability
associated with the following:
During 2009, our tax provision was reduced by $75 million due to the reversal of tax reserves
from the resolution of tax audits in our international jurisdictions, for an effective tax rate
benefit of approximately 8.1 percentage points.
In the fourth quarter, we reversed approximately $39 million of valuation allowances on some
of our deferred tax assets as we anticipate receiving future benefit from those tax assets, which
decreased our effective tax rate by approximately 4.2 percentage points.
Also in the fourth quarter of 2009, there was a significant tax law change in Mexico which
required us to re-measure our deferred tax assets and liabilities resulting in a net provision
expense of $72 million. Certain aspects of the tax law change in Mexico are still subject to
clarification with the tax authorities and may require that we revise our deferred taxes in the
future as new information becomes available. There was also a tax law change in Canada which
reduced certain provincial tax rates and which resulted in a tax provision benefit of $7 million.
The net effect of these law changes increased our effective tax rate by approximately 7.1
percentage points.
Our effective tax rate was also favorably impacted in 2009 by lower carrying charges on tax
reserves as well as tax planning strategies.
In 2008, we had impairment charges primarily related to Mexico as well as restructuring
charges which resulted in a tax provision benefit of $115 million. The net impact of these items
decreased our effective tax rate by 14.8 percentage points.
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2008 vs. 2007
Our effective tax rate was a benefit of 7.4 percent in 2008 and an expense of 2.6 percent in
2007, respectively. The decrease in our effective tax rate is due primarily to the year-over-year
comparability associated with the following:
In 2008, we had impairment charges primarily related to Mexico as well as restructuring
charges which resulted in a tax provision benefit of $115 million. The net impact of these items
decreased our effective tax rate by 14.8 percentage points.
In 2007, we had tax law changes that reduced our deferred income tax provision by $13 million,
coupled with valuation allowance reversals of $11 million. These items decreased our effective tax
rate by 2.4 percentage points.
LIQUIDITY AND FINANCIAL CONDITION
Cash Flows
2009 vs. 2008
Bottling LLC generated $1,355 million of net cash from operations, a decrease of $118 million
from 2008. The decrease in net cash provided by operations was driven primarily by an increase in
pension contributions offset by timing of note receivable interest payments from PBG and disbursements, net of collections primarily related to promotional activities.
Net cash used for investments was $469 million, a decrease of $1,074 million from 2008. The
decrease in cash used for investments primarily reflects $742 million of payments made in 2008
associated with our investment in JSC Lebedyansky (Lebedyansky), lower net issuances of notes receivable from PBG and lower capital expenditures and acquisition spending in 2009. This was partially offset by lower
proceeds from the collection of notes receivable from PBG in 2009 and by a loan made to our
noncontrolled affiliate, which was contemplated as part of the initial capitalization of the
purchase of Lebedyansky between PepsiCo and us.
Net cash used for financing activities was $961 million, an increase of $1,415 million as
compared to a source of cash of $454 million in 2008. The decrease in cash from financing
activities primarily reflects the repayment of our $1.3 billion bond maturing in February 2009. In
addition, in 2008, the Company issued $1.3 billion in senior notes to partially pre-fund the 2009
bond maturity and received $308 million of cash from PepsiCo for their proportional share in the
acquisitions by PR Beverages. This was partially offset by the issuance of a $750 million bond in
2009 and lower distributions and short-term borrowings in 2009.
2008 vs. 2007
Bottling LLC generated $1,473 million of net cash from operations, a decrease of $505 million
from 2007. The decrease in net cash provided by operations was driven primarily by lower interest
income received from PBG, timing of accounts payable disbursements and higher payments related to
promotional activities.
Net cash used for investments was $1,543 million, a decrease of $73 million from 2007. The
decrease in cash used for investments primarily reflects $1,027 million of proceeds from collection
of notes receivable from PBG and lower capital expenditures, partially offset by $742 million of
payments associated with our investment in Lebedyansky, and payments for acquisitions.
Net cash provided by financing activities was $454 million, an increase of $826 million as
compared to a use of cash of $372 million in 2007. The increase in cash from financing primarily
reflects proceeds from the issuance of $1.3 billion in senior notes to partially pre-fund the
February 2009 bond maturity of $1.3 billion. Also reflected in financing activities was $308
million of cash received from PepsiCo for their proportional share in the acquisitions by PR
Beverages. These increases were partially offset by higher distributions to Bottling LLCs owners.
Capital Expenditures
Our business requires substantial infrastructure investments to maintain our existing level of
operations and to fund investments targeted at growing our business. Capital expenditures included
in our cash flows from investing activities totaled $556 million, $755 million and $854 million
during 2009, 2008 and 2007, respectively. Capital expenditures decreased $199 million in 2009 due
to our disciplined approach to capital spending.
Liquidity and Capital Resources
Our principal sources of cash include cash from our operating activities and the issuance of
debt and bank borrowings. We believe that these cash inflows will be sufficient to fund capital
expenditures, benefit plan contributions, acquisitions and working capital requirements. Our
liquidity remains healthy and management does not expect that it will be materially impacted in the
near-future.
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Acquisitions and Investments
During 2009, we acquired a Pepsi-Cola and Dr Pepper franchise bottler serving portions of
central Texas, as well as a Pepsi-Cola franchise bottler serving northeastern Massachusetts. The
total cost of these acquisitions during 2009 was approximately $92 million.
During 2009, we acquired distribution rights for certain energy drinks in the United States
and Canada and protein-enhanced functional beverages in the United States. In addition, we
acquired rights to manufacture and distribute Crush in portions of the United States. The total
cost of these distribution and franchise rights during 2009 was approximately $40 million, of which
$20 million will be paid over the next four years.
During 2008, we completed a joint acquisition with PepsiCo of Russias leading branded juice
company Lebedyansky for approximately $1.8 billion. Lebedyansky was acquired 58.3 percent by
PepsiCo and 41.7 percent by PR Beverages, our Russian venture with PepsiCo. We have recorded an
equity investment for PR Beverages share in Lebedyansky and a noncontrolling interest for
PepsiCos proportional contribution to PR Beverages relating to Lebedyansky. As a result of
PepsiCos 40 percent ownership of PR Beverages, PepsiCo and Bottling LLC have acquired a 75 percent
and 25 percent economic stake in Lebedyansky, respectively.
Also during 2008, we acquired a Pepsi-Cola franchise bottler serving portions of Colorado,
Arizona and New Mexico and a company that will manufacture various Pepsi products in Siberia and
Eastern Russia. The total cost of acquisitions during 2008 was approximately $257 million.
Additionally, PBG acquired a Pepsi-Cola franchise bottler serving certain New York counties in
whole or in part. This Pepsi-Cola franchise bottler was subsequently contributed to Bottling LLC.
Long-Term Debt Activities
During the first quarter of 2009, we issued $750 million in senior notes, with a coupon rate
of 5.125 percent, maturing in 2019. The net proceeds of the offering, together with a portion of
the proceeds from the offering of our senior notes issued in the fourth quarter of 2008, were used
to repay our senior notes due at their scheduled maturity on February 17, 2009. The next
significant scheduled debt maturity is not until 2012.
During the fourth quarter of 2008, we issued $1.3 billion in senior notes with a coupon rate
of 6.95 percent, maturing in 2014. A portion of the proceeds of this debt was used to finance
acquisitions and repay PBGs short-term commercial paper debt.
Short-Term Debt Activities
As of year-end 2009, we had available short-term bank credit lines of approximately $892
million, of which the majority was uncommitted. These lines were primarily used to support the
general operating needs of our international locations. As of December 26, 2009, we had $188
million outstanding under these lines of credit at a weighted-average interest rate of 3.1 percent.
As of year-end 2008, we had available short-term bank credit lines of approximately $772 million,
of which $103 million was outstanding at a weighted-average interest rate of 10.0 percent.
Our peak borrowing timeframe varies with our working capital requirements and the seasonality
of our business. Additionally, throughout the year, we may have further short-term borrowing
requirements driven by other operational needs of our business. During 2009, borrowings from our
line of credit facilities peaked at $245 million, reflecting payments for working capital
requirements.
Debt Covenants and Credit Ratings
Certain of our senior notes have redemption features and non-financial covenants that will,
among other things, limit our ability to create or assume liens, enter into sale and lease-back
transactions, engage in mergers or consolidations and transfer or lease all or substantially all of
our assets. Additionally, certain of our senior notes have financial covenants. These covenants
are not, and it is not anticipated that they will become restrictive to our liquidity or capital
resources. We are in compliance with all debt covenants. For a discussion of our covenants, see
Note 7 Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated Financial Statements.
Our credit ratings are periodically reviewed by rating agencies. Currently our long-term
ratings from Moodys and Standard and Poors are A2 and A, respectively. Changes in our operating
results or financial position could impact the ratings assigned by the various agencies resulting
in higher or lower borrowing costs.
Pensions
During 2010, we expect to contribute $158 million to fund PBGs U.S. pension and
postretirement plans. For further information about our pension and postretirement plan funding
see section entitled Pension and Postretirement Medical Benefit Plans in our Critical Accounting
Policies.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 26, 2009:
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | 2010 | 2011- 2012 | 2013- 2014 | 2015 and beyond | |||||||||||||||
Long-term debt obligations(1) |
$ | 4,515 | $ | 7 | $ | 1,008 | $ | 1,700 | $ | 1,800 | ||||||||||
Capital lease obligations(2) |
28 | 8 | 13 | 5 | 2 | |||||||||||||||
Operating leases(2) |
250 | 56 | 62 | 31 | 101 | |||||||||||||||
Interest obligations(3) |
1,301 | 217 | 499 | 341 | 244 | |||||||||||||||
Purchase obligations: |
||||||||||||||||||||
Raw material obligations(4) |
408 | 387 | 21 | | | |||||||||||||||
Capital expenditure obligations(5) |
50 | 50 | | | | |||||||||||||||
Other obligations(6) |
224 | 127 | 62 | 13 | 22 | |||||||||||||||
Other long-term liabilities(7) |
35 | 8 | 14 | 8 | 5 | |||||||||||||||
$ | 6,811 | $ | 860 | $ | 1,679 | $ | 2,098 | $ | 2,174 | |||||||||||
(1) | See Note 7 Short-Term Borrowings and Long-Term Debt in the Notes to Consolidated Financial Statements for additional information relating to our long-term debt obligations. | |
(2) | Capital lease obligation balances include imputed interest. See Note 8 Leases in the Notes to Consolidated Financial Statements for additional information relating to our lease obligations. | |
(3) | Represents interest payment obligations related to our long-term fixed-rate debt as specified in the applicable debt agreements. A portion of our long-term debt has variable interest rates due to existing swap agreements. We have estimated our variable interest payment obligations by using the interest rate forward curve where practical. Given uncertainties in future interest rates we have not included the beneficial impact of interest rate swaps after the year 2010. | |
(4) | Represents obligations to purchase raw materials pursuant to contracts entered into by PepsiCo on our behalf and international agreements to purchase raw materials. | |
(5) | Represents legally binding commitments to suppliers under capital expenditure related contracts or purchase orders. | |
(6) | Represents legally binding agreements to purchase goods or services that specify all significant terms, including: fixed or minimum quantities, price arrangements and timing of payments. If applicable, penalty, notice, or minimum purchase amount is used in the calculation. Balances also include non-cancelable customer contracts for sports marketing arrangements. | |
(7) | Primarily represents non-compete contracts and future payment obligations related to distribution rights that resulted from various acquisitions. The non-current portion of unrecognized tax benefits recorded on the balance sheet as of December 26, 2009 is not included in the table. There was no current portion of unrecognized tax benefits as of December 26, 2009. For additional information about our income taxes see Note 11 Income Taxes in the Notes to Consolidated Financial Statements. |
This table excludes our pension and postretirement liabilities recorded on the balance sheet.
For a discussion of our future pension contributions, as well as expected pension and
postretirement benefit payments see Note 10 Pension and Postretirement Medical Benefit Plans in the
Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
For information about our off-balance sheet arrangements see Note 13 Related Party
Transactions in the Notes to Consolidated Financial Statements regarding certain guarantees we made
to our parent, PBG.
MARKET RISKS AND CAUTIONARY STATEMENTS
Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, our financial position is routinely subject to a variety of
risks. These risks include changes in the price of commodities purchased and used in our business,
interest rates on outstanding debt and currency movements impacting our non-U.S. dollar denominated
assets and liabilities. We are also subject to the risks associated with the business environment
in which we operate. We regularly assess these risks and have strategies in place to reduce the
adverse effects of these exposures.
Our objective in managing our exposure to fluctuations in commodity prices, interest rates and
foreign currency exchange rates is to minimize the volatility of earnings and cash flows associated
with changes in the applicable
36
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rates and prices. To achieve this objective, we have derivative instruments to hedge against
the risk of adverse movements in commodity prices, interest rates and foreign currency. We monitor
our counterparty credit risk on an ongoing basis. Our corporate policy prohibits the use of
derivative instruments for trading or speculative purposes, and we have procedures in place to
monitor and control their use. See Note 9 Financial Instruments and Risk Management in the Notes
to Consolidated Financial Statements for additional information relating to our derivative
instruments.
A sensitivity analysis has been prepared to determine the effects that market risk exposures
may have on our financial instruments. These sensitivity analyses evaluate the effect of
hypothetical changes in commodity prices, interest rates and foreign currency exchange rates and
changes in PBGs stock price on our unfunded deferred compensation liability. Information provided
by these sensitivity analyses does not necessarily represent the actual changes in fair value that
we would incur under normal market conditions because, due to practical limitations, all variables
other than the specific market risk factor were held constant. As a result, the reported changes
in the values of some financial instruments that are affected by the sensitivity analyses are not
matched with the offsetting changes in the values of the items that those instruments are designed
to finance or hedge.
Commodity Price Risk
We are subject to market risks with respect to commodities because our ability to recover
increased costs through higher pricing may be limited by the competitive business environment in
which we operate. We use forward and option contracts to hedge the risk of adverse movements in
commodity prices related primarily to anticipated purchases of raw materials and energy used in our
operations. With respect to commodity price risk, we currently have various contracts outstanding
for commodity purchases in 2010 and 2011, which establish our purchase prices within defined
ranges. We estimate that a 10 percent decrease in commodity prices with all other variables held
constant would have resulted in a change in the fair value of our financial instruments of $48
million and $14 million at December 26, 2009 and December 27, 2008, respectively.
Interest Rate Risk
Interest rate risk is inherent to both fixed-rate and floating-rate debt. We effectively
converted $1.25 billion of our senior notes to floating-rate debt through the use of interest rate
swaps. Changes in interest rates on our interest rate swaps and other variable debt would change
our interest expense. We estimate that a 50 basis point increase in interest rates on our variable
rate debt and cash equivalents, with all other variables held constant, would have resulted in an
increase to net interest expense of $4 million and $1 million in fiscal years 2009 and 2008,
respectively.
Foreign Currency Exchange Rate Risk
In 2009, approximately 30 percent of our net revenues were generated from outside the United
States. Social, economic and political conditions in these international markets may adversely
affect our results of operations, financial condition and cash flows. The overall risks to our
international businesses include changes in foreign governmental policies and other social,
political or economic developments. These developments may lead to new product pricing, tax or
other policies and monetary fluctuations that may adversely impact our business. In addition, our
results of operations and the value of our foreign assets and liabilities are affected by
fluctuations in foreign currency exchange rates.
As currency exchange rates change, translation of the statements of operations of our
businesses outside the U.S. into U.S. dollars affects year-over-year comparability. We generally
have not hedged against these types of currency risks because cash flows from our international
operations have been reinvested locally. We have foreign currency transactional risks in certain
of our international territories for transactions that are denominated in currencies that are
different from their functional currency. We have entered into forward exchange contracts to hedge
portions of our forecasted U.S. dollar cash flows in these international territories. A 10
percent weaker U.S. dollar against the applicable foreign currency, with all other variables held
constant, would result in a change in the fair value of these contracts of $16 million and $5
million at December 26, 2009 and December 27, 2008, respectively.
In 2007, we entered into forward exchange contracts to economically hedge a portion of
intercompany receivable balances that are denominated in Mexican pesos. A 10 percent weaker U.S.
dollar versus the Mexican peso, with all other variables held constant, would result in a change of
$4 million in the fair value of these contracts at December 26, 2009 and December 27, 2008.
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Unfunded Deferred Compensation Liability
Our unfunded deferred compensation liability is subject to changes in PBGs stock price, as
well as price changes in certain other equity and fixed-income investments. We use prepaid forward
contracts to hedge the portion of our deferred compensation liability that is based on PBGs stock
price. Therefore, changes in compensation expense as a result of changes in PBGs stock price are
substantially offset by the changes in the fair value of these contracts. We estimate that a 10
percent unfavorable change in PBGs year-end stock price would have reduced the fair value from
these forward contract commitments by $2 million and $1 million at December 26, 2009 and December
27, 2008, respectively.
Cautionary Statements
Except for the historical information and discussions contained herein, statements contained
in this annual report on Form 10-K may constitute forward-looking statements as defined by the
Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on
currently available competitive, financial and economic data and our operating plans. These
statements involve a number of risks, uncertainties and other factors that could cause actual
results to be materially different. Among the events and uncertainties that could adversely affect
future periods are:
| risk associated with PBGs pending merger with PepsiCo, including satisfaction of certain conditions of the pending merger, contractual restrictions on the conduct of our business included in the merger agreement, and the potential for loss of key personnel, disruption of our sales and operations or any impact on our relationships with third parties as a result of the pending merger; |
| PepsiCos ability to affect matters concerning us through its equity ownership of PBG and Bottling LLC, representation on PBGs Board and approval rights under our Master Bottling Agreement; |
| material changes in expected levels of bottler incentive payments from PepsiCo; |
| restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs; |
| material changes from expectations in the cost or availability of ingredients, packaging materials, other raw materials or energy, including changes resulting from restrictions on our suppliers required by PepsiCo; |
| limitations on the availability of water or obtaining water rights; |
| an inability to achieve strategic business plan targets; |
| an inability to achieve cost savings; |
| material changes in capital investment for infrastructure and an inability to achieve the expected timing for returns on cold-drink equipment and related infrastructure expenditures; |
| decreased demand for our product resulting from changes in consumers preferences; |
| an inability to achieve volume growth through product and packaging initiatives; |
| impact of competitive activities on our business; |
| impact of customer consolidations on our business; |
| unfavorable weather conditions in our markets; |
| an inability to successfully integrate acquired businesses or to meet projections for performance in newly acquired territories; |
| loss of business from a significant customer; |
| loss of key members of management; |
| failure or inability to comply with laws and regulations; |
| litigation, other claims and negative publicity relating to alleged unhealthy properties or environmental impact of our products; |
| changes in laws and regulations governing the manufacture and sale of food and beverages (including taxes on sweetened beverages), the environment, transportation, employee safety, labor and government contracts; |
| changes in accounting standards and taxation requirements (including unfavorable outcomes from audits performed by various tax authorities); |
| an increase in costs of pension, medical and other employee benefit costs; |
| unfavorable market performance of assets in PBGs pension plans or material changes in key assumptions used to calculate the liability of PBGs pension plans, such as discount rate; |
| unforeseen social, economic and political changes; |
| possible recalls of our products; |
| interruptions of operations due to labor disagreements; |
| limitations on our ability to invest in our business as a result of our repayment obligations under our existing indebtedness; |
| changes in our debt ratings, an increase in financing costs or limitations on our ability to obtain credit; and |
| material changes in expected interest and currency exchange rates. |
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AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Bottling Group, LLC
Consolidated Statements of Operations
Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions
in millions
2009 | 2008 | 2007 | ||||||||||
Net Revenues |
$ | 13,219 | $ | 13,796 | $ | 13,591 | ||||||
Cost of sales |
7,379 | 7,586 | 7,370 | |||||||||
Gross Profit |
5,840 | 6,210 | 6,221 | |||||||||
Selling, delivery and administrative expenses |
4,777 | 5,171 | 5,167 | |||||||||
Impairment charges |
| 412 | | |||||||||
Operating Income |
1,063 | 627 | 1,054 | |||||||||
Interest expense |
255 | 244 | 232 | |||||||||
Interest income |
108 | 162 | 222 | |||||||||
Other non-operating (income) expenses, net |
(4 | ) | 24 | (5 | ) | |||||||
Income Before Income Taxes |
920 | 521 | 1,049 | |||||||||
Income tax (benefit) expense |
(26 | ) | (39 | ) | 27 | |||||||
Net Income |
946 | 560 | 1,022 | |||||||||
Net income attributable to noncontrolling interests |
33 | 24 | 28 | |||||||||
Net Income Attributable to Bottling LLC |
$ | 913 | $ | 536 | $ | 994 | ||||||
See accompanying notes to Consolidated Financial Statements.
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Table of Contents
Bottling Group, LLC
Consolidated Statements of Cash Flows
Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions
in millions
2009 | 2008 | 2007 | ||||||||||
Cash FlowsOperations |
||||||||||||
Net income |
$ | 946 | $ | 560 | $ | 1,022 | ||||||
Adjustments to reconcile net income to net cash provided by operations: |
||||||||||||
Depreciation and amortization |
636 | 672 | 668 | |||||||||
Deferred income taxes |
(12 | ) | (87 | ) | (8 | ) | ||||||
Share-based compensation |
58 | 56 | 61 | |||||||||
Impairment charges |
| 412 | | |||||||||
Defined benefit pension and postretirement expenses |
98 | 114 | 121 | |||||||||
Net other non-cash charges and credits |
55 | 95 | 78 | |||||||||
Changes in operating working capital, excluding effects of acquisitions: |
||||||||||||
Accounts receivable, net |
(67 | ) | 40 | (110 | ) | |||||||
Inventories |
(46 | ) | 3 | (19 | ) | |||||||
Prepaid expenses and other current assets |
10 | (96 | ) | 116 | ||||||||
Accounts payable and other current liabilities |
38 | (136 | ) | 187 | ||||||||
Income taxes payable |
(51 | ) | 18 | 5 | ||||||||
Net change in operating working capital |
(116 | ) | (171 | ) | 179 | |||||||
Pension contributions to funded plans |
(229 | ) | (85 | ) | (70 | ) | ||||||
Other operating activities, net |
(81 | ) | (93 | ) | (73 | ) | ||||||
Net Cash Provided by Operations |
1,355 | 1,473 | 1,978 | |||||||||
Cash FlowsInvestments |
||||||||||||
Capital expenditures |
(556 | ) | (755 | ) | (854 | ) | ||||||
Acquisitions, net of cash acquired |
(112 | ) | (257 | ) | (49 | ) | ||||||
Investments in noncontrolled affiliates |
(2 | ) | (742 | ) | | |||||||
Proceeds from sale of property, plant and equipment |
15 | 24 | 14 | |||||||||
Increase in notes receivable from PBG, net |
(173 | ) | (839 | ) | (733 | ) | ||||||
Proceeds from collection of notes receivable from PBG |
418 | 1,027 | | |||||||||
Issuance of note receivable from noncontrolled affiliate |
(92 | ) | | | ||||||||
Repayments of note receivable from noncontrolled affiliate |
28 | | | |||||||||
Other investing activities, net |
5 | (1 | ) | 6 | ||||||||
Net Cash Used for Investments |
(469 | ) | (1,543 | ) | (1,616 | ) | ||||||
Cash FlowsFinancing |
||||||||||||
Short-term borrowings, netthree months or less |
66 | (58 | ) | (40 | ) | |||||||
Proceeds from short-term borrowingsmore than three months |
| 117 | 167 | |||||||||
Payments of short-term borrowingsmore than three months |
| (91 | ) | (211 | ) | |||||||
Proceeds from issuances of long-term debt |
741 | 1,290 | 24 | |||||||||
Payments of long-term debt |
(1,330 | ) | (9 | ) | (41 | ) | ||||||
Contributions from noncontrolling interest holder |
33 | 308 | | |||||||||
Distributions to owners |
(463 | ) | (1,102 | ) | (271 | ) | ||||||
Other financing activities, net |
(8 | ) | (1 | ) | | |||||||
Net Cash (Used for) Provided by Financing |
(961 | ) | 454 | (372 | ) | |||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
16 | (57 | ) | 28 | ||||||||
Net (Decrease) Increase in Cash and Cash Equivalents |
(59 | ) | 327 | 18 | ||||||||
Cash and Cash EquivalentsBeginning of Year |
786 | 459 | 441 | |||||||||
Cash and Cash EquivalentsEnd of Year |
$ | 727 | $ | 786 | $ | 459 | ||||||
See accompanying notes to Consolidated Financial Statements.
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Bottling Group, LLC
Consolidated Balance Sheets
December 26, 2009 and December 27, 2008
in millions
in millions
2009 | 2008 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash and cash equivalents |
$ | 727 | $ | 786 | ||||
Accounts receivable, net |
1,491 | 1,371 | ||||||
Inventories |
600 | 528 | ||||||
Prepaid expenses and other current assets |
398 | 337 | ||||||
Total Current Assets |
3,216 | 3,022 | ||||||
Property, plant and equipment, net |
3,887 | 3,869 | ||||||
Other intangible assets, net |
3,941 | 3,751 | ||||||
Goodwill |
1,506 | 1,434 | ||||||
Investments in noncontrolled affiliates |
627 | 619 | ||||||
Notes receivable from PBG |
3,447 | 3,692 | ||||||
Other assets |
158 | 108 | ||||||
Total Assets |
$ | 16,782 | $ | 16,495 | ||||
LIABILITIES AND EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts payable and other current liabilities |
$ | 1,597 | $ | 1,529 | ||||
Short-term borrowings |
188 | 103 | ||||||
Current maturities of long-term debt |
15 | 1,305 | ||||||
Total Current Liabilities |
1,800 | 2,937 | ||||||
Long-term debt |
4,454 | 3,789 | ||||||
Other liabilities |
929 | 1,284 | ||||||
Deferred income taxes |
313 | 279 | ||||||
Total Liabilities |
7,496 | 8,289 | ||||||
Equity |
||||||||
Owners net investment |
9,412 | 8,907 | ||||||
Accumulated other comprehensive loss |
(879 | ) | (1,373 | ) | ||||
Total Bottling LLC Owners Equity |
8,533 | 7,534 | ||||||
Noncontrolling interests |
753 | 672 | ||||||
Total Equity |
9,286 | 8,206 | ||||||
Total Liabilities and Equity |
$ | 16,782 | $ | 16,495 | ||||
See accompanying notes to Consolidated Financial Statements.
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Bottling Group, LLC
Consolidated Statements of Changes in Equity
Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions
Accumulated | Total | |||||||||||||||||||||||
Other | Bottling | |||||||||||||||||||||||
Owners | Compre- | LLC | Noncon- | Compre- | ||||||||||||||||||||
Net | hensive | Owners | trolling | Total | hensive | |||||||||||||||||||
Investment | Loss | Equity | Interests | Equity | Income (Loss) | |||||||||||||||||||
Balance at December 30, 2006 |
$ | 8,681 | $ | (589 | ) | $ | 8,092 | $ | 18 | $ | 8,110 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
994 | | 994 | 28 | 1,022 | $ | 1,022 | |||||||||||||||||
Net currency translation adjustment |
| 235 | 235 | | 235 | 235 | ||||||||||||||||||
Cash flow hedge adjustment, net of tax of $2 |
| 2 | 2 | | 2 | 2 | ||||||||||||||||||
Pension and postretirement medical benefit
plans adjustment, net of tax of $(3) |
| 163 | 163 | | 163 | 163 | ||||||||||||||||||
Total comprehensive income |
$ | 1,422 | ||||||||||||||||||||||
Impact from the adoption of new income tax
standard |
(45 | ) | | (45 | ) | | (45 | ) | ||||||||||||||||
Cash distributions to owners |
(271 | ) | | (271 | ) | | (271 | ) | ||||||||||||||||
Contributions from owners |
| | | 333 | 333 | |||||||||||||||||||
Share-based compensation |
59 | | 59 | | 59 | |||||||||||||||||||
Balance at December 29, 2007 |
9,418 | (189 | ) | 9,229 | 379 | 9,608 | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||
Net income |
536 | | 536 | 24 | 560 | $ | 560 | |||||||||||||||||
Net currency translation adjustment |
| (593 | ) | (593 | ) | (70 | ) | (663 | ) | (663 | ) | |||||||||||||
Cash flow hedge adjustment, net of tax of $(3) |
| (64 | ) | (64 | ) | | (64 | ) | (64 | ) | ||||||||||||||
Pension and postretirement medical benefit
plans adjustment, net of tax of $2 |
| (562 | ) | (562 | ) | | (562 | ) | (562 | ) | ||||||||||||||
Total comprehensive loss |
$ | (729 | ) | |||||||||||||||||||||
Pension and postretirement measurement date
adjustment |
(27 | ) | 35 | 8 | | 8 | ||||||||||||||||||
Cash distributions to owners |
(1,102 | ) | | (1,102 | ) | | (1,102 | ) | ||||||||||||||||
Contributions from owners |
26 | | 26 | 339 | 365 | |||||||||||||||||||
Share-based compensation |
56 | | 56 | | 56 | |||||||||||||||||||
Balance at December 27, 2008 |
8,907 | (1,373 | ) | 7,534 | 672 | 8,206 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||
Net income |
913 | | 913 | 33 | 946 | $ | 946 | |||||||||||||||||
Net currency translation adjustment |
| 171 | 171 | (8 | ) | 163 | 163 | |||||||||||||||||
Cash flow hedge adjustment, net of tax of $1 |
| 114 | 114 | | 114 | 114 | ||||||||||||||||||
Pension and postretirement medical benefit
plans adjustment, net of tax of $(2) |
| 209 | 209 | | 209 | 209 | ||||||||||||||||||
Total comprehensive income |
$ | 1,432 | ||||||||||||||||||||||
Tax benefit equity awards |
1 | | 1 | | 1 | |||||||||||||||||||
Withholding tax equity awards |
(7 | ) | | (7 | ) | | (7 | ) | ||||||||||||||||
Cash distributions to owners |
(463 | ) | | (463 | ) | | (463 | ) | ||||||||||||||||
Contributions from owner |
7 | | 7 | | 7 | |||||||||||||||||||
Contributions from noncontrolling interest holder |
| | | 56 | 56 | |||||||||||||||||||
Share-based compensation |
54 | | 54 | | 54 | |||||||||||||||||||
Balance at December 26, 2009 |
$ | 9,412 | $ | (879 | ) | $ | 8,533 | $ | 753 | $ | 9,286 | |||||||||||||
See accompanying notes to Consolidated Financial Statements.
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Bottling Group, LLC
Consolidated Statements of Comprehensive Income (Loss)
Fiscal years ended December 26, 2009, December 27, 2008 and December 29, 2007
in millions
2009 | 2008 | 2007 | ||||||||||
Net income |
$ | 946 | $ | 560 | $ | 1,022 | ||||||
Net currency translation adjustment |
163 | (663 | ) | 235 | ||||||||
Cash flow hedge adjustment, net of tax |
114 | (64 | ) | 2 | ||||||||
Pension and postretirement medical
benefit plans adjustment, net of tax |
209 | (562 | ) | 163 | ||||||||
Comprehensive income (loss) |
1,432 | (729 | ) | 1,422 | ||||||||
Less: Comprehensive income (loss)
attributable to noncontrolling interests |
25 | (46 | ) | 28 | ||||||||
Comprehensive income (loss)
attributable to Bottling LLC |
$ | 1,407 | $ | (683 | ) | $ | 1,394 | |||||
See accompanying notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular dollars in millions
Note 1Basis of Presentation
Bottling Group, LLC (referred to as Bottling LLC, we, our, us and the Company) is
the principal operating subsidiary of The Pepsi Bottling Group, Inc. (PBG) and consists of
substantially all of the operations and the assets of PBG. PBG is the worlds largest
manufacturer, seller and distributor of Pepsi-Cola beverages. We have the exclusive right to
manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of the U.S., Mexico,
Canada, Spain, Russia, Greece and Turkey.
In conjunction with PBGs initial public offering and other subsequent transactions, PBG and
PepsiCo, Inc. (PepsiCo) contributed bottling businesses and assets used in the bottling
businesses to Bottling LLC. As a result of the contribution of these assets, PBG owns 93.4 percent
of Bottling LLC and PepsiCo owns the remaining 6.6 percent as of December 26, 2009. PepsiCo also
owns 40 percent of PR Beverages Limited (PR Beverages), a consolidated venture for our Russian
operations, which was formed on March 1, 2007.
On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which
PepsiCo will acquire all outstanding shares of PBG common stock it does not already own for the
price of $36.50 in cash or 0.6432 shares of PepsiCo common stock, subject to proration such that
the aggregate consideration to be paid to PBG shareholders shall be 50 percent in cash and 50
percent in PepsiCo common stock. At a special meeting of PBGs shareholders held on February 17,
2010, the shareholders adopted the merger agreement. The transaction is subject to certain
regulatory approvals and is expected to be finalized by the end of the first quarter of 2010.
Note 2Summary of Significant Accounting Policies
The preparation of our Consolidated Financial Statements in conformity with accounting
principles generally accepted in the U.S. (GAAP) often requires management to make judgments,
estimates and assumptions that affect the reported amounts included in our Consolidated Financial
Statements and related disclosures. We evaluate our estimates on an on-going basis using our
historical experience as well as other factors we believe appropriate under the circumstances, such
as current economic conditions, and adjust or revise our estimates as circumstances change. As
future events and their effect cannot be determined with precision, actual results may differ from
these estimates. In preparation of these financial statements, we have evaluated and assessed all
events occurring subsequent to December 26, 2009 and through February 22, 2010, which is the date
our financial statements were issued.
Basis of Consolidation We consolidate in our financial statements entities in which we have
a controlling financial interest, as well as variable interest entities where we are the primary
beneficiary. Noncontrolling interests in earnings and ownership has been recorded for the
percentage of these entities not owned by Bottling LLC. In addition, we use the equity method of
accounting to recognize investments in and income from entities where we have significant
influence, but do not have a controlling financial interest. We have eliminated all intercompany
accounts and transactions in consolidation.
Fiscal Year Our U.S. and Canadian operations report using a fiscal year that consists of 52
weeks, ending on the last Saturday in December. Every five or six years a 53rd week is added.
Fiscal years 2009, 2008 and 2007 consisted of 52 weeks. Our remaining countries report on a
calendar-year basis. Accordingly, we recognize our quarterly business results as outlined below:
Quarter | U.S. & Canada | Mexico & Europe | ||
First Quarter
|
12 weeks | January and February | ||
Second Quarter | 12 weeks | March, April and May | ||
Third Quarter | 12 weeks | June, July and August | ||
Fourth Quarter | 16 weeks | September, October, November and December |
Revenue Recognition Revenue, net of sales returns, is recognized when our products are
delivered to customers in accordance with the written sales terms. We offer certain sales
incentives on a local and national level through various customer trade agreements designed to
enhance the growth of our revenue, market share and consumer brand awareness. Customer trade
agreements are accounted for as a reduction to our revenues.
Customer trade agreements with our customers include payments for in-store displays, volume
rebates, equipment placements, featured advertising and other growth incentives. A number of our
customer trade agreements are based on quarterly and annual targets that generally do not exceed
one year. Amounts recognized in our financial statements are based on amounts estimated to be paid
to our customers depending upon current performance, historical experience, actual and forecasted
volume and other performance criteria.
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Advertising and Marketing Costs We are involved in a variety of programs to promote our
products. We include advertising and marketing costs in selling, delivery and administrative
(SD&A) expenses. Advertising and marketing costs were $360 million, $437 million and $424
million in 2009, 2008 and 2007, respectively, before bottler incentives received from PepsiCo and
other brand owners.
Bottler Incentives PepsiCo and other brand owners, at their discretion, provide us with
various forms of bottler incentives. These incentives cover a variety of initiatives, including
direct marketplace support and advertising support. We classify bottler incentives as follows:
| Direct marketplace support represents PepsiCos and other brand owners agreed-upon funding to assist us in offering sales and promotional discounts to retailers and is generally recorded as an adjustment to cost of sales. If the direct marketplace support is a reimbursement for a specific, incremental and identifiable program, the funding is recorded as an offset to the cost of the program either in net revenues or SD&A expenses. | ||
| Advertising support represents agreed-upon funding to assist us with the cost of media time and promotional materials and is generally recorded as an adjustment to cost of sales. Advertising support that represents reimbursement for a specific, incremental and identifiable media cost, is recorded as a reduction to advertising and marketing expenses within SD&A expenses. |
Total bottler incentives recognized as adjustments to net revenues, cost of sales and SD&A
expenses in our Consolidated Statements of Operations were as follows:
Fiscal Year Ended | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net revenues |
$ | 100 | $ | 93 | $ | 66 | ||||||
Cost of sales |
539 | 586 | 626 | |||||||||
Selling, delivery and administrative expenses |
47 | 57 | 67 | |||||||||
Total bottler incentives |
$ | 686 | $ | 736 | $ | 759 | ||||||
Share-Based Compensation The Company grants a combination of PBG stock option awards and PBG
restricted stock units to our middle and senior management. See Note 3 for further discussion on
our share-based compensation.
Shipping and Handling Costs Our shipping and handling costs reported in the Consolidated
Statements of Operations are recorded primarily within SD&A expenses. Such costs recorded within
SD&A expenses totaled $1.7 billion in 2009, 2008 and 2007.
Foreign Currency Gains and Losses and Currency Translation We translate the balance sheets
of our foreign subsidiaries at the exchange rates in effect at the balance sheet date, while we
translate the statements of operations at the average rates of exchange during the year. The
resulting translation adjustments of our foreign subsidiaries are included in accumulated other
comprehensive loss (AOCL), net of noncontrolling interests in our Consolidated Balance Sheets.
Transactional gains and losses on our financial assets and liabilities arising from the impact of
currency exchange rate fluctuations on transactions in foreign currency that is different from the
local functional currency are included in other non-operating (income) expenses, net in our
Consolidated Statements of Operations.
Pension and Postretirement Medical Benefit Plans We participate in PBG sponsored pension and
other postretirement medical benefit plans in various forms in the U.S. and other similar plans in
our international locations, covering employees who meet specified eligibility requirements.
Based on new pension accounting rules, we began to recognize the overfunded or underfunded
status of each of the pension and other postretirement plans beginning on December 30, 2006. In
addition, on December 30, 2007, we changed our measurement date to the year-end balance sheet date
for our plan assets, liabilities and expenses. For fiscal years ended 2007 and prior, the majority
of the pension and other postretirement plans used a September 30 measurement date and all plan
assets and obligations were generally reported as of that date. As part of measuring the plan
assets and benefit obligations on December 30, 2007, we adjusted our opening balances of owners
net investment and AOCL for the change in net periodic benefit cost and fair value, respectively,
from the previously used September 30 measurement date. The adoption of the measurement date
provisions resulted in a net decrease in the pension and other postretirement medical benefit plans
liability of $9 million, a net decrease in owners net investment of $27 million and a net decrease
in AOCL of $35 million. There was no impact on our results of operations.
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The determination of pension and postretirement medical benefit plan obligations and related
expenses requires the use of assumptions to estimate the amount of benefits that employees earn
while working, as well as the present value of those benefit obligations. Significant assumptions
include discount rate; expected rate of return on plan assets; certain employee-related factors
such as retirement age, mortality, and turnover; rate of salary increases for plans where benefits
are based on earnings; and for retiree medical plans, health care cost trend rates. We evaluate
these assumptions on an annual basis at each measurement date based upon historical experience of
the plans and managements best judgment regarding future expectations.
Differences between the assumed rate of return and actual return on plan assets are deferred
in AOCL in equity and amortized to earnings utilizing the market-related value method. Under this
method, differences between the assumed rate of return and actual rate of return from any one year
will be recognized over a five-year period in the market-related value.
Differences between assumed and actual returns on plan assets and other gains and losses
resulting from changes in actuarial assumptions are determined at each measurement date and
deferred in AOCL in equity. To the extent the amount of all unrecognized gains and losses exceeds
10 percent of the larger of the benefit obligation or the market-related value of plan assets, such
amount is amortized to earnings over the average remaining service period of active participants.
The cost or benefit from benefit plan changes is also deferred in AOCL in equity and amortized
to earnings on a straight-line basis over the average remaining service period of the employees
expected to receive benefits.
See Note 10 Pension and Postretirement Medical Benefit Plans for further discussion on pension
and postretirement medical benefit plans.
Income Taxes We are a limited liability company, classified as a partnership for U.S. tax
purposes and, as such, generally will pay limited U.S. federal, state and local income taxes. Our
federal and state distributive shares of income, deductions and credits are allocated to our owners
based on their percentage of ownership. However, certain domestic and foreign affiliates pay taxes
in their respective jurisdictions and record related deferred income tax assets and liabilities.
Our effective tax rate is based on pre-tax income, statutory tax rates, tax laws and regulations
and tax planning strategies available to us in the various jurisdictions in which we operate.
Our deferred tax assets and liabilities reflect our best estimate of the tax benefits and
costs we expect to realize in the future. We establish valuation allowances to reduce our deferred
tax assets to an amount that will more likely than not be realized.
Effective fiscal year 2007, we adopted the new income tax standard and began to recognize the
impact of our tax positions in our financial statements if those positions will more likely than
not be sustained on audit, based on the technical merit of the position. The impact of adopting
this standard was recorded by adjusting the opening balance of owners net investment.
Significant management judgment is required in evaluating our tax positions and in determining
our effective tax rate.
See Note 11 Income Taxes for further discussion on our income taxes.
Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments
with original maturities not exceeding three months at the time of purchase. The fair value of our
cash and cash equivalents approximates the amounts shown on our Consolidated Balance Sheets due to
their short-term nature.
Allowance for Doubtful Accounts A portion of our accounts receivable will not be collected
due to non-payment, bankruptcies and sales returns. We reserve an amount based on the evaluation
of the aging of accounts receivable, sales return trend analysis, detailed analysis of high-risk
customers accounts, and the overall market and economic conditions of our customers.
Inventories We value our inventories at the lower of cost or net realizable value. The cost
of our inventory is generally computed using the average cost method.
Property, Plant and Equipment We record property, plant and equipment (PP&E) at cost, except
for PP&E that has been impaired, for which we write down the carrying amount to estimated fair
market value, which then becomes the new cost basis.
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We depreciate PP&E on a straight-line basis over the estimated lives as follows:
Buildings and improvements |
20-33 years | |||
Manufacturing and distribution equipment |
2-15 years | |||
Marketing equipment |
2-7 years |
Other Intangible Assets, net and Goodwill Intangible assets with indefinite useful lives
and goodwill are not amortized; however, they are evaluated for impairment at least annually, or
more frequently if facts and circumstances indicate that the assets may be impaired.
Intangible assets that are determined to have a finite life are amortized on a straight-line
basis over the period in which we expect to receive economic benefit, which generally ranges from
five to twenty years, and are evaluated for impairment only if facts and circumstances indicate
that the carrying value of the asset may not be recoverable.
The determination of the expected life depends upon the use and the underlying characteristics
of the intangible asset. In our evaluation of the expected life of these intangible assets, we
consider the nature and terms of the underlying agreements; our intent and ability to use the
specific asset; the age and market position of the products within the territories in which we are
entitled to sell; the historical and projected growth of those products; and costs, if any, to
renew the related agreement.
See Note 5 Other Intangible Assets, net and Goodwill for further discussion on our goodwill
and other intangible assets.
Noncontrolling Interests Noncontrolling interests are recorded for the entities that we
consolidate but are not wholly owned by Bottling LLC. Noncontrolling interest recorded in our
Consolidated Financial Statements is primarily comprised of PepsiCos share of the consolidated net
income and net assets of the PR Beverages venture. At December 26, 2009, PepsiCo owned 40 percent
of the PR Beverages venture.
Financial Instruments and Risk Management All derivative instruments are recorded at fair
value as either assets or liabilities in our Consolidated Balance Sheets. Derivative instruments
are generally designated and accounted for as either a hedge of a recognized asset or liability
(fair value hedge) or a hedge of a forecasted transaction (cash flow hedge). Certain of these
derivatives are not designated as hedging instruments and are used as economic hedges to manage
certain risks in our business.
For derivative instruments that are designated and qualify as a cash flow hedge, the effective
portion of the change in the fair value of a derivative instrument is deferred in AOCL until the
underlying hedged item is recognized in earnings. The derivative gain or loss recognized in
earnings is recorded consistent with the expense classification of the underlying hedged item. The
ineffective portion of a fair value change on a qualifying cash flow hedge is recognized in
earnings immediately. For derivatives that receive fair value hedge treatment, we recognize the
change in fair value for both the derivative and hedged item currently in earnings.
Derivative instruments that are not designated as hedging instruments, but are used as
economic hedges to manage certain risks in our business, are marked-to-market on a periodic basis
and recognized currently in earnings consistent with the expense classification of the underlying
hedged item.
Commitments and Contingencies We are subject to various claims and contingencies related to
lawsuits, environmental and other matters arising out of the normal course of business.
Liabilities related to commitments and contingencies are recognized when a loss is probable and
reasonably estimable.
New Accounting Standards
Accounting Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Codification Update No. 2009-01 (ASU No. 2009-1), Topic 105 Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards CodificationTM
(Codification) as the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with GAAP. The guidance also
explicitly recognizes rules and interpretive releases of the Securities and Exchange Commission
(SEC) under federal securities laws as authoritative GAAP for SEC registrants. This standard
became effective in the fourth quarter of 2009 and required the Company to update all GAAP
references to refer to the new Codification topics where applicable.
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Variable Interest Entity
In June 2009, the FASB issued an accounting standard on variable interest entities, which was
incorporated into the Consolidation topic of the Codification, to address the elimination of the
concept of a qualifying special purpose entity. This standard also replaces the quantitative-based
risks and rewards calculation for determining which enterprise has a controlling financial interest
in a variable interest entity with an approach focused on identifying which enterprise has the
power to direct the activities of a variable interest entity and the obligation to absorb losses of
the entity or the right to receive benefits from the entity. Additionally, it provides more timely
and useful information about an enterprises involvement with a variable interest entity. The
standard will become effective in the first quarter of 2010. We do not expect that this standard
will have a material impact on our Consolidated Financial Statements.
Postretirement Benefit Plan Disclosure
In December 2008, the FASB issued an accounting standard enhancing employers disclosures
about postretirement benefit plan assets, which was incorporated into the Codification topic
Compensation Retirement Benefits. This new standard requires companies to disclose information
about the fair value measurement of plan assets. The standard became effective in the fourth
quarter of 2009. See Note 10 Pension and Postretirement Medical Benefit Plans for further
information.
Derivative Instruments and Hedging Activity
In March 2008, the FASB issued an accounting standard, which was incorporated into the
Derivatives and Hedging topic of the Codification, requiring enhanced disclosure for derivative and
hedging activities. The standard became effective in the first quarter of 2009. See Note 9
Financial Instruments and Risk Management for the required disclosures.
Business Combinations
In December 2007, the FASB issued an accounting standard which addresses the accounting and
disclosure for identifiable assets acquired, liabilities assumed, and noncontrolling interests in a
business combination. The standard, which was incorporated into the Business Combinations topic of
the Codification, became effective in 2009 and did not have a material impact on our Consolidated
Financial Statements.
Noncontrolling Interests
In December 2007, the FASB issued an accounting standard on noncontrolling interests which
addresses the accounting and reporting framework for noncontrolling interests by a parent company.
The standard, which was incorporated into the Consolidation topic of the Codification, also
addresses disclosure requirements to distinguish between interests of the parent and interests of
the noncontrolling owners of a subsidiary. The standard became effective in the first quarter of
2009 and required that minority interest be renamed noncontrolling interests and that a company
present a consolidated net income measure that includes the amount attributable to such
noncontrolling interests for all periods presented. In addition, it requires reporting
noncontrolling interests as a component of equity in our Consolidated Balance Sheets and below
income tax expense in our Consolidated Statements of Operations. We have retrospectively applied
the presentation to our prior year balances in our Consolidated Financial Statements.
Note 3Share-Based Compensation
Accounting for Share-Based Compensation
Effective January 1, 2006, the Company began recognizing compensation expense for equity
awards over the vesting period based on their grant-date fair value. The Company uses the modified
prospective approach. Under this transition method, the measurement and our method of amortization
of costs for share-based payments granted prior to, but not vested as of January 1, 2006, would be
based on the same estimate of the grant-date fair value and the same amortization method that was
previously used in our pro forma disclosure. Results for prior periods have not been restated as
provided for under the modified prospective approach. For equity awards granted after the date of
adoption, we amortize share-based compensation expense on a straight-line basis over the vesting
term.
Compensation expense is recognized only for share-based payments expected to vest. We
estimate forfeitures, both at the date of grant as well as throughout the vesting period, based on
our historical experience and future expectations.
Total share-based compensation expense recognized in the Consolidated Statements of Operations
for the years ended 2009, 2008 and 2007 was $58 million, $56 million and $61 million, respectively.
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Share-Based Long-Term Incentive Compensation Plans
We grant a mix of PBG stock options and PBG restricted stock units to middle and senior
management employees under PBGs incentive plans.
Shares of PBG stock available for future issuance to Bottling LLCs employees under existing
plans were 9.4 million at December 26, 2009.
The fair value of PBG stock options was estimated at the date of grant using the
Black-Scholes-Merton option-valuation model. The table below outlines the weighted-average
assumptions for options granted during years ended December 26, 2009, December 27, 2008 and
December 29, 2007:
2009 | 2008 | 2007 | ||||||||||
Risk-free interest rate |
2.2 | % | 2.8 | % | 4.5 | % | ||||||
Expected term (in years) |
5.3 | 5.3 | 5.6 | |||||||||
Expected volatility |
30 | % | 24 | % | 25 | % | ||||||
Expected dividend yield |
2.8 | % | 2.0 | % | 1.8 | % |
The risk-free interest rate is based on the implied yield available on U.S. Treasury
zero-coupon issues with an equivalent remaining expected term. The expected term of the options
represents the estimated period of time employees will retain their vested stocks until exercise.
Due to the lack of historical experience in stock option exercises, we estimate expected term
utilizing a combination of the simplified method and historical experience of similar awards,
giving consideration to the contractual terms, vesting schedules and expectations of future
employee behavior. Expected stock price volatility is based on a combination of historical
volatility of PBGs stock and the implied volatility of its traded options. The expected dividend
yield is managements long-term estimate of PBGs annual dividends to be paid as a percentage of
share price.
The fair value of restricted stock units is based on the fair value of PBG stock on the date
of grant.
We receive a tax deduction for certain stock option exercises when the options are exercised,
generally for the excess of the stock price over the exercise price of the options. Additionally,
we receive a tax deduction for certain restricted stock units equal to the fair market value of
PBGs stock at the date the restricted stock units are converted to PBG stock. GAAP requires that
benefits received from tax deductions up to the grant-date fair value of equity awards be reported
as operating cash inflows in our Consolidated Statements of Cash Flows. Benefits from tax
deductions in excess of the grant-date fair value from equity awards are treated as financing cash
inflows in our Consolidated Statements of Cash Flows. For the year ended December 26, 2009, the
tax benefits from equity awards did not have a significant impact on our Consolidated Financial
Statements.
As of December 26, 2009, there was approximately $71 million of total unrecognized
compensation cost related to nonvested share-based compensation arrangements granted under the
incentive plans. That cost is expected to be recognized over a weighted-average period of 1.8
years.
Stock Options
PBG stock options expire after 10 years and generally vest ratably over three years.
The following table summarizes option activity for Bottling LLCs employees during the year
ended December 26, 2009:
Weighted- | Weighted- | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Remaining | Aggregate | ||||||||||||||
Shares | Price | Contractual | Intrinsic | |||||||||||||
(in millions) | per Share | Term (years) | Value | |||||||||||||
Outstanding at December 27,
2008 |
27.5 | $ | 26.59 | 5.5 | $ | 33 | ||||||||||
Granted |
5.7 | $ | 18.90 | |||||||||||||
Exercised |
(8.7 | ) | $ | 22.38 | ||||||||||||
Forfeited |
(0.8 | ) | $ | 25.32 | ||||||||||||
Outstanding at December 26,
2009 |
23.7 | $ | 26.32 | 6.2 | $ | 266 | ||||||||||
Vested or expected to vest at
December 26, 2009 |
23.1 | $ | 26.44 | 6.2 | $ | 256 | ||||||||||
Exercisable at December 26,
2009 |
14.6 | $ | 27.46 | 4.7 | $ | 147 | ||||||||||
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The aggregate intrinsic value in the table above is before income taxes, based on PBGs
closing stock price of $37.56 and $22.00 as of the last business day of the years ended December
26, 2009 and December 27, 2008, respectively.
For the years ended December 26, 2009, December 27, 2008 and December 29, 2007, the
weighted-average grant-date fair value of PBG stock options granted was $4.54, $7.09 and $8.18,
respectively. The total intrinsic value of PBG stock options exercised during the years ended
December 26, 2009, December 27, 2008 and December 29, 2007 was $93 million, $21 million and $99
million, respectively.
Restricted Stock Units
PBG restricted stock units granted to employees generally vest over three years. In addition,
restricted stock unit awards to certain senior executives contain vesting provisions that are
contingent upon the achievement of pre-established performance targets. All restricted stock unit
awards are settled in shares of PBG common stock.
The following table summarizes restricted stock unit activity for Bottling LLCs employees
during the year ended December 26, 2009:
Weighted- | ||||||||||||||||
Weighted- | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Shares | Grant-Date | Contractual | Intrinsic | |||||||||||||
(in thousands) | Fair Value | Term (years) | Value | |||||||||||||
Outstanding at December 27, 2008 |
3,302 | $ | 32.04 | 1.3 | $ | 73 | ||||||||||
Granted |
1,864 | $ | 18.78 | |||||||||||||
Converted |
(914 | ) | $ | 29.52 | ||||||||||||
Forfeited |
(208 | ) | $ | 29.15 | ||||||||||||
Outstanding at December 26, 2009 |
4,044 | $ | 26.65 | 1.4 | $ | 152 | ||||||||||
Vested or expected to vest at
December 26, 2009 |
3,537 | $ | 26.69 | 1.4 | $ | 133 | ||||||||||
Convertible at December 26, 2009 |
3 | $ | 30.85 | | $ | 0.1 | ||||||||||
For the years ended December 26, 2009, December 27, 2008 and December 29, 2007, the
weighted-average grant-date fair value of PBG restricted stock units granted was $18.78, $35.34 and
$31.01, respectively. The total intrinsic value of restricted stock units converted during the
years ended December 26, 2009 and December 27, 2008 was $18 million and $4 million, respectively.
No PBG restricted stock units were converted during the year ended December 29, 2007.
Note 4Balance Sheet Details
2009 | 2008 | |||||||
Accounts Receivable, net |
||||||||
Trade accounts receivable |
$ | 1,278 | $ | 1,208 | ||||
Allowance for doubtful accounts |
(69 | ) | (71 | ) | ||||
Accounts receivable from PepsiCo |
210 | 154 | ||||||
Other receivables |
72 | 80 | ||||||
$ | 1,491 | $ | 1,371 | |||||
Inventories |
||||||||
Raw materials and supplies |
$ | 220 | $ | 185 | ||||
Finished goods |
380 | 343 | ||||||
$ | 600 | $ | 528 | |||||
Prepaid Expenses and Other Current Assets |
||||||||
Prepaid expenses |
$ | 220 | $ | 187 | ||||
Accrued interest receivable from PBG |
81 | 118 | ||||||
Other current assets |
97 | 32 | ||||||
$ | 398 | $ | 337 | |||||
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2009 | 2008 | |||||||
Property, Plant and Equipment, net(1) |
||||||||
Land |
$ | 306 | $ | 300 | ||||
Buildings and improvements |
1,704 | 1,542 | ||||||
Manufacturing and distribution equipment |
4,192 | 3,999 | ||||||
Marketing equipment |
2,192 | 2,246 | ||||||
Capital leases(2) |
46 | 23 | ||||||
Other |
138 | 139 | ||||||
8,578 | 8,249 | |||||||
Accumulated depreciation |
(4,691 | ) | (4,380 | ) | ||||
$ | 3,887 | $ | 3,869 | |||||
(1) | Pursuant to the terms of an industrial revenue bond, we transferred title of certain fixed assets with a net book value of $70 million to a state governmental authority in the U.S. to receive a property tax abatement. The title to these assets will revert back to us upon retirement or cancellation of the bond. These fixed assets are still recognized in the Companys Consolidated Balance Sheets as all risks and rewards remain with the Company. | |
(2) | Capital leases primarily represent manufacturing and office equipment. |
2009 | 2008 | |||||||
Other Assets |
||||||||
Note receivable from noncontrolled affiliate |
$ | 73 | $ | | ||||
Other assets |
85 | 108 | ||||||
$ | 158 | $ | 108 | |||||
Accounts Payable and Other Current Liabilities |
||||||||
Accounts payable |
$ | 497 | $ | 444 | ||||
Accounts payable to PepsiCo |
204 | 217 | ||||||
Trade incentives |
232 | 189 | ||||||
Accrued compensation and benefits |
256 | 240 | ||||||
Other accrued taxes |
121 | 128 | ||||||
Accrued interest |
63 | 62 | ||||||
Other current liabilities |
224 | 249 | ||||||
$ | 1,597 | $ | 1,529 | |||||
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Note 5Other Intangible Assets, net and Goodwill
The components of other intangible assets are as follows:
2009 | 2008 | |||||||
Intangibles subject to amortization: |
||||||||
Gross carrying amount: |
||||||||
Customer relationships and lists |
$ | 47 | $ | 45 | ||||
Franchise and distribution rights |
79 | 41 | ||||||
Other identified intangibles |
26 | 34 | ||||||
152 | 120 | |||||||
Accumulated amortization: |
||||||||
Customer relationships and lists |
(18 | ) | (15 | ) | ||||
Franchise and distribution rights |
(36 | ) | (31 | ) | ||||
Other identified intangibles |
(7 | ) | (21 | ) | ||||
(61 | ) | (67 | ) | |||||
Intangibles subject to amortization, net |
91 | 53 | ||||||
Intangibles not subject to amortization: |
||||||||
Carrying amount: |
||||||||
Franchise rights |
3,390 | 3,244 | ||||||
Licensing rights |
315 | 315 | ||||||
Distribution rights |
52 | 49 | ||||||
Brands |
40 | 39 | ||||||
Other identified intangibles |
53 | 51 | ||||||
Intangibles not subject to amortization |
3,850 | 3,698 | ||||||
Total other intangible assets, net |
$ | 3,941 | $ | 3,751 | ||||
During the second quarter of 2009, we acquired a Pepsi-Cola and Dr Pepper franchise bottler
serving portions of central Texas. As a result of this acquisition we recorded approximately $56
million of non-amortizable franchise rights and $8 million of non-compete agreements, with a
weighted-average amortization period of 5 years.
During the third quarter of 2009, we acquired a Pepsi-Cola franchise bottler serving
northeastern Massachusetts. As a result of this acquisition we recorded approximately $24 million
of non-amortizable franchise rights and $1 million of non-compete agreements, with a
weighted-average amortization period of 5 years.
During 2009, we acquired distribution rights for certain energy drinks in the United States,
Canada and Mexico, and protein-enhanced functional beverages in the United States. As a result of
these acquisitions we recorded approximately $36 million of amortizable distribution rights, with a
weighted-average amortization period of 10 years.
During 2009, we acquired rights to manufacture and distribute Crush brands in portions of the
United States and recorded approximately $4 million of non-amortizable franchise rights.
During the first quarter of 2008, PBG acquired a Pepsi-Cola franchise bottler serving certain
New York counties in whole or in part, which was contributed to Bottling LLC. As a result of the
acquisition we recorded approximately $18 million of non-amortizable franchise rights and $4
million of non-compete agreements, with a weighted-average amortization period of 10 years.
During the first quarter of 2008, we acquired distribution rights for SoBe brands in portions
of Arizona and Texas and recorded approximately $6 million of non-amortizable distribution rights.
During the fourth quarter of 2008, we acquired a Pepsi-Cola franchise bottler serving portions
of Colorado, Arizona and New Mexico. As a result of the acquisition we recorded approximately $176
million of non-amortizable franchise rights.
The total cost of acquisitions and distribution and franchise rights during 2009 and 2008 was
approximately $132 million and $257 million, respectively.
Intangible Asset Amortization
Intangible asset amortization expense was $10 million, $9 million and $10 million in 2009,
2008 and 2007, respectively. Amortization expense for each of the next five years is estimated to
be approximately $12 million or less.
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Goodwill
The changes in the carrying value of goodwill by reportable segment for the years ended
December 27, 2008 and December 26, 2009 are as follows:
U.S. & | ||||||||||||||||
Total | Canada | Europe | Mexico | |||||||||||||
Balance at December 29, 2007 |
$ | 1,533 | $ | 1,290 | $ | 17 | $ | 226 | ||||||||
Purchase price allocations |
27 | 20 | 13 | (6 | ) | |||||||||||
Impact of foreign currency translation and other |
(126 | ) | (75 | ) | (4 | ) | (47 | ) | ||||||||
Balance at December 27, 2008 |
1,434 | 1,235 | 26 | 173 | ||||||||||||
Purchase price allocations |
13 | 11 | 2 | | ||||||||||||
Impact of foreign currency translation and other |
59 | 49 | | 10 | ||||||||||||
Balance at December 26, 2009 |
$ | 1,506 | $ | 1,295 | $ | 28 | $ | 183 | ||||||||
During 2009, the purchase price allocations in the U.S. & Canada segment primarily relate to
goodwill allocations resulting from changes in taxes associated with our previous acquisitions.
During 2008, the purchase price allocations in the U.S. & Canada segment primarily relate to
goodwill allocations resulting from the acquisitions discussed above. In the Europe segment, the
purchase price allocations primarily relate to Russias purchase of a company that will manufacture
various Pepsi products in Siberia and Eastern Russia. The purchase price allocations in the Mexico
segment primarily relate to goodwill allocations resulting from changes in taxes associated with
our previous acquisitions.
Annual Impairment Testing
The Company completed its impairment test of goodwill and indefinite lived intangible assets
during the third quarter of 2009 and recorded no impairment charge. In the fourth quarter of 2008,
the Company recorded $412 million in non-cash impairment charges ($297 million net of tax) relating
primarily to distribution rights and brands for the Electropura water business in Mexico. The
impairment charge relating to these intangible assets was determined based upon the findings of an
extensive strategic review and the finalization of certain restructuring plans for our Mexican
business. The fair value of our distribution rights was estimated using a multi-period excess
earnings method that is based upon estimated discounted future cash flows. The fair value of our
brands was estimated using a multi-period royalty savings method, which reflects the savings
realized by owning the brand and, therefore, not having to pay a royalty fee to a third party.
Note 6Fair Value Measurements
During 2008, the Company began disclosing the fair value of all financial instruments valued
on a recurring basis, at least annually. Fair value is defined as the price that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It also establishes a three level fair value hierarchy that
prioritizes the inputs used to measure fair value. The three levels of the hierarchy are defined
as follows:
Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than quoted prices included in Level 1, such as quoted
prices for identical assets or liabilities in non-active markets, quoted prices for similar
assets or liabilities in active markets and inputs other than quoted prices that are observable
for substantially the full term of the asset or liability.
Level 3 Unobservable inputs reflecting managements own assumptions about the input used in
pricing the asset or liability.
If the inputs used to measure the financial instruments fall within different levels of the
hierarchy, the categorization is based on the lowest level input that is significant to the fair
value measurement of the instrument.
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The following table summarizes the financial assets and liabilities we measure at fair value
on a recurring basis as of December 26, 2009 and December 27, 2008:
Level 2 | ||||||||
2009 | 2008 | |||||||
Financial Assets: |
||||||||
Commodity contracts(1) |
$ | 81 | $ | | ||||
Foreign currency contracts (1) |
| 13 | ||||||
Prepaid forward contracts (2) |
15 | 13 | ||||||
Interest rate swaps (3) |
| 8 | ||||||
$ | 96 | $ | 34 | |||||
Financial Liabilities: |
||||||||
Commodity contracts (1) |
$ | 3 | $ | 57 | ||||
Foreign currency contracts (1) |
6 | 6 | ||||||
Interest rate swaps (3) |
64 | 1 | ||||||
$ | 73 | $ | 64 | |||||
(1) | Based primarily on the forward rates of the specific indices upon which contract settlement is based. | |
(2) | Based primarily on the value of PBGs stock price. | |
(3) | Based primarily on the London Inter-Bank Offer Rate (LIBOR) index. |
Other Financial Assets and Liabilities
Financial assets with carrying values approximating fair value include cash and cash
equivalents and accounts receivable. Financial liabilities with carrying values approximating fair
value include accounts payable and other accrued liabilities and short-term debt. The carrying
values of these financial assets and liabilities approximates fair value due to their short
maturities and since interest rates approximate current market rates for short-term debt.
Long-term debt, which includes the current maturities of long-term debt, at December 26, 2009,
had a carrying value and fair value of $4.5 billion and $4.9 billion, respectively, and at December
27, 2008, had a carrying value and fair value of $5.1 billion and $5.3 billion, respectively. The
fair value is based on interest rates that are currently available to us for issuance of debt with
similar terms and remaining maturities.
Note 7Short-Term Borrowings and Long-Term Debt
2009 | 2008 | |||||||
Short-term borrowings |
||||||||
Current maturities of long-term debt |
$ | 15 | $ | 1,305 | ||||
Other short-term borrowings |
188 | 103 | ||||||
$ | 203 | $ | 1,408 | |||||
Long-term debt |
||||||||
5.63% (5.0% effective rate) (1) (2) senior notes due 2009 |
$ | | $ | 1,300 | ||||
4.63% (4.6% effective rate) (2) senior notes due 2012 |
1,000 | 1,000 | ||||||
5.00% (5.2% effective rate) senior notes due 2013 |
400 | 400 | ||||||
6.95% (7.4% effective rate) (2) senior notes due 2014 |
1,300 | 1,300 | ||||||
4.13% (4.4% effective rate) senior notes due 2015 |
250 | 250 | ||||||
5.50% (5.3% effective rate) (1) senior notes due 2016 |
800 | 800 | ||||||
5.125% (4.9% effective rate) (1) senior notes due 2019 |
750 | | ||||||
Capital lease obligations (Note 8) |
25 | 8 | ||||||
Other (average rate 3.8%) |
15 | 36 | ||||||
4,540 | 5,094 | |||||||
Fair value hedge adjustment (3) |
(64 | ) | 6 | |||||
Unamortized discount, net |
(7 | ) | (6 | ) | ||||
Current maturities of long-term debt |
(15 | ) | (1,305 | ) | ||||
$ | 4,454 | $ | 3,789 | |||||
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(1) | Effective interest rates include the impact of the gain/loss realized on swap instruments and represent the rates that were achieved in 2009. | |
(2) | These notes are guaranteed by PepsiCo. | |
(3) | The portion of our fixed-rate debt obligations that is hedged is reflected in our Consolidated Balance Sheets as an amount equal to the sum of the debts carrying value plus a fair value adjustment, representing changes recorded in the fair value of the hedged debt obligations attributable to movements in market interest rates. |
Aggregate Maturities Long-Term Debt
Aggregate maturities of long-term debt as of December 26, 2009 are as follows: 2010: $7
million, 2011: $8 million, 2012: $1,000 million, 2013: $400 million, 2014: $1,300 million, 2015 and
thereafter: $1,800 million. The maturities of long-term debt do not include the capital lease
obligations, the non-cash impact of the fair value hedge adjustment and the interest effect of the
unamortized discount.
On January 14, 2009, we issued $750 million in senior notes, with a coupon rate of 5.125
percent, maturing in 2019. The net proceeds of the offering, together with a portion of the
proceeds from the offering of our senior notes issued in the fourth quarter of 2008, were used to
repay our senior notes due in 2009, at their scheduled maturity on February 17, 2009. Any excess
proceeds of this offering were used for general corporate purposes. The next significant scheduled
debt maturity is not until 2012.
On October 24, 2008 we issued $1.3 billion of 6.95 percent senior notes due 2014 (the
Notes). The Notes were guaranteed by PepsiCo on February 17, 2009. A portion of the proceeds of
this debt was used to finance acquisitions and repay PBGs short-term commercial paper debt.
2009 Short-Term Debt Activities
We had available short-term bank credit lines of approximately $892 million at year-end 2009,
of which the majority was uncommitted. These lines were primarily used to support the general
operating needs of our international locations. As of December 26, 2009, we had $188 million
outstanding under these lines of credit at a weighted-average interest rate of 3.1 percent. As of
December 27, 2008, we had available short-term bank credit lines of approximately $772 million with
$103 million outstanding at a weighted-average interest rate of 10.0 percent.
Debt Covenants
Certain of our senior notes have redemption features and non-financial covenants that will,
among other things, limit our ability to create or assume liens, enter into sale and lease-back
transactions, engage in mergers or consolidations and transfer or lease all or substantially all of
our assets. Additionally, certain of secured debt should not be greater than 10 percent of our net
tangible assets. Net tangible assets are defined as total assets less current liabilities and net
intangible assets.
Interest Payments
Amounts paid to third parties for interest, net of settlements from our interest rate swaps,
were $253 million, $216 million and $227 million in 2009, 2008 and 2007, respectively.
Letters of Credit, Bank Guarantees and Surety Bonds
At December 26, 2009, we had outstanding letters of credit, bank guarantees and surety bonds
from financial institutions valued at $71 million.
Note 8Leases
We have non-cancelable commitments under both capital and long-term operating leases,
principally for real estate, manufacturing and office equipment. Certain of our operating leases
for real estate contain escalation clauses, holiday rent allowances and other rent incentives. We
recognize rent expense on our operating leases, including these allowances and incentives, on a
straight-line basis over the lease term. Capital and operating lease commitments expire at various
dates through 2072. Most leases require payment of related executory costs, which include property
taxes, maintenance and insurance.
The cost of manufacturing and office equipment under capital leases is included in the
Consolidated Balance Sheets as PP&E. Amortization of assets under capital leases is included in
depreciation expense.
Capital lease additions totaled $25 million, $4 million and $7 million for 2009, 2008 and
2007, respectively.
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The future minimum lease payments by year and in the aggregate, under capital leases and
non-cancelable operating leases consisted of the following at December 26, 2009:
Leases | ||||||||
Capital | Operating | |||||||
2010 |
$ | 8 | $ | 56 | ||||
2011 |
7 | 35 | ||||||
2012 |
6 | 27 | ||||||
2013 |
5 | 18 | ||||||
2014 |
| 13 | ||||||
Thereafter |
2 | 101 | ||||||
$ | 28 | $ | 250 | |||||
Less: amount representing interest |
3 | |||||||
Present value of net minimum lease payments |
25 | |||||||
Less: current portion of net minimum lease payments |
7 | |||||||
Long-term portion of net minimum lease payments |
$ | 18 | ||||||
The total minimum rentals to be received in the future from our non-cancelable subleases were
$3 million at December 26, 2009.
Components of Net Rental Expense Under Operating Leases
2009 | 2008 | 2007 | ||||||||||
Minimum rentals |
$ | 109 | $ | 121 | $ | 114 | ||||||
Sublease rental income |
(2 | ) | (1 | ) | (2 | ) | ||||||
Net rental expense |
$ | 107 | $ | 120 | $ | 112 | ||||||
Note 9Financial Instruments and Risk Management
We are subject to the risk of loss arising from adverse changes in commodity prices, foreign
currency exchange rates, interest rates and PBGs stock price. In the normal course of business,
we manage these risks through a variety of strategies, including the use of derivatives. Our
corporate policy prohibits the use of derivative instruments for trading or speculative purposes,
and we have procedures in place to monitor and control their use.
We are exposed to counterparty credit risk on all of our derivative financial instruments. We
have established and maintain counterparty credit guidelines and only enter into transactions with
financial institutions of investment grade or better. We monitor our counterparty credit risk and
utilize numerous counterparties to minimize our exposure to potential defaults. We do not require
collateral under these transactions.
Commodity We use forward and option contracts to hedge the risk of adverse movements in
commodity prices related primarily to anticipated purchases of raw materials and energy used in our
operations. These contracts generally range from one to 24 months in duration. Our open commodity
derivative contracts that qualify for cash flow hedge accounting have a notional value, based on
the contract price, of $347 million as of December 26, 2009. Our open commodity derivative
contracts that act as economic hedges but do not qualify for hedge accounting have a notional
value, based on the contract price, of $50 million as of December 26, 2009.
Foreign Currency We are subject to foreign currency transactional risks in certain of our
international territories primarily for the purchase of commodities that are denominated in
currencies that are different from their functional currency. We enter into forward contract
agreements to hedge a portion of this foreign currency risk. These contracts generally range from
one to 24 months in duration. Our open foreign currency derivative contracts that qualify for
cash flow hedge accounting have a notional value, based on the contract price, of $150 million as
of December 26, 2009.
We have foreign currency derivative contracts to economically hedge the foreign currency risk
associated with certain assets on our balance sheet, which have a notional value, based on the
contract price, of $40 million as of December 26, 2009. Additionally, we fair value certain vendor
and customer contracts that have embedded foreign currency derivative components. These contracts
generally range from one year to three years and as of December 26, 2009 have a notional value,
based on the contract price, of $10 million.
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Interest We have entered into treasury rate lock agreements to hedge against adverse
interest rate changes relating to the issuance of certain fixed-rate debt financing arrangements.
The settled gains and losses from these treasury rate lock agreements that were considered
effective were deferred in AOCL and are being amortized to interest expense over the duration of
the debt term. The Company has a $3 million net deferred gain in AOCL related to these
instruments, which will be amortized over the next six years. For the year ended December 26,
2009, we recognized in interest expense a loss of $0.4 million.
We effectively converted $1.25 billion of our fixed-rate debt to floating-rate debt through
the use of interest rate swaps with the objective of reducing our overall borrowing costs. These
interest rate swaps meet the criteria for fair value hedge accounting and are assumed to be 100
percent effective in eliminating the market-rate risk inherent in our long-term debt. Accordingly,
any gain or loss associated with these swaps is fully offset by the opposite market impact on the
related debt and recognized currently in earnings.
Unfunded Deferred Compensation Liability Our unfunded deferred compensation liability is
subject to changes in PBGs stock price as well as price changes in other equity and fixed-income
investments. We use prepaid forward contracts to hedge the portion of our deferred compensation
liability that is based on PBGs stock price. At December 26, 2009, we had a prepaid forward
contract for 410,000 shares of PBGs common stock.
Balance Sheet Classification
The following summarizes the fair values and location in our Consolidated Balance Sheet of all
derivatives held by the Company as of December 26, 2009:
Derivatives Designated as Hedging | ||||||
Instruments | Balance Sheet Classification | Fair Value | ||||
Assets |
||||||
Commodity contracts |
Prepaid expenses and other current assets | $ | 61 | |||
Commodity contracts |
Other assets | 14 | ||||
$ | 75 | |||||
Liabilities |
||||||
Foreign currency contracts |
Accounts payable and other current liabilities | $ | 1 | |||
Commodity contracts |
Accounts payable and other current liabilities | 3 | ||||
Interest rate swaps |
Other liabilities | 64 | ||||
$ | 68 | |||||
Derivatives Not Designated as | ||||||
Hedging Instruments | Balance Sheet Classification | Fair Value | ||||
Assets |
||||||
Commodity contracts |
Prepaid expenses and other current assets | $ | 4 | |||
Prepaid forward contracts |
Prepaid expenses and other current assets | 15 | ||||
Commodity contracts |
Other assets | 2 | ||||
$ | 21 | |||||
Liabilities |
||||||
Foreign currency contracts |
Accounts payable and other current liabilities | $ | 4 | |||
Foreign currency contracts |
Other liabilities | 1 | ||||
$ | 5 | |||||
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Table of Contents
Cash Flow Hedge Gains (Losses) Recognition
The following summarizes the gains (losses), recognized in the Consolidated Statement of
Operations and AOCL, of derivatives designated and qualifying as cash flow hedges for the year
ended December 26, 2009:
Amount of Gain | Amount of Gain | |||||||||
Derivatives in Cash | (Loss) | Location of Gain (Loss) | (Loss) Reclassified | |||||||
Flow Hedging | Recognized in | Reclassified from AOCL into | from AOCL into | |||||||
Relationships | AOCL | Income | Income | |||||||
Foreign currency
contracts |
$ | (19 | ) | Cost of sales | $ | (10 | ) | |||
Commodity contracts |
77 | Cost of sales | 5 | |||||||
Commodity contracts |
8 | Selling, delivery and administrative expenses | (42 | ) | ||||||
$ | 66 | $ | (47 | ) | ||||||
Assuming no change in the commodity prices and foreign currency rates as measured on December
26, 2009, $50 million of unrealized gains will be recognized in earnings over the next 12 months.
During 2009, we recognized $7 million of ineffectiveness relating to our commodity cash flow
hedges. During 2008, we recognized $8 million of ineffectiveness for the treasury rate locks that
were settled in the fourth quarter.
Other Derivatives Gains (Losses) Recognition
The following summarizes the gains (losses) and the location in the Consolidated Statement of
Operations of derivatives designated and qualifying as fair value hedges and derivatives not
designated as hedging instruments for the year ended December 26, 2009:
Location of Gain (Loss) | Amount of Gain (Loss) | |||||
Recognized in Income on | Recognized in Income | |||||
Derivative | on Derivative | |||||
Derivatives in Fair Value Hedging Relationship |
||||||
Interest rate swaps |
Interest expense, net | $ | 27 | |||
Derivatives Not Designated as Hedging
Instruments |
||||||
Prepaid forward contracts |
Selling, delivery and administrative expenses | $ | 9 | |||
Foreign currency contracts |
Other non-operating (income) expenses, net | (4 | ) | |||
Commodity contracts |
Cost of sales | 6 | ||||
$ | 11 | |||||
The Company has recorded $4 million of net foreign currency transactional gains in other
non-operating (income) expenses, net in the Consolidated Statement of Operations for the year ended
December 26, 2009.
Note 10Pension and Postretirement Medical Benefit Plans
Employee Benefit Plans
We participate in PBG sponsored pension and other postretirement medical benefit plans in
various forms in the United States and other similar pension plans in our international locations,
covering employees who meet specified eligibility requirements. The assets, liabilities and
expense associated with our international plans were not significant to our results of operations
and are not included in the tables and discussion presented below.
Defined Benefit Pension Plans
In the U.S., we participate in PBG sponsored non-contributory defined benefit pension plans
for certain full-time salaried and hourly employees. Benefits are generally based on years of
service and compensation, or stated amounts for each year of service. Effective January 1, 2007,
newly hired salaried and non-union hourly employees are not eligible to participate in these plans.
Additionally, effective April 1, 2009, benefits from these plans are no
longer accrued for certain salaried and non-union employees that did not meet specified age
and service requirements.
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Postretirement Medical Plans
PBGs postretirement medical plans provide medical and life insurance benefits principally to
U.S. retirees and their dependents. Employees are eligible for benefits if they meet age and
service requirements. The plans are not funded and since 1993 have included retiree cost sharing.
Defined Contribution Benefits
Nearly all of our U.S. employees are eligible to participate in PBGs defined contribution
plans, which are voluntary defined contribution savings plans. We make matching contributions to
the defined contribution savings plans on behalf of participants eligible to receive such
contributions. Additionally, employees not eligible to participate in the defined benefit pension
plans and employees whose benefits have been frozen as of April 1, 2009, are currently receiving
additional retirement contributions under PBGs defined contribution plans. Defined contribution
expense was $42 million, $29 million and $27 million in 2009, 2008 and 2007, respectively.
Components of Net Pension Expense and Other Amounts Recognized in Other Comprehensive (Income)
Loss
Pension | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net pension expense |
||||||||||||
Service cost |
$ | 45 | $ | 51 | $ | 55 | ||||||
Interest cost |
104 | 100 | 90 | |||||||||
Expected return on plan assets (income) |
(120 | ) | (116 | ) | (102 | ) | ||||||
Amortization of net loss |
35 | 15 | 38 | |||||||||
Amortization of prior service amendments |
6 | 7 | 7 | |||||||||
Settlement / curtailment charges |
1 | 20 | | |||||||||
Special termination benefits |
| 7 | 4 | |||||||||
Net pension expense for the defined benefit plans |
71 | 84 | 92 | |||||||||
Other comprehensive (income) loss |
||||||||||||
Prior service cost arising during the year |
7 | 14 | 8 | |||||||||
Net (gain) loss arising during the year |
(147 | ) | 619 | (114 | ) | |||||||
Amortization of net loss |
(36 | ) | (15 | ) | (38 | ) | ||||||
Amortization of prior service amendments (1) |
(6 | ) | (27 | ) | (7 | ) | ||||||
Total recognized in other comprehensive (income) loss |
(182 | ) | 591 | (151 | ) | |||||||
Total recognized in net pension expense and other
comprehensive (income) loss |
$ | (111 | ) | $ | 675 | $ | (59 | ) | ||||
(1) | 2008 includes curtailment charge of $20 million. |
Components of Postretirement Medical Expense and Other Amounts Recognized in Other
Comprehensive (Income) Loss
Postretirement | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Net postretirement expense |
||||||||||||
Service cost |
$ | 5 | $ | 5 | $ | 5 | ||||||
Interest cost |
21 | 21 | 20 | |||||||||
Amortization of net loss |
1 | 3 | 4 | |||||||||
Special termination benefits |
| 1 | | |||||||||
Net postretirement expense |
27 | 30 | 29 | |||||||||
Other comprehensive (income) loss |
||||||||||||
Net gain arising during the year |
(22 | ) | (30 | ) | (4 | ) | ||||||
Amortization of net loss |
(1 | ) | (3 | ) | (4 | ) | ||||||
Total recognized in other comprehensive (income) loss |
(23 | ) | (33 | ) | (8 | ) | ||||||
Total recognized in net postretirement expense and other
comprehensive (income) loss |
$ | 4 | $ | (3 | ) | $ | 21 | |||||
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Changes in Benefit Obligations
Pension | Postretirement | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Obligation at beginning of year |
$ | 1,724 | $ | 1,585 | $ | 327 | $ | 353 | ||||||||
Adjustment for measurement date change |
| (53 | ) | | (5 | ) | ||||||||||
Service cost |
45 | 51 | 5 | 5 | ||||||||||||
Interest cost |
104 | 100 | 21 | 21 | ||||||||||||
Plan amendments |
7 | 14 | | | ||||||||||||
Plan curtailment |
| (50 | ) | | | |||||||||||
Actuarial loss (gain) |
17 | 141 | (22 | ) | (30 | ) | ||||||||||
Benefit payments |
(75 | ) | (69 | ) | (20 | ) | (19 | ) | ||||||||
Special termination benefits |
| 7 | | 1 | ||||||||||||
Adjustment for Medicare subsidy |
| | | 1 | ||||||||||||
Transfers |
(2 | ) | (2 | ) | | | ||||||||||
Obligation at end of year |
$ | 1,820 | $ | 1,724 | $ | 311 | $ | 327 | ||||||||
Changes in the Fair Value of Plan Assets
Pension | Postretirement | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fair value of plan assets at beginning of year |
$ | 1,045 | $ | 1,455 | $ | | $ | | ||||||||
Adjustment for measurement date change |
| (17 | ) | | | |||||||||||
Actual return on plan assets |
284 | (412 | ) | | | |||||||||||
Transfers |
(2 | ) | (2 | ) | | | ||||||||||
Employer contributions |
239 | 90 | 20 | 18 | ||||||||||||
Adjustment for Medicare subsidy |
| | | 1 | ||||||||||||
Benefit payments |
(75 | ) | (69 | ) | (20 | ) | (19 | ) | ||||||||
Fair value of plan assets at end of year |
$ | 1,491 | $ | 1,045 | $ | | $ | | ||||||||
Amounts Included in AOCL
Pension | Postretirement | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Prior service cost |
$ | 38 | $ | 38 | $ | 3 | $ | 3 | ||||||||
Net loss |
696 | 879 | 26 | 49 | ||||||||||||
Total |
$ | 734 | $ | 917 | $ | 29 | $ | 52 | ||||||||
Estimated Gross Amounts in AOCL to be Amortized in 2010
Pension | Postretirement | |||||||
Prior service cost |
$ | 6 | $ | | ||||
Net loss |
$ | 40 | $ | |
Selected Information for Plans with Liabilities in Excess of Plan Assets
Pension | Postretirement | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Projected benefit obligation |
$ | 1,820 | $ | 1,724 | $ | 311 | $ | 327 | ||||||||
Accumulated benefit obligation |
$ | 1,772 | $ | 1,636 | $ | 311 | $ | 327 | ||||||||
Fair value of plan assets |
$ | 1,491 | $ | 1,045 | $ | | $ | |
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Fair Market Value of Pension Plan Assets
Fair Value Measurements at | ||||||||||||||||
December 26, 2009 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Asset Category |
||||||||||||||||
Cash equivalent funds(1) |
$ | 35 | $ | | $ | 35 | $ | | ||||||||
Equity funds(1): |
||||||||||||||||
Large-cap |
386 | | 386 | | ||||||||||||
Mid-cap |
87 | | 87 | | ||||||||||||
Small-cap |
47 | | 47 | | ||||||||||||
International companies |
461 | | 461 | | ||||||||||||
Fixed income(1) |
454 | | 454 | | ||||||||||||
Group annuity contracts (GAC)(2) |
21 | | | 21 | ||||||||||||
Total fair value |
$ | 1,491 | $ | | $ | 1,470 | $ | 21 | ||||||||
(1) | Fair value is based primarily on the commingled fund indices upon which settlement is based. | |
(2) | Fair value reflects the current market value of the transferable funds, assuming long-term assets were sold prior to maturity. |
The following table sets forth a summary of changes in the fair value of the GAC:
Level 3 | ||||
Asset | ||||
Balance at December 27, 2008 |
$ | 17 | ||
Realized capital gains |
| |||
Unrealized gains |
3 | |||
Interest and dividends |
1 | |||
Purchases, sales, issuances and settlements, net |
| |||
Balance at December 26, 2009 |
$ | 21 | ||
Reconciliation of Funded Status
Pension | Postretirement | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Funded status at measurement date |
$ | (329 | ) | $ | (679 | ) | $ | (311 | ) | $ | (327 | ) | ||||
Amounts recognized |
||||||||||||||||
Accounts payable and other current liabilities |
$ | (3 | ) | $ | (10 | ) | $ | (23 | ) | $ | (24 | ) | ||||
Other liabilities |
(326 | ) | (669 | ) | (288 | ) | (303 | ) | ||||||||
Total net liabilities |
(329 | ) | (679 | ) | (311 | ) | (327 | ) | ||||||||
Accumulated other comprehensive loss |
734 | 917 | 29 | 52 | ||||||||||||
Net amount recognized |
$ | 405 | $ | 238 | $ | (282 | ) | $ | (275 | ) | ||||||
Weighted Average Assumptions
Pension | Postretirement | |||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
Expense discount rate |
6.20 | % | 6.70 | % | 6.00 | % | 6.50 | % | 6.35 | % | 5.80 | % | ||||||||||||
Liability discount rate |
6.25 | % | 6.20 | % | 6.35 | % | 5.75 | % | 6.50 | % | 6.20 | % | ||||||||||||
Expected rate of return on plan assets(1) |
8.00 | % | 8.50 | % | 8.50 | % | N/A | N/A | N/A | |||||||||||||||
Expense rate of compensation increase |
3.53 | % | 3.56 | % | 3.55 | % | 3.53 | % | 3.56 | % | 3.55 | % | ||||||||||||
Liability rate of compensation increase |
3.04 | % | 3.53 | % | 3.56 | % | 3.43 | % | 3.53 | % | 3.56 | % |
(1) | Expected rate of return on plan assets is presented after administration expenses. |
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The expected rate of return on plan assets for a given fiscal year is based upon actual
historical returns and the long-term outlook on asset classes in the pension plans investment
portfolio.
Funding and Plan Assets
Allocation Percentage | ||||||||||||
Target | Actual | Actual | ||||||||||
2010 | 2009 | 2008 | ||||||||||
Asset Category |
||||||||||||
Equity securities |
65 | % | 65 | % | 60 | % | ||||||
Debt securities |
35 | % | 35 | % | 40 | % |
The table above shows the target allocation for 2010 and the actual allocation as of December
26, 2009 and December 27, 2008. Target allocations of PBG sponsored pension plans assets reflect
the long-term nature of our pension liabilities. None of the current assets are invested directly
in equity or debt instruments issued by PBG, PepsiCo or any bottling affiliates of PepsiCo,
although it is possible that insignificant indirect investments exist through our broad market
indices. PBG sponsored pension plans equity investments are currently diversified across all
areas of the equity market (i.e., large, mid and small capitalization stocks as well as
international equities). PBG sponsored pension plans fixed income investments consist primarily
of corporate bonds. The pension plans currently do not invest directly in any derivative
investments. The pension plans assets are held in a pension trust account at our trustees bank.
PBGs pension investment policy and strategy are mandated by PBGs Pension Investment
Committee (PIC) and are overseen by the PBG Board of Directors Compensation and Management
Development Committee. The plan assets are invested using a combination of enhanced and passive
indexing strategies. The performance of the plan assets is benchmarked against market indices and
reviewed by the PIC. Changes in investment strategies, asset allocations and specific investments
are approved by the PIC prior to execution.
Health Care Cost Trend Rates
We have assumed an average increase of 8.00 percent in 2010 in the cost of postretirement
medical benefits for employees who retired before cost sharing was introduced. This average
increase is then projected to decline gradually to five percent in 2015 and thereafter.
Assumed health care cost trend rates have an impact on the amounts reported for postretirement
medical plans. A one-percentage point change in assumed health care costs would have the following
impact:
1% Increase | 1% Decrease | |||||||
Effect on total fiscal year 2009 service and interest cost components |
$ | | $ | | ||||
Effect on total fiscal year 2009 postretirement benefit obligation |
$ | 5 | $ | (4 | ) |
Pension and Postretirement Cash Flow
We do not fund PBG sponsored pension and postretirement medical plans when our contributions
would not be tax deductible or when benefits would be taxable to the employee before receipt. Of
the total U.S. pension liabilities at December 26, 2009, $66 million relates to pension plans not
funded due to these unfavorable tax consequences.
Pension | Postretirement | |||||||
Employer Contributions |
||||||||
2008
|
$ | 90 | $ | 18 | ||||
2009
|
$ | 239 | $ | 20 | ||||
2010 (expected)
|
$ | 135 | $ | 23 |
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Expected Benefits
The expected benefit payments to be made from PBG sponsored pension and postretirement medical
plans (with and without the prescription drug subsidy provided by the Medicare Prescription Drug,
Improvement and Modernization Act of 2003) to our participants over the next ten years are as
follows:
Postretirement | ||||||||||||
Including | Excluding | |||||||||||
Medicare | Medicare | |||||||||||
Pension | Subsidy | Subsidy | ||||||||||
Expected Benefit Payments |
||||||||||||
2010 |
$ | 66 | $ | 23 | $ | 24 | ||||||
2011 |
$ | 72 | $ | 24 | $ | 25 | ||||||
2012 |
$ | 79 | $ | 24 | $ | 25 | ||||||
2013 |
$ | 88 | $ | 25 | $ | 26 | ||||||
2014 |
$ | 94 | $ | 26 | $ | 26 | ||||||
2015 to 2019 |
$ | 589 | $ | 135 | $ | 137 |
Note 11Income Taxes
The details of our income tax provision are set forth below:
2009 | 2008 | 2007 | ||||||||||
(Benefit) Expense |
||||||||||||
Current: |
||||||||||||
Federal |
$ | 8 | $ | 7 | $ | 6 | ||||||
Foreign |
(24 | ) | 43 | 24 | ||||||||
State |
2 | (2 | ) | 5 | ||||||||
(14 | ) | 48 | 35 | |||||||||
Deferred: |
||||||||||||
Federal |
(14 | ) | 12 | (17 | ) | |||||||
Foreign |
3 | (96 | ) | 6 | ||||||||
State |
(1 | ) | (3 | ) | 3 | |||||||
(12 | ) | (87 | ) | (8 | ) | |||||||
$ | (26 | ) | $ | (39 | ) | $ | 27 | |||||
In 2009, our tax provision includes the following significant items:
| Tax audit resolutions We finalized various audits in our international jurisdictions which resulted in a net tax provision benefit of $75 million. | ||
| Valuation allowances We reversed valuation allowances on some of our deferred tax assets, as we anticipate receiving future benefit from these tax assets, which resulted in a benefit to the tax provision of $39 million. | ||
| Tax law changes Mexico and Canada enacted tax law changes in the fourth quarter of 2009 which required us to re-measure our deferred tax assets and liabilities resulting in a net provision expense of $65 million. |
In 2008, our tax provision included the following significant items:
| Tax impact from impairment charge During 2008, we recorded a deferred tax benefit of $115 million associated with impairment charges primarily related to our business in Mexico. |
In 2007, our tax provision included higher taxes on higher international earnings as well as
the following significant items:
| Valuation allowances During 2007, we reversed valuation allowances resulting in an $11 million tax benefit. These reversals were due to improved profitability trends in Russia. | ||
| Tax law changes During 2007, changes to the income tax laws in Canada and Mexico were enacted. These law changes required us to re-measure our deferred tax assets and liabilities which resulted in a net decrease to our income tax expense of approximately $13 million. |
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Our U.S. and foreign income before income taxes is set forth below:
2009 | 2008 | 2007 | ||||||||||
U.S. |
$ | 612 | $ | 653 | $ | 789 | ||||||
Foreign |
308 | (132 | ) | 260 | ||||||||
$ | 920 | $ | 521 | $ | 1,049 | |||||||
Below is the reconciliation of our income tax rate from the U.S. federal statutory rate to our
effective tax rate:
2009 | 2008 | 2007 | ||||||||||
Income taxes computed at the U.S. federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Income taxable to owners |
(22.6 | ) | (44.3 | ) | (25.9 | ) | ||||||
State income tax, net of federal tax benefit |
0.2 | (0.7 | ) | 0.6 | ||||||||
Impact of foreign results |
(7.9 | ) | (11.1 | ) | (3.5 | ) | ||||||
Change in valuation allowances, net |
(7.3 | ) | 0.4 | (2.4 | ) | |||||||
Nondeductible expenses |
3.8 | 6.3 | 1.9 | |||||||||
Other, net |
(3.0 | ) | 1.1 | (1.8 | ) | |||||||
Impairment charges |
| 5.5 | | |||||||||
Reversal of tax reserves from audit settlements |
(8.2 | ) | | | ||||||||
Tax law change |
7.2 | 0.4 | (1.3 | ) | ||||||||
Total effective income tax rate |
(2.8 | )% | (7.4 | )% | 2.6 | % | ||||||
The details of our 2009 and 2008 deferred tax liabilities (assets) are set forth below:
2009 | 2008 | |||||||
Intangible assets and property, plant and equipment |
$ | 281 | $ | 288 | ||||
Investments |
326 | 305 | ||||||
Recapture liability |
109 | | ||||||
Other |
66 | 12 | ||||||
Gross deferred tax liabilities |
782 | 605 | ||||||
Net operating loss carryforwards |
(438 | ) | (433 | ) | ||||
Employee benefit obligations |
(60 | ) | (41 | ) | ||||
Recapture recovery benefit |
(109 | ) | | |||||
Various liabilities and other |
(99 | ) | (114 | ) | ||||
Gross deferred tax assets |
(706 | ) | (588 | ) | ||||
Deferred tax asset valuation allowance |
170 | 214 | ||||||
Net deferred tax assets |
(536 | ) | (374 | ) | ||||
Net deferred tax liabilities |
$ | 246 | $ | 231 | ||||
Classification within the Consolidated Balance Sheets |
||||||||
Prepaid expenses and other current assets |
$ | (67 | ) | $ | (51 | ) | ||
Other assets |
(1 | ) | | |||||
Accounts payable and other current liabilities |
1 | 3 | ||||||
Deferred income taxes |
313 | 279 | ||||||
Net amount recognized |
$ | 246 | $ | 231 | ||||
We have net operating loss carryforwards (NOLs) totaling $1,576 million at December 26,
2009, which resulted in deferred tax assets of $438 million and which may be available to reduce
future taxes in the U.S., Spain, Greece, Turkey, Russia and Mexico. Of these NOLs, $18 million
expire in 2010; $481 million expire at various times between 2011 and 2028; and $1,077 million have
an indefinite life. At December 26, 2009, we have tax credit carryforwards in Mexico of $29
million, which expire at various times between 2010 and 2017.
We establish valuation allowances on our deferred tax assets, including NOLs and tax credits,
when the amount of expected future taxable income is not likely to support the use of the deduction
or credit. Our valuation allowances, which reduce deferred tax assets to an amount that will more
likely than not be realized, were $170
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million at December 26, 2009. Our valuation allowance
decreased $44 million in 2009 and decreased $26 million in 2008.
Deferred taxes have not been recognized on the excess of the amount for financial reporting
purposes over the tax basis of investments in foreign subsidiaries that are expected to be
permanent in duration. This amount becomes taxable upon a repatriation of assets from the
subsidiary or a sale or liquidation of the subsidiary. The amount of such temporary difference
totaled approximately $1,426 million at December 26, 2009 and $1,048 million at December 27, 2008.
Determination of the amount of unrecognized deferred income taxes related to this temporary
difference is not practicable.
Income taxes receivable from taxing authorities were $8 million and $12 million at December
26, 2009 and December 27, 2008, respectively. Such amounts are recorded within prepaid expenses
and other current assets in our Consolidated Balance Sheets. Income taxes payable to taxing
authorities were $16 million and $13 million at December 26, 2009 and December 27, 2008,
respectively. Such amounts are recorded within accounts payable and other current liabilities in
our Consolidated Balance Sheets.
Amounts paid to taxing authorities and PepsiCo for income taxes were $38 million, $30 million
and $29 million in 2009, 2008 and 2007, respectively.
We file annual income tax returns in the U.S. federal jurisdiction, various U.S. state and
local jurisdictions, and in various foreign jurisdictions. Our tax filings are subject to review
by various tax authorities who may disagree with our positions.
A number of years may elapse before an uncertain tax position, for which we have established
tax reserves, is audited and finally resolved. While it is often difficult to predict the final
outcome or the timing of the resolution of an audit, we believe that our reserves for uncertain tax
benefits reflect the outcome of tax positions that is more likely than not to occur. We adjust
these reserves, as well as the related interest and penalties, in light of changing facts and
circumstances. The resolution of a matter could be recognized as an adjustment to our provision
for income taxes and our deferred taxes in the period of resolution, and may also require a use of
cash.
Our major taxing jurisdictions include Mexico, Canada and Russia. The following table
summarizes the years that remain subject to examination and the years currently under audit by
major tax jurisdictions:
Years subject to | ||||||||
Jurisdiction | examination | Years under audit | ||||||
Canada |
2006-2008 | 2006-2007 | ||||||
Mexico |
2004-2008 | N/A | ||||||
Russia |
2008 | N/A |
We currently have on-going income tax audits in our major tax jurisdictions, where issues such
as deductibility of certain expenses have been raised. However, we do not anticipate any material
changes in our reserves for uncertain tax benefits within the next 12 months. In the event that we
cannot reach settlement of some of these audits, our tax reserves may increase, although we cannot
estimate such potential increases at this time.
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Table of Contents
Below is a reconciliation of the beginning and ending amounts of our reserves for income taxes
which are recorded in our Consolidated Balance Sheets.
2009 | 2008 | |||||||
Reserves (excluding interest and penalties) |
||||||||
Balance at beginning of year |
$ | 71 | $ | 87 | ||||
Increases due to tax positions related to prior years |
2 | 3 | ||||||
Increases due to tax positions related to the current year |
5 | 9 | ||||||
Decreases due to tax positions related to prior years |
(2 | ) | (4 | ) | ||||
Decreases due to settlements with taxing authorities |
(54 | ) | | |||||
Decreases due to lapse of statute of limitations |
(3 | ) | (5 | ) | ||||
Currency translation adjustment |
2 | (19 | ) | |||||
Balance at end of year |
$ | 21 | $ | 71 | ||||
Classification of reserves within the Consolidated
Balance Sheets |
||||||||
Other liabilities |
$ | 18 | $ | 68 | ||||
Deferred income taxes |
3 | 3 | ||||||
Total amount of reserves recognized |
$ | 21 | $ | 71 | ||||
Of the $21 million of 2009 income tax reserves above, approximately $20 million would impact
our effective tax rate over time, if recognized.
2009 | 2008 | |||||||
Interest and penalties accrued |
$ | 13 | $ | 45 | ||||
We recognized $38 million of benefit and $14 million of expense, net of reversals, during the
fiscal years 2009 and 2008 respectively, for interest and penalties related to income tax reserves
in the income tax expense line of our Consolidated Statements of Operations.
Note 12Segment Information
We operate in one industry, carbonated soft drinks and other ready-to-drink beverages, and all
of our segments derive revenue from these products. Bottling LLC has three reportable segments
U.S. & Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico.
Operationally, the Company is organized along geographic lines with specific regional
management teams having responsibility for the financial results in each reportable segment. We
evaluate the performance of these segments based on operating income or loss. Operating income or
loss is exclusive of net interest expense, noncontrolling interests, other non-operating (income)
expenses, net and income taxes.
The Companys corporate headquarters centrally manages commodity derivatives on behalf of our
segments. During 2009, we expanded our hedging program to mitigate price changes associated with
certain commodities utilized in our production process. These derivatives hedge the underlying
price risk associated with the commodity and are not entered into for speculative purposes.
Certain commodity derivatives do not qualify for hedge accounting treatment. Others receive hedge
accounting treatment but may have some element of ineffectiveness based on the accounting standard.
These commodity derivatives are marked-to-market each period until settlement, resulting in gains
and losses being reflected in corporate headquarters results. The gains and losses are
subsequently reflected in the segment results when the underlying commoditys cost is recognized.
Therefore, segment results reflect the contract purchase price of these commodities. The Company
did not have any comparable mark-to-market commodity derivative activity in prior years.
The following tables summarize select financial information related to our reportable segments:
Net Revenues | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
U.S. & Canada |
$ | 10,315 | $ | 10,300 | $ | 10,336 | ||||||
Europe |
1,755 | 2,115 | 1,872 | |||||||||
Mexico |
1,149 | 1,381 | 1,383 | |||||||||
Worldwide net revenues |
$ | 13,219 | $ | 13,796 | $ | 13,591 | ||||||
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Net revenues in the U.S. were $9,201 million, $9,097 million and $9,202 million in 2009, 2008
and 2007, respectively. In 2009, sales to Wal-Mart Stores, Inc. and its affiliated companies were
11 percent of our revenues, primarily as a result of transactions in the U.S. & Canada segment. In
2008 and 2007, the Company did not have one individual customer that represented 10 percent of
total revenues.
Operating Income (Loss) | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
U.S. & Canada |
$ | 883 | $ | 864 | $ | 876 | ||||||
Europe |
112 | 101 | 106 | |||||||||
Mexico |
56 | (338 | ) | 72 | ||||||||
Total segments |
1,051 | 627 | 1,054 | |||||||||
Corporate net impact of mark-to-market
on commodity hedges |
12 | | | |||||||||
Worldwide operating income |
1,063 | 627 | 1,054 | |||||||||
Interest expense |
255 | 244 | 232 | |||||||||
Interest income |
108 | 162 | 222 | |||||||||
Other non-operating (income) expenses, net |
(4 | ) | 24 | (5 | ) | |||||||
Income before income taxes |
$ | 920 | $ | 521 | $ | 1,049 | ||||||
Total Assets | Long-Lived Assets(1) | |||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
U.S. & Canada |
$ | 13,387 | $ | 13,328 | $ | 13,334 | $ | 11,055 | $ | 11,098 | $ | 11,391 | ||||||||||||
Europe(2) |
2,395 | 2,222 | 1,671 | 1,753 | 1,630 | 1,014 | ||||||||||||||||||
Mexico |
988 | 945 | 1,707 | 755 | 745 | 1,443 | ||||||||||||||||||
Total segments |
16,770 | 16,495 | 16,712 | 13,563 | 13,473 | 13,848 | ||||||||||||||||||
Corporate |
12 | | | 3 | | | ||||||||||||||||||
Worldwide total |
$ | 16,782 | $ | 16,495 | $ | 16,712 | $ | 13,566 | $ | 13,473 | $ | 13,848 | ||||||||||||
(1) | Long-lived assets represent PP&E, other intangible assets, net, goodwill, investments in noncontrolled affiliates, notes receivable from PBG and other assets. | |
(2) | Long-lived assets include an equity method investment in Russia with a net book value of $619 million and $617 million as of December 26, 2009 and December 27, 2008, respectively. |
Long-lived assets in the U.S. were $9,921 million, $10,100 million and $10,138 million in
2009, 2008 and 2007, respectively. Long-lived assets in Russia were $1,406 million, $1,290 million
and $626 million in 2009, 2008 and 2007, respectively.
Capital Expenditures | Depreciation and Amortization | |||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
U.S. & Canada |
$ | 398 | $ | 523 | $ | 626 | $ | 482 | $ | 498 | $ | 509 | ||||||||||||
Europe |
110 | 147 | 146 | 81 | 86 | 72 | ||||||||||||||||||
Mexico |
48 | 85 | 82 | 73 | 88 | 87 | ||||||||||||||||||
Worldwide total |
$ | 556 | $ | 755 | $ | 854 | $ | 636 | $ | 672 | $ | 668 | ||||||||||||
Note 13Related Party Transactions
PepsiCo is a related party due to the nature of our franchise relationship and its ownership
interest in our Company. PBG has entered into a number of agreements with PepsiCo. Although we
are not a direct party to these contracts, as the principal operating subsidiary of PBG, we derive
direct benefit from them. The most significant agreements that govern our relationship with
PepsiCo consist of:
(1) | Master Bottling Agreement for cola beverages bearing the Pepsi-Cola and Pepsi trademarks in the U.S.; bottling agreements and distribution agreements for non-cola beverages; and a master fountain syrup agreement in the U.S.; | ||
(2) | Agreements similar to the Master Bottling Agreement and the non-cola agreement for each country in which we operate, as well as a fountain syrup agreement for Canada; | ||
(3) | A shared services agreement where we obtain various services from PepsiCo and provide services to PepsiCo; |
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(4) | Russia Venture Agreement related to the formation of PR Beverages; and | ||
(5) | Russia Snack Food Distribution Agreement pursuant to which our PR Beverages venture purchases snack food products from Frito-Lay, Inc. (Frito), a subsidiary of PepsiCo, for sale and distribution in the Russian Federation. |
The Master Bottling Agreement provides that we will purchase our entire requirements of
concentrates for the cola beverages from PepsiCo at prices and on terms and conditions determined
from time to time by PepsiCo. Additionally, we review our annual marketing, advertising,
management and financial plans each year with PepsiCo for its approval. If we fail to submit these
plans, or if we fail to carry them out in all material respects, PepsiCo can terminate our beverage
agreements. If our beverage agreements with PepsiCo are terminated for this or for any other
reason, it would have a material adverse effect on our business and financial results.
On March 1, 2007, together with PepsiCo, we formed PR Beverages, a venture that enables us to
strategically invest in Russia to accelerate our growth. Bottling LLC contributed its business in
Russia to PR Beverages, and PepsiCo entered into bottling agreements with PR Beverages for PepsiCo
beverage products sold in Russia on the same terms as in effect for Bottling LLC immediately prior
to the venture. PR Beverages has an exclusive license to manufacture and sell PepsiCo concentrate
for such products. PR Beverages has contracted with a PepsiCo subsidiary to manufacture such
concentrate.
The following income (expense) amounts are considered related party transactions as a result
of our relationship with PepsiCo and its affiliates:
2009 | 2008 | 2007 | ||||||||||
Net revenues: |
||||||||||||
Bottler incentives and other arrangements (1) |
$ | 100 | $ | 93 | $ | 66 | ||||||
Cost of sales: |
||||||||||||
Purchases of concentrate and finished products, and royalty fees (2) |
$ | (3,225 | ) | $ | (3,451 | ) | $ | (3,406 | ) | |||
Bottler incentives and other arrangements (1) |
476 | 542 | 582 | |||||||||
Total cost of sales |
$ | (2,749 | ) | $ | (2,909 | ) | $ | (2,824 | ) | |||
Selling, delivery and administrative expenses: |
||||||||||||
Bottler incentives and other arrangements (1) |
$ | 47 | $ | 56 | $ | 66 | ||||||
Fountain service fee (3) |
205 | 187 | 188 | |||||||||
Frito-Lay purchases (4) |
(350 | ) | (355 | ) | (270 | ) | ||||||
Shared services: (5) |
||||||||||||
Shared services expense |
(52 | ) | (52 | ) | (57 | ) | ||||||
Shared services revenue |
7 | 7 | 8 | |||||||||
Net shared services |
(45 | ) | (45 | ) | (49 | ) | ||||||
Total selling, delivery and administrative expenses |
$ | (143 | ) | $ | (157 | ) | $ | (65 | ) | |||
Income tax benefit: (6) |
$ | 1 | $ | 1 | $ | 7 | ||||||
(1) | Bottler Incentives and Other Arrangements In order to promote PepsiCo beverages, PepsiCo, at its discretion, provides us with various forms of bottler incentives. These incentives cover a variety of initiatives, including direct marketplace support and advertising support. We record most of these incentives as an adjustment to cost of sales unless the incentive is for reimbursement of a specific, incremental and identifiable cost. Under these conditions, the incentive would be recorded as an offset against the related costs, either in net revenues or SD&A expenses. Changes in our bottler incentives and funding levels could materially affect our business and financial results. | |
(2) | Purchases of Concentrate and Finished Product As part of our franchise relationship, we purchase concentrate from PepsiCo, pay royalties and produce or distribute other products through various arrangements with PepsiCo or PepsiCo joint ventures. The prices we pay for concentrate, finished goods and royalties are generally determined by PepsiCo at its sole discretion. Concentrate prices are typically determined annually. Significant changes in the amount we pay PepsiCo for concentrate, finished goods and royalties could materially affect our business and financial results. These amounts are reflected in cost of sales in our Consolidated Statements of Operations. | |
(3) | Fountain Service Fee We manufacture and distribute fountain products and provide fountain equipment service to PepsiCo customers in some territories in accordance with the Pepsi beverage agreements. Fees received |
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from PepsiCo for these transactions offset the cost to provide these services. The fees and costs for these services are recorded in SD&A expenses in our Consolidated Statements of Operations. | ||
(4) | Frito-Lay Purchases We purchase snack food products from Frito for sale and distribution in Russia primarily to accommodate PepsiCo with the infrastructure of our distribution network. Frito would otherwise be required to source third-party distribution services to reach their customers in Russia. We make payments to PepsiCo for the cost of these snack products and retain a minimal net fee based on the gross sales price of the products. Payments for the purchase of snack products are reflected in SD&A expenses in our Consolidated Statements of Operations. Net fees associated with the sale of the Frito product after SD&A costs were $14 million, $34 million and $22 million in 2009, 2008 and 2007, respectively. | |
(5) | Shared Services We provide to and receive various services from PepsiCo and PepsiCo affiliates pursuant to a shared services agreement and other arrangements. In the absence of these agreements, we would have to obtain such services on our own. We might not be able to obtain these services on terms, including cost, which are as favorable as those we receive from PepsiCo. Total expenses incurred and income generated is reflected in SD&A expenses in our Consolidated Statements of Operations. | |
(6) | Income Tax Benefit Includes settlements under the tax separation agreement with PepsiCo. |
Other Related Party Transactions
There are certain manufacturing cooperatives whose assets, liabilities and results of
operations are consolidated in our financial statements. Concentrate purchases from PepsiCo by
these cooperatives, not included in the table above, for the years ended 2009, 2008 and 2007 were
$144 million, $140 million and $143 million, respectively. We also have equity investments in
certain other manufacturing cooperatives. Total purchases by the company of finished goods from these
cooperatives, not included in the table above, for the years ended 2009, 2008 and 2007 were $58
million, $61 million and $66 million, respectively. These manufacturing cooperatives purchase
concentrate from PepsiCo for certain of its finished goods sold to the Company.
As of December 26, 2009 and December 27, 2008, the receivables from PepsiCo and its affiliates
were $210 million and $154 million, respectively. Our receivables from PepsiCo are shown as part
of accounts receivable in our Consolidated Balance Sheets. As of December 26, 2009 and December
27, 2008, the payables to PepsiCo and its affiliates were $204 million and $217 million,
respectively. Our payables to PepsiCo are shown as part of accounts payable and other current
liabilities in our Consolidated Balance Sheets.
As a result of the formation of PR Beverages, PepsiCo has agreed to contribute a note payable
of $83 million plus accrued interest to the venture to be settled in the form of PP&E. PepsiCo has
contributed $73 million in regards to this note. The remaining balance to be contributed to the
venture is $17 million as of December 26, 2009.
PBG is a related party, as we are the principal operating subsidiary of PBG and we make up
substantially all of the operations and assets of PBG. At December 26, 2009, PBG owned
approximately 93.4 percent of our equity.
We make distributions to PBG and PepsiCo to fund PBGs cash needs. During 2009, 2008 and
2007, we made cash distributions to PBG and PepsiCo totaling $463 million, $1,102 million and $271
million, respectively.
Throughout 2009 we loaned $173 million to PBG, net of repayments, through a series of 1-year
notes with interest rates ranging from 0.5 percent to 2.3 percent. In addition, at the end of 2009
PBG repaid $418 million of intercompany loans owed to us. The resulting net decrease in the notes
receivable from PBG in 2009 was $245 million. During 2008, we loaned PBG $839 million, net of
repayments. At the end of 2008, PBG repaid $1,027 million of intercompany loans owed to us. Total
intercompany loans owed to us from PBG at December 26, 2009 and December 27, 2008, were $3,447
million and $3,692 million, respectively. The loan proceeds were used by PBG to pay for interest,
taxes, dividends, share repurchases and acquisitions. Accrued interest receivable from PBG on
these notes totaled $81 million and $118 million at December 26, 2009 and December 27, 2008,
respectively, and is included in prepaid expenses and other current assets in our Consolidated
Balance Sheets.
Total interest income recognized in our Consolidated Statements of Operations relating to
outstanding loans with PBG was $88 million, $140 million and $199 million, in 2009, 2008 and 2007,
respectively.
PBG provides insurance and risk management services to us pursuant to a contractual agreement.
Total premiums paid to PBG during 2009, 2008 and 2007 were $103 million, $113 million and $113 million,
respectively. The related expense was recorded in SD&A expenses in our Consolidated Statements of
Operations.
PBG has a committed credit facility of $1.2 billion and an uncommitted credit facility of $500
million. Both of these credit facilities are guaranteed by the Company and are used to support
PBGs commercial paper program and our working capital requirements. PBG had no outstanding
commercial paper at December 26, 2009 and December 27, 2008, respectively.
In March 1999, PBG issued $1 billion of seven percent senior notes due 2029, which are
guaranteed by us.
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During the second half of 2008, together with PepsiCo, we completed a joint acquisition of JSC
Lebedyansky (Lebedyansky) for approximately $1.8 billion. The acquisition did not include the
companys baby food and mineral water businesses, which were spun off to shareholders in a separate
transaction prior to our acquisition. Lebedyansky was acquired 58.3 percent by PepsiCo and 41.7
percent by PR Beverages, our Russian venture with PepsiCo. We and PepsiCo have an ownership
interest in PR Beverages of 60 percent and 40 percent, respectively. As a result, PepsiCo and we
have acquired a 75 percent and 25 percent economic stake in Lebedyansky, respectively.
We have recorded an equity investment for PR Beverages share in Lebedyansky. In addition, we
have recorded a noncontrolling interest contribution for PepsiCos proportional contribution to PR
Beverages relating to Lebedyansky.
During the first quarter of 2009, we issued a ruble-denominated three-year note with an
interest rate of 10.0 percent to Lebedyansky, a consolidated subsidiary of PepsiCo and a
noncontrolled affiliate of Bottling LLC, valued at $73 million at December 26, 2009. This funding
was contemplated as part of the initial capitalization of the purchase of Lebedyansky between
PepsiCo and us. This note receivable is recorded in other assets in our Consolidated Balance
Sheets.
One of our managing directors is an officer of PepsiCo and the other managing directors and
officers are employees of PBG.
Note 14Restructuring Charges
On November 18, 2008, we announced a restructuring program to enhance the Companys operating
capabilities in each of our reporting segments with the objective to strengthen customer service
and selling effectiveness; simplify decision making and streamline the organization; drive greater
cost productivity to adapt to current macroeconomic challenges; and rationalize the Companys
supply chain infrastructure. As part of the restructuring program, we eliminated approximately
4,000 positions across all reporting segments, we closed four facilities in the United States and
three plants and 17 distribution centers in Mexico and we eliminated 534 routes in Mexico. In
addition, PBG modified its U.S. defined benefit pension plans, which will generate long-term
savings and significantly reduce future financial obligations. The program was substantially
complete in December of 2009 and certain restructuring actions previously planned for 2010 have
been cancelled as a result of the pending merger with PepsiCo.
The Company recorded pre-tax charges of $107 million over the course of the restructuring
program which were primarily for severance and related benefits, pension and other employee-related
costs and other charges including employee relocation and asset disposal costs. These charges were
recorded in SD&A expenses.
The Company expects about $80 million in pre-tax cash expenditures from these restructuring
actions, of which $75 million has been paid since the inception of the program, with the balance
expected to occur in 2010. This includes $8 million of employee benefit payments made through
2009, pursuant to existing unfunded termination indemnity plans. These benefit payments have been
accrued for in previous periods, and therefore, are not included in our cost for this program and
are not included in the tables below.
The following tables summarize the pre-tax costs associated with the restructuring program:
By Reportable Segment
U.S. & | ||||||||||||||||
Worldwide | Canada | Mexico | Europe | |||||||||||||
Costs incurred through December 27, 2008 |
$ | 83 | $ | 53 | $ | 3 | $ | 27 | ||||||||
Costs incurred during the year ended
December 26, 2009 |
24 | 10 | 14 | | ||||||||||||
Total costs incurred |
$ | 107 | $ | 63 | $ | 17 | $ | 27 | ||||||||
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By Activity:
Asset | ||||||||||||||||
Pension & | Disposal, | |||||||||||||||
Severance | Other | Employee | ||||||||||||||
& Related | Related | Relocation | ||||||||||||||
Total | Benefits | Costs | & Other | |||||||||||||
Costs incurred through December 27, 2008 |
$ | 83 | $ | 47 | $ | 29 | $ | 7 | ||||||||
Cash payments |
(11 | ) | (10 | ) | | (1 | ) | |||||||||
Non-cash settlements |
(30 | ) | (1 | ) | (23 | ) | (6 | ) | ||||||||
Remaining costs accrued at
December 27, 2008 |
42 | 36 | 6 | | ||||||||||||
Costs incurred during the year ended December 26, 2009 |
24 | 8 | 3 | 13 | ||||||||||||
Cash payments |
(56 | ) | (40 | ) | (7 | ) | (9 | ) | ||||||||
Non-cash settlements |
(5 | ) | | (1 | ) | (4 | ) | |||||||||
Remaining costs accrued at
December 26, 2009 |
$ | 5 | $ | 4 | $ | 1 | $ | | ||||||||
Note 15Accumulated Other Comprehensive Loss
The year-end balances related to each component of AOCL were as follows:
2009 | 2008 | 2007 | ||||||||||
Net currency translation adjustment |
$ | (180 | ) | $ | (351 | ) | $ | 242 | ||||
Cash flow hedge adjustment (1) |
69 | (45 | ) | 19 | ||||||||
Pension and postretirement medical benefit plans adjustment (2) |
(768 | ) | (977 | ) | (450 | ) | ||||||
Accumulated other comprehensive loss |
$ | (879 | ) | $ | (1,373 | ) | $ | (189 | ) | |||
(1) | Net of taxes of $(1) million in 2009, $(2) million in 2008 and $1 million in 2007. | |
(2) | Net of taxes of $2 million in 2009, $4 million in 2008 and $1 million in 2007. |
Note 16Supplemental Cash Flow Information
The table below presents the Companys supplemental cash flow information:
2009 | 2008 | 2007 | ||||||||||
Non-cash investing and financing activities: |
||||||||||||
Increase (decrease) in accounts payable related to capital
expenditures |
$ | 14 | $ | (67 | ) | $ | 15 | |||||
Acquisition of intangible asset |
$ | | $ | | $ | 315 | ||||||
Contribution of acquired entity by PBG |
$ | 7 | $ | 26 | $ | | ||||||
Liabilities assumed in conjunction with acquisition of bottlers |
$ | 34 | $ | 17 | $ | 1 | ||||||
Capital-in-kind contributions |
$ | 24 | $ | 34 | $ | 15 | ||||||
Share-based compensation |
$ | 18 | $ | 4 | $ | |
Note 17Contingencies
We are subject to various claims and contingencies related to lawsuits, environmental
and other matters arising out of the normal course of business. We believe that the ultimate liability
arising from such claims or contingencies, if any, in excess of amounts already recognized is not
likely to have a material adverse effect on our results of operations, financial position or
liquidity.
On April 19, 2009, PBG received an unsolicited proposal from PepsiCo to acquire all of the
outstanding shares of PBGs common stock not already owned by PepsiCo for $29.50 per share.
The proposal consisted of $14.75 in cash plus 0.283 shares of PepsiCo common stock for each share
of PBG common stock. Immediately following receipt of the proposal, PBGs Board of Directors
formed a special committee to review the adequacy of the proposal. On May 4, 2009, PBGs Board of
Directors rejected the proposal.
On August 3, 2009, PBG and PepsiCo entered into a definitive merger agreement, under which
PepsiCo will acquire all outstanding shares of PBG common stock it does not already own for the
price of $36.50 in cash or 0.6432 shares of PepsiCo common stock, subject to proration such that
the aggregate consideration to be paid to PBG shareholders shall be 50 percent in cash and 50
percent in PepsiCo common stock. At a special meeting of
shareholders held on February 17, 2010, PBGs shareholders adopted the merger agreement. The
transaction is subject to certain regulatory approvals and is expected to be finalized by the end
of the first quarter of 2010.
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As discussed below, PBG and members of its Board of Directors have been named in a number of
lawsuits relating to the PepsiCo proposal. Although we have not been directly named in these
lawsuits, we could be negatively impacted by these lawsuits as we are the principal operating
subsidiary of PBG.
Delaware Actions
Beginning on April 22, 2009, seven putative stockholder class action complaints challenging
the April 19 proposal were filed against PBG and the individual members of its Board of Directors
in the Court of Chancery of the State of Delaware (the Delaware Lawsuits). The complaints
alleged, among other things, that the defendants had breached or would breach their fiduciary
duties owed to the public stockholders of PBG in connection with the April 19 proposal. The
Delaware Lawsuits were consolidated on June 5, 2009, and an amended complaint was filed on June 19,
2009. The amended complaint seeks, among other things, damages and declaratory, injunctive, and
other equitable relief alleging, among other things, that the defendants have breached or will
breach their fiduciary duties owed to the public stockholders of PBG, that the April 19 proposal
and the transactions contemplated thereunder were not entirely fair to the public stockholders,
that PepsiCo had retaliated or would retaliate against PBG for rejecting the April 19 proposal, and
that certain provisions of PBGs certificate of incorporation are invalid and/or inapplicable to
the April 19 proposal and the pending merger.
On July 23, 2009, motions for partial summary judgment were filed concerning the plaintiffs
allegations relating to PBGs certificate of incorporation. On August 31, 2009, the Court of
Chancery entered a Stipulation and Order Governing the Protection and Exchange of Confidential
Information in each of the Delaware Lawsuits. Shortly thereafter, defendants began producing
documents to co-lead plaintiffs in these actions. On November 20, 2009, the parties to the
Delaware Lawsuits entered into the Stipulation and Agreement of Compromise, Settlement, and Release
described below (the Settlement Stipulation).
Westchester County Actions
Beginning on April 29, 2009, two putative stockholder class action complaints were filed
against PBG and members of its Board of Directors in the Supreme Court of the State of New York,
County of Westchester. The complaints seek, among other things, damages and declaratory,
injunctive, and other equitable relief and allege, among other things, that the defendants have
breached or will breach their fiduciary duties owed to the public stockholders of PBG, that the
April 19 proposal and the transactions contemplated thereunder were not entirely fair to the public
stockholders of PBG, and that the defensive measures implemented by PBG were not being used to
maximize stockholder value. On June 8, 2009, PBG filed Motions to Dismiss (or, in the alternative,
to Stay), the actions in favor of the previously filed actions pending in the Delaware Court of
Chancery. As of June 26, 2009, PBGs Motions were fully briefed and submitted to the Court.
On October 19, 2009, the parties to the two Westchester County actions entered into a
stipulation staying the Westchester County actions in favor of the Delaware Lawsuits. On October
21, 2009, the court entered an order staying the two Westchester County actions pending resolution
of the Delaware Lawsuits. On November 20, 2009, the parties to the two Westchester County actions
entered into the Settlement Stipulation described below.
New York County Actions
On May 8, 2009, a putative stockholder class action complaint was filed against PBG and the
members of its Board of Directors other than John C. Compton and Cynthia M. Trudell in the Supreme
Court of the State of New York, County of New York. The complaint alleged that the defendants had
breached their fiduciary duties owed to the public stockholders of PBG by depriving those
stockholders of the full and fair value of their shares by failing to accept PepsiCos April 19
proposal to acquire PBG or to negotiate with PepsiCo after that proposal was made and by adopting
certain defensive measures. On June 8, 2009, PBG filed Motions to Dismiss (or, in the alternative,
to Stay) this action in favor of the previously filed actions pending in the Delaware Court of
Chancery. The plaintiff failed to file a timely opposition to the Motion. On August 10, 2009, the
plaintiff filed an amended class action complaint, adding as defendants PepsiCo, Mr. Compton and
Ms. Trudell. The amended complaint seeks, among other things, damages and declaratory, injunctive,
and other equitable relief and alleges, among other things, that the defendants have breached or
will breach their fiduciary duties owed to the public stockholders of PBG and that the pending
merger is not entirely fair to the public stockholders of PBG. On August 27, 2009, PBG again filed
Motions to Dismiss (or, in the alternative, to Stay) this action in favor of the previously filed
actions pending in the Delaware Court of Chancery.
On October 2, 2009, the parties to the New York County action entered into a stipulation
providing that this action should be voluntarily stayed for 45 days while plaintiffs counsel
conferred with co-lead counsel in the
Delaware Lawsuits and that the defendants motion to dismiss or stay should be adjourned
during the voluntary stay. Also on October 2, 2009, the court entered an order staying the New
York County action for 45 days while plaintiffs counsel conferred with co-lead counsel in the
Delaware Lawsuit. On November 13, 2009, the parties to the New York County action entered into a
stipulation providing that the action should be voluntarily stayed pending
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resolution of the
Delaware Lawsuits. On November 20, 2009, the parties to the New York County action entered into
the Settlement Stipulation described below. On December 2, 2009, the court entered an order
staying the New York County action pending resolution of the Delaware Lawsuits.
Settlement of Shareholder Litigation
On November 20, 2009, the parties to the Delaware Lawsuits, as well as the parties to the
three actions pending in the Supreme Court of the State of New York, entered into a Settlement
Stipulation to resolve all of these actions.
Pursuant to the Settlement Stipulation, and in exchange for the releases described below,
defendants have taken or will take the following actions, among others: (1) PepsiCo and PBG have
included and will continue to include co-lead counsel in the disclosure process (including
providing them with the opportunities to review and comment on drafts of the preliminary and final
proxy statements/prospectuses before they were or are filed with the SEC); (2) PepsiCo agreed to
reduce the termination fee set forth in the merger agreement from $165.3 million to $115 million;
and (3) PepsiCo agreed to shorten the termination fee period set forth in the merger agreement from
12 months to 6 months. The settlement is conditioned on satisfaction by co-lead counsel that the
disclosures made in connection with the pending merger are not materially omissive or misleading.
Pursuant to the Settlement Stipulation, the Delaware Lawsuits will be dismissed with prejudice
on the merits, the plaintiffs in the New York actions will voluntarily dismiss those actions with
prejudice, and all defendants will be released from any and all claims relating to, among other
things, the pending merger, the merger agreement, and any disclosures made in connection therewith.
The Settlement Stipulation is subject to customary conditions, including consummation of the
merger, completion of certain confirmatory discovery, class certification, and final approval by
the Court of Chancery of the State of Delaware following notice to PBGs shareholders. On December
2, 2009, the Court of Chancery entered an order setting forth the schedule and procedures for
notice to PBGs shareholders and the courts review of the settlement. The Court of Chancery
scheduled a hearing for April 12, 2010, at which the court will consider the fairness,
reasonableness, and adequacy of the settlement.
The settlement will not affect the form or amount of the consideration to be received by PBGs
shareholders in the pending merger. The defendants have denied and continue to deny any wrongdoing
or liability with respect to all claims, events, and transactions complained of in the
aforementioned litigations or that they have engaged in any wrongdoing. The defendants have
entered into the Settlement Stipulation to eliminate the uncertainty, burden, risk, expense, and
distraction of further litigation.
Note 18Selected Quarterly Financial Data (unaudited)
Quarter to quarter comparisons of our financial results are impacted by our fiscal year cycle
and the seasonality of our business. The seasonality of our operating results arises from higher
sales in the second and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not significantly
impacted by business seasonality.
First | Second | Third | Fourth | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Full Year | ||||||||||||||||
2009 (1) |
||||||||||||||||||||
Net revenues |
$ | 2,507 | $ | 3,274 | $ | 3,633 | $ | 3,805 | $ | 13,219 | ||||||||||
Gross profit |
$ | 1,104 | $ | 1,444 | $ | 1,621 | $ | 1,671 | $ | 5,840 | ||||||||||
Operating income |
$ | 115 | $ | 310 | $ | 458 | $ | 180 | $ | 1,063 | ||||||||||
Net income |
$ | 64 | $ | 299 | $ | 446 | $ | 137 | $ | 946 | ||||||||||
Net income
attributable to
Bottling LLC |
$ | 67 | $ | 292 | $ | 418 | $ | 136 | $ | 913 |
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First | Second | Third | Fourth | |||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Full Year | ||||||||||||||||
2008 (1) |
||||||||||||||||||||
Net revenues |
$ | 2,651 | $ | 3,522 | $ | 3,814 | $ | 3,809 | $ | 13,796 | ||||||||||
Gross profit |
$ | 1,169 | $ | 1,606 | $ | 1,737 | $ | 1,698 | $ | 6,210 | ||||||||||
Operating income (loss) |
$ | 106 | $ | 343 | $ | 453 | $ | (275 | ) | $ | 627 | |||||||||
Net income (loss) |
$ | 95 | $ | 306 | $ | 401 | $ | (242 | ) | $ | 560 | |||||||||
Net income (loss)
attributable to
Bottling LLC |
$ | 98 | $ | 297 | $ | 384 | $ | (243 | ) | $ | 536 |
(1) | For additional unaudited information see Items affecting comparability of our financial results in Managements Financial Review in Item 7. |
Note 19Subsequent Event
On February 12, 2010, the Company purchased Ab-Tex Beverage, Ltd. With nearly 450 employees,
Ab-Tex bottles, packages and distributes several leading beverage brands, including Pepsi-Cola, Dr
Pepper, Mountain Dew, 7UP, and Sunkist throughout central Texas.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Owners of
Bottling Group, LLC
Somers, New York
Bottling Group, LLC
Somers, New York
We have audited the accompanying consolidated balance sheets of Bottling Group, LLC and
subsidiaries (the Company) as of December 26, 2009 and December 27, 2008, and the related
consolidated statements of operations, changes in equity,
comprehensive income (loss) and cash
flows for each of the three years in the period ended December 26, 2009. Our audits also included
the financial statement schedule listed in the Index at Item 15. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on the financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of the Company as of December 26, 2009 and December
27, 2008, and the results of their operations and their cash flows for each of the three years in
the period ended December 26, 2009, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the accompanying consolidated
financial statements have been retrospectively adjusted for the adoption of new accounting guidance
for the presentation and disclosure of noncontrolling interests.
As discussed in Note 2 to the consolidated financial statements, effective December 30, 2007, the
Company adopted the new accounting guidance for defined benefit pension and other postretirement
plans, related to the measurement date provision.
As
discussed in Note 2 to the consolidated financial statements, effective December 31, 2006, the
Company adopted new accounting guidance on the accounting for uncertain tax positions.
As discussed in Note 1 to the consolidated financial statements, on February 17, 2010, The Pepsi
Bottling Group, Inc. shareholders adopted the merger agreement with PepsiCo, Inc.
/s/ Deloitte & Touche LLP
New York, New York
February 22, 2010
February 22, 2010
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Included in Item 7, Managements Financial Review Market Risks and Cautionary Statements.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Included in Item 7, Managements Financial Review Financial Statements.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
ITEM 9A(T). | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Bottling LLCs management carried out an evaluation, as required by Rule 13a-15(b) of the
Securities Exchange Act of 1934 (the Exchange Act), with the participation of our Principal
Executive Officer and our Principal Financial Officer, of the effectiveness of our disclosure
controls and procedures, as of the end of our last fiscal quarter. Based upon this evaluation, the
Principal Executive Officer and the Principal Financial Officer concluded that our disclosure
controls and procedures were effective, as of the end of the period covered by this Annual Report
on Form 10-K, such that the information relating to Bottling LLC and its consolidated subsidiaries
required to be disclosed in our Exchange Act reports filed with the SEC (i) is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to Bottling LLCs management, including our Principal Executive
Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Managements Annual Report on Internal Control Over Financial Reporting
Bottling LLCs management is responsible for establishing and maintaining adequate internal
control over financial reporting for Bottling LLC. Internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with generally accepted accounting
principles and includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of Bottling LLCs assets, (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that Bottling LLCs receipts and expenditures are being made only in
accordance with authorizations of Bottling LLCs management and Managing Directors, and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of Bottling LLCs assets that could have a material effect on the financial statements.
As required by Section 404 of the Sarbanes-Oxley Act of 2002 and the related rule of the SEC,
management assessed the effectiveness of Bottling LLCs internal control over financial reporting
using the Internal Control-Integrated Framework developed by the Committee of Sponsoring
Organizations of the Treadway Commission.
Based on this assessment, management concluded that Bottling LLCs internal control over
financial reporting was effective as of December 26, 2009. Management has not identified any
material weaknesses in Bottling LLCs internal control over financial reporting as of December 26,
2009.
This Annual Report on Form 10-K does not include an attestation report of Bottling LLCs
independent registered public accounting firm regarding internal control over financial reporting.
Managements report was not subject to attestation by Bottling LLCs independent registered public
accounting firm pursuant to temporary rules of the SEC that permit Bottling LLC to provide only
managements report in this Annual Report on Form 10-K.
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Changes in Internal Control Over Financial Reporting
In addition, Bottling LLCs management also carried out an evaluation, as required by Rule
13a-15(d) of the Exchange Act, with the participation of our Principal Executive Officer and our
Principal Financial Officer, of changes in Bottling LLCs internal control over financial
reporting. Based on this evaluation, the Principal Executive Officer and the Principal Financial
Officer concluded that there were no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. | OTHER INFORMATION |
None.
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PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Bottling LLC Managing Directors
The name, age and background of each of Bottling LLCs Managing Directors is set forth below.
Managing Directors are elected by a majority of the members of Bottling LLC and their terms of
office continue until their successors are appointed and qualified or until their earlier
resignation or removal, death or disability. There are no family relationships among our Managing
Directors.
Thomas M. Lardieri, 49, was appointed Managing Director of Bottling LLC in June 2007. He has
also served as PBGs Vice President and Controller since June 2007. Previously, Mr. Lardieri, a
19-year Pepsi veteran, had served as Vice President, Risk Management and General Auditor of PepsiCo
since June 2001. Mr. Lardieri joined PepsiCos international beverage division in 1988 where he
held a variety of accounting positions.
Marie T. Gallagher, 50, was appointed Managing Director of Bottling LLC in December 2007.
She has also served as Vice President and Assistant Controller of PepsiCo since 2005. Prior to
joining PepsiCo in 2005, Ms. Gallagher served as the Assistant Controller at Altria Corporate
Services, Inc. since 1992. Prior to that, Ms. Gallagher was a Senior Manager at
PricewaterhouseCoopers LLP.
Steven M. Rapp, 56, was appointed Managing Director of Bottling LLC in January 2005. He has
also served as PBGs Senior Vice President, General Counsel and Secretary since January 2005. Mr.
Rapp previously served as Vice President, Deputy General Counsel and Assistant Secretary from 1999
through 2004. Mr. Rapp joined PepsiCo as a corporate attorney in 1986 and was appointed Division
Counsel of Pepsi-Cola Company in 1994.
Bottling LLC Executive Officers
The name, age and background of each of Bottling LLCs executive officers who held office as
of February 5, 2010 is set forth below. Executive officers are elected by our Managing Directors,
and their terms of office continue until their successors are appointed and qualified or until
their earlier resignation or removal. There are no family relationships among our executive
officers.
Eric J. Foss, 51, is the Principal Executive Officer of Bottling LLC. He is also PBGs
Chairman and Chief Executive Officer and a member of PBGs Board of Directors. Mr. Foss served as
PBGs President and Chief Executive Officer from July 2006 to October 2008. Previously, Mr. Foss
served as PBGs Chief Operating Officer from September 2005 to July 2006 and President of PBG North
America from September 2001 to September 2005. Prior to that, Mr. Foss was the Executive Vice
President and General Manager of PBG North America from August 2000 to September 2001. From October
1999 until August 2000, he served as PBGs Senior Vice President, U.S. Sales and Field Operations,
and prior to that, he was PBGs Senior Vice President, Sales and Field Marketing, since March 1999.
Mr. Foss joined the
Pepsi-Cola Company in 1982 where he held a variety of field and headquarters-based sales, marketing and general management positions. From 1994 to 1996, Mr. Foss was General Manager of Pepsi-Cola North Americas Great West Business Unit. In 1996, Mr. Foss was named General Manager for the Central Europe Region for Pepsi-Cola International (PCI), a position he held until joining PBG in March 1999. Mr. Foss is also a director of UDR, Inc. and serves on the Industry Affairs Council of the Grocery Manufacturers of America.
Pepsi-Cola Company in 1982 where he held a variety of field and headquarters-based sales, marketing and general management positions. From 1994 to 1996, Mr. Foss was General Manager of Pepsi-Cola North Americas Great West Business Unit. In 1996, Mr. Foss was named General Manager for the Central Europe Region for Pepsi-Cola International (PCI), a position he held until joining PBG in March 1999. Mr. Foss is also a director of UDR, Inc. and serves on the Industry Affairs Council of the Grocery Manufacturers of America.
Alfred H. Drewes, 54, is the Principal Financial Officer of Bottling LLC. He is also PBGs
Senior Vice President and Chief Financial Officer. Previously, Mr. Drewes served as Senior Vice
President and Chief Financial Officer of PCI. Mr. Drewes joined PepsiCo in 1982 as a financial
analyst in New Jersey. During the next nine years, he rose through increasingly responsible finance
positions within Pepsi-Cola North America in field operations and headquarters. In 1991, Mr. Drewes
joined PCI as Vice President of Manufacturing Operations, with responsibility for the global
concentrate supply organization. In 1994, he was appointed Vice President of Business Planning and
New Business Development and, in 1996, relocated to London as the Vice President and Chief
Financial Officer of the Europe and Sub-Saharan Africa Business Unit of PCI. Mr. Drewes is also a
director of the Meredith Corporation.
Thomas M. Lardieri, 49, is the Principal Accounting Officer of Bottling LLC.
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Worldwide Code of Conduct
Bottling LLC has not adopted a Code of Ethics because PBGs Worldwide Code of Conduct applies
to all of our officers and employees, including our Principal Executive Officer, Principal
Financial Officer and Principal Accounting Officer. A copy of PBGs Worldwide Code of Conduct is
available upon request without charge by writing to Bottling Group, LLC at One Pepsi Way, Somers,
New York 10589, Attention: Investor Relations. Any material amendments to the Worldwide Code of
Conduct and any waiver from a provision of the Code of Conduct granted by PBGs Board to any
director or executive officer will be posted on PBGs website within four business days of such
amendment or waiver.
ITEM 11. | EXECUTIVE COMPENSATION |
Information on the compensation of our executive officers is contained in PBGs Annual Report
on Form 10-K for Fiscal Year-end December 26, 2009 under Item 11 Executive Compensation and is
incorporated herein by reference. Individuals do not receive additional compensation or benefits
for serving as Managing Directors of Bottling LLC.
Compensation Committee Interlocks and Insider Participation
Bottling LLC does not have a compensation committee because our executive compensation program
is overseen by the Compensation and Management Development Committee of PBGs Board of Directors.
During fiscal year 2009, the following individuals served as members of PBGs Compensation and
Management Development Committee: Barry H. Beracha, Ira D. Hall, Susan D. Kronick and John A.
Quelch. None of these individuals has ever served as an officer or employee of PBG, Bottling LLC
or any of its subsidiaries. Ms. Alvarado has an indirect business relationship with PBG as
described below under Relationships and Transactions with Management and Others. No member of
PBGs Compensation and Management Development Committee has any interlocking relationship requiring
disclosure under the rules of the SEC.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
PBG holds 93.4% and PepsiCo holds 6.6% of the ownership of Bottling LLC. PBGs address is One
Pepsi Way, Somers, New York 10589 and PepsiCos address is 700 Anderson Hill Road, Purchase, New
York 10577.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Although Bottling LLC may not be a direct party to the following transactions, as the
principal operating subsidiary of PBG, it derives certain benefits from them. Accordingly, set
forth below is information relating to certain transactions between PBG and PepsiCo. In addition,
set forth below is information relating to certain transactions between Bottling LLC and PBG
(PBG/Bottling LLC Transactions) and certain transactions with management and others.
Stock Ownership and Director Relationships with PepsiCo. PBG was initially incorporated in
January 1999 as a wholly owned subsidiary of PepsiCo to effect the separation of most of PepsiCos
company-owned bottling businesses. PBG became a publicly traded company on March 31, 1999. As of
January 22, 2010, PepsiCos ownership represented 31.6% of PBGs outstanding common stock and 100%
of PBGs outstanding Class B common stock, together representing 38.6% of the voting power of all
classes of PBGs voting stock. PepsiCo also owns approximately 6.6% of the equity of Bottling LLC.
In addition, Marie T. Gallagher, a Managing Director of Bottling LLC, is an officer of PepsiCo.
Agreements and Transactions with PepsiCo and Affiliates. PBG and PepsiCo (and certain of its
affiliates) have entered into transactions and agreements with one another, incident to their
respective businesses, and PBG and PepsiCo are expected to enter into material transactions and
agreements from time to time in the future. As used in this section, PBG includes PBG and its
subsidiaries.
Material agreements and transactions between PBG and PepsiCo (and certain of its affiliates)
during 2009 are described below.
Merger Agreement. On August 3, 2009, PBG and PepsiCo entered into a definitive merger
agreement, under which PepsiCo will acquire all outstanding shares of PBG common stock it does not
already own for the price of $36.50 in cash or 0.6432 shares of PepsiCo common stock, subject to
proration such that the aggregate consideration to be paid to PBG shareholders shall be 50 percent
in cash and 50 percent in PepsiCo common stock. At a special meeting of PBGs shareholders held on
February 17, 2010, PBGs shareholders adopted the merger agreement. The transaction is subject to
certain regulatory approvals and is expected to be finalized by the end of the first quarter of
2010.
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Beverage Agreements and Purchases of Concentrates and Finished Products. PBG purchases
concentrates from PepsiCo and manufactures, packages, distributes and sells carbonated and
non-carbonated beverages under license agreements with PepsiCo. These agreements give PBG the right
to manufacture, sell and distribute beverage products of PepsiCo in both bottles and cans and
fountain syrup in specified territories. The agreements also provide PepsiCo with the ability to
set prices of such concentrates, as well as the terms of payment and other terms and conditions
under which PBG purchases such concentrates. In addition, PBG bottles water under the Aquafina
trademark pursuant to an agreement with PepsiCo, which provides for the payment of a royalty fee to
PepsiCo. In certain instances, PBG purchases finished beverage products from PepsiCo. During 2009,
total payments by PBG to PepsiCo for concentrates, royalties and finished beverage products that
were recognized in cost of goods sold were
approximately $2.6 billion.
There are certain manufacturing cooperatives whose assets, liabilities and results of
operations are consolidated in our financial statements. Concentrate purchases from PepsiCo by
these cooperatives for 2009 were $144 million.
Transactions with Joint Ventures in which PepsiCo holds an equity interest. PBG purchases tea
concentrate and finished beverage products from the Pepsi/Lipton Tea Partnership, a joint venture
of Pepsi-Cola North America, a division of PepsiCo, and Lipton. During 2009, total payments to PepsiCo for the benefit of the Pepsi/Lipton Tea Partnership that
were recognized in cost of goods sold were approximately $300
million.
PBG purchases finished beverage products from the North American Coffee Partnership, a joint
venture of Pepsi-Cola North America and Starbucks in which PepsiCo has a 50% interest. During 2009,
total payments to the North American Coffee Partnership by PBG that
were recognized in cost of goods sold were approximately $275
million.
Under tax sharing arrangements we have with PepsiCo and PepsiCo joint ventures, we received
approximately $1 million in tax related benefits in 2009.
In 2008, together with PepsiCo, we completed a joint acquisition of JSC Lebedyansky
(Lebedyansky) for approximately $1.8 billion. Lebedyansky was acquired 58.3% by PepsiCo and 41.7%
by PR Beverages Limited. We and PepsiCo have an ownership interest in PR Beverages Limited of 60%
and 40%, respectively. As a result, PepsiCo and we have acquired a 75% and 25% economic stake in
Lebedyansky, respectively.
During the first quarter of 2009, we issued a ruble-denominated three-year note with an
interest rate of 10.0% to Lebedyansky valued at $73 million at December 26, 2009. This funding was
contemplated as part of the initial capitalization of the purchase of Lebedyansky between PepsiCo
and us.
As a result of the formation of PR Beverages, PepsiCo has agreed to contribute a note payable
of $83 million plus accrued interest to the venture to be settled in the form of property, plant
and equipment. During 2009, PepsiCo has contributed $24 million in regards to this note.
Purchase of Frito-Lay Snack Food Products. Pursuant to a Distribution Agreement between PR
Beverages and Frito-Lay Manufacturing, LLC, a wholly-owned subsidiary of PepsiCo, PR Beverages
purchases snack food products from Frito-Lay Manufacturing for sale and distribution through
Russia. In 2009, amounts paid or payable by PR Beverages to Frito-Lay Manufacturing were
approximately $350 million. Net fees associated with the sale of the Frito product after
selling, delivery and administrative costs were $14 million.
Shared Services. PepsiCo provides various services to PBG pursuant to a shared services
agreement and other arrangements, including information technology maintenance and the procurement
of raw materials. During 2009, amounts paid or payable to PepsiCo for these services totaled
approximately $52 million. Pursuant to the shared services agreement and other arrangements, PBG
provides various services to PepsiCo, including credit and collection, international tax and
supplier services. During 2009, payments to PBG from PepsiCo for these services totaled
approximately $4 million.
Rental Payments. Amounts paid or payable by PepsiCo to PBG for rental of office space at
certain PBG facilities were approximately $3 million in 2009.
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National Fountain Services. PBG provides certain manufacturing, delivery and equipment
maintenance services to PepsiCos national fountain customers in specified territories. In 2009,
net amounts paid or payable by PepsiCo to PBG for these services were approximately $205 million.
Bottler Incentives. PepsiCo provides PBG with marketing support in the form of bottler
incentives. The level of this support is negotiated annually and can be increased or decreased at
the discretion of PepsiCo. These bottler incentives are intended to cover a variety of programs and
initiatives, including direct marketplace support (including point-of-sale materials) and
advertising support. For 2009, total bottler incentives received from PepsiCo, including media
costs shared by PepsiCo, were approximately $623 million.
PepsiCo Guarantees. The $1.0 billion of 4.63% senior notes due November 2012 issued by us on
November 15, 2002 and the $1.3 billion of 6.95% senior notes due February 2014 issued by us on
October 24, 2008 are guaranteed by PepsiCo in accordance with the terms set forth in the related
indentures.
PBG/Bottling LLC Transactions. PBG is considered a related party, as we are the principal
operating subsidiary of PBG and we make up substantially all of the operations and assets of PBG.
At December 26, 2009, PBG owned approximately 93.4% of our equity.
PBG provides insurance and risk management services to us pursuant to a contractual agreement.
Total premiums paid to PBG during 2009 were $103 million.
In March 1999, PBG issued $1 billion of seven percent senior notes due 2029, which are
guaranteed by us.
PBG has a $1.2 billion commercial paper program that is supported by a $1.2 billion committed
credit facility and an uncommitted credit facility of $500 million. Both of these credit facilities
are guaranteed by us. At December 26, 2009, PBG had no outstanding commercial paper.
Throughout 2009 we loaned $173 million to PBG, net of repayments, through a series of 1-year
notes with interest rates ranging from 0.5 percent to 2.3 percent. In addition, at the end of 2009
PBG repaid $418 million of intercompany loans owed to us. The resulting net decrease in the notes
receivable from PBG in 2009 was $245 million. Total intercompany loans owed to us from PBG at
December 26, 2009 were $3,447 million. The loan proceeds were used by PBG to pay for interest,
taxes, dividends, share repurchases and acquisitions. Accrued interest receivable from PBG on
these notes totaled $81 million at December 26, 2009.
Total interest income recognized in our Consolidated Statements of Operations relating to
outstanding loans with PBG was $88 million in 2009.
Bottling LLC Distribution. We make distributions to PBG and PepsiCo to fund PBGs cash needs.
During 2009, in accordance with our Limited Liability Company Agreement we made cash distributions
to PBG and PepsiCo in the amount of $433 million and $30
million, respectively.
Relationships and Transactions with Management and Others. One of our managing directors is an
officer of PepsiCo and the other managing directors and officers are employees of PBG.
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ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Deloitte & Touche LLP has served as our independent registered public accounting firm since
June 2005. In addition to retaining independent accountants to audit our consolidated financial
statements for 2009, we and our affiliates retained Deloitte & Touche LLP, as well as other
accounting firms, to provide various services in 2009. The aggregate fees billed for professional
services by Deloitte & Touche LLP in 2008 and 2009 were as follows:
Audit and Non-Audit Fees
(in millions)
(in millions)
2009 | 2008 | |||||||
Audit Fees(1) |
$ | 5.9 | $ | 5.8 | ||||
Audit-Related Fees(2) |
$ | 0.6 | $ | 0.8 | ||||
Tax Fees(3) |
$ | 1.2 | $ | 0.4 | ||||
All Other Fees |
$ | 0.0 | $ | 0.0 | ||||
Total |
$ | 7.7 | $ | 7.0 | ||||
(1) | Represents fees for the audit of our consolidated financial statements, audit of internal controls, the reviews of interim financial statements included in our Forms 10-Q and all statutory audits. | |
(2) | Represents fees primarily related to audits of employee benefit plans and other audit-related services. | |
(3) | Represents fees primarily related to assistance with tax compliance and consultation matters. |
Pre-Approval Policies and Procedures. We have a policy that defines audit, audit-related and
non-audit services to be provided to us by our independent registered public accounting firm and
requires such services to be pre-approved by the Audit and Affiliated Transactions Committee. In
accordance with our policy and applicable SEC rules and regulations, the Committee or its
Chairperson pre-approves such services provided to us. Pre-approval is detailed as to the
particular service or category of services. If the services are required prior to a regularly
scheduled Committee meeting, the Committee Chairperson is authorized to approve such services,
provided that they are consistent with our policy and applicable SEC rules and regulations, and
that the full Committee is advised of such services at the next regularly scheduled Committee
meeting. The independent accountants and management periodically report to the Committee regarding
the extent of the services provided by the independent accountants in accordance with this
pre-approval, and the fees for the services performed to date. The Audit and Affiliated
Transactions Committee pre-approved all audit and non-audit fees of Deloitte & Touche LLP billed
for fiscal years 2009 and 2008.
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PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a) 1. Financial Statements. The following consolidated financial statements of Bottling LLC and
its subsidiaries are included herein:
Consolidated Statements of Operations Fiscal years ended December 26, 2009, December 27, 2008
and December 29, 2007.
Consolidated Statements of Cash Flows Fiscal years ended December 26, 2009, December 27, 2008
and December 29, 2007.
Consolidated Balance Sheets December 26, 2009 and December 27, 2008.
Consolidated Statements of Changes in Equity Fiscal years ended December 26, 2009, December 27,
2008 and December 29, 2007.
Consolidated
Statements of Comprehensive Income (Loss) Fiscal years ended December 26, 2009, December 27,
2008 and December 29, 2007.
Notes to Consolidated Financial Statements.
Report of Independent Registered Public Accounting Firm
2. Financial Statement Schedules. The following financial statement schedule of Bottling LLC and
its subsidiaries is included in this Report on the page indicated:
Page | ||||
Schedule II Valuation and Qualifying Accounts for the
fiscal years ended December 26, 2009, December 27, 2008 and
December 29, 2007 |
86 |
3. Exhibits
See Index
to Exhibits on pages 87 88.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Bottling
Group, LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: February 22, 2010
Bottling Group, LLC |
||||
/s/ Eric J. Foss | ||||
Eric J. Foss | ||||
Principal Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Bottling Group, LLC and in the
capacities and on the dates indicated.
SIGNATURE | TITLE | DATE | ||
/s/ Eric J. Foss
|
Principal Executive Officer | February 22, 2010 | ||
/s/ Alfred H. Drewes
|
Principal Financial Officer | February 22, 2010 | ||
/s/ Thomas M. Lardieri
|
Principal Accounting Officer and Managing Director | February 22, 2010 | ||
/s/ Steven M. Rapp
|
Managing Director | February 22, 2010 | ||
/s/ Marie T. Gallagher
|
Managing Director | February 22, 2010 |
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INDEX TO FINANCIAL STATEMENT SCHEDULES
Page | ||||
Schedule II Valuation and Qualifying Accounts for the fiscal
years ended December 26, 2009, December 27, 2008 and December 29,
2007 |
86 |
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SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS BOTTLING GROUP, LLC
Balance at | Charges to | Accounts | Foreign | Balance at | ||||||||||||||||
Beginning | Cost and | Written | Currency | End of | ||||||||||||||||
In millions | of Period | Expenses | Off | Translation | Period | |||||||||||||||
Fiscal Year Ended December 26, 2009 |
||||||||||||||||||||
Allowance for losses on trade accounts receivable |
$ | 71 | $ | 11 | $ | (13 | ) | $ | | $ | 69 | |||||||||
Fiscal Year Ended December 27, 2008 |
||||||||||||||||||||
Allowance for losses on trade accounts receivable |
$ | 54 | $ | 30 | $ | (9 | ) | $ | (4 | ) | $ | 71 | ||||||||
Fiscal Year Ended December 29, 2007 |
||||||||||||||||||||
Allowance for losses on trade accounts receivable |
$ | 50 | $ | 11 | $ | (10 | ) | $ | 3 | $ | 54 | |||||||||
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Index to Exhibits
EXHIBIT NO. | DESCRIPTION OF EXHIBIT | |
3.1
|
Articles of Formation of Bottling LLC, which is incorporated herein by reference to Exhibit 3.4 to Bottling LLCs Registration Statement on Form S-4 (Registration No. 333-80361). | |
3.2
|
Amended and Restated Limited Liability Company Agreement of Bottling LLC, which is incorporated herein by reference to Exhibit 3.5 to Bottling LLCs Registration Statement on Form S-4 (Registration No. 333-80361). | |
3.3
|
Amendment No. 1 to Bottling LLCs Amended and Restated Limited Liability Company Agreement, which is incorporated herein by reference to Exhibit 3.3 to Bottling LLCs Quarterly Report on Form 10-Q for the quarter ended June 14, 2008. | |
4.1
|
Indenture dated as of March 8, 1999 by and among PBG, as obligor, Bottling Group, LLC, as guarantor, and The Chase Manhattan Bank, as trustee, relating to $1,000,000,000 7% Series B Senior Notes due 2029, which is incorporated herein by reference to Exhibit 10.14 to PBGs Registration Statement on Form S-1 (Registration No. 333-70291). | |
4.2
|
Indenture dated as of November 15, 2002 among Bottling Group, LLC, PepsiCo, Inc., as guarantor, and JPMorgan Chase Bank, as trustee, relating to $1,000,000,000 4 5/8% Senior Notes due November 15, 2012, which is incorporated herein by reference to Exhibit 4.8 to PBGs Annual Report on Form 10-K for the year ended December 28, 2002. | |
4.3
|
Registration Rights Agreement dated as of November 7, 2002 relating to the $1,000,000,000 4 5/8% Senior Notes due November 15, 2012, which is incorporated herein by reference to Exhibit 4.8 to Bottling Group LLCs Annual Report on Form 10-K for the year ended December 28, 2002. | |
4.4
|
Indenture, dated as of June 10, 2003 by and between Bottling Group, LLC, as obligor, and JPMorgan Chase Bank, as trustee, relating to $250,000,000 4 1/8% Senior Notes due June 15, 2015, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLCs registration statement on Form S-4 (Registration No. 333-106285). | |
4.5
|
Registration Rights Agreement dated June 10, 2003
by and among Bottling Group, LLC, J.P. Morgan
Securities Inc., Lehman Brothers Inc., Banc of
America Securities LLC, Citigroup Global Markets
Inc, Credit Suisse First Boston LLC, Deutsche Bank
Securities Inc., Blaylock & Partners, L.P. and
Fleet Securities, Inc, relating to $250,000,000
4 1/8% Senior Notes due June 15, 2015, which is incorporated herein by reference to Exhibit 4.3 to Bottling Group, LLCs registration statement on Form S-4 (Registration No. 333-106285). |
|
4.6
|
Indenture, dated as of October 1, 2003, by and
between Bottling Group, LLC, as obligor, and
JPMorgan Chase Bank, as trustee, which is
incorporated herein by reference to Exhibit 4.1 to
Bottling Group, LLCs Current Report on Form 8-K
dated October 3, 2003. |
|
4.7
|
Form of Note for the $400,000,000 5.00% Senior Notes due November 15, 2013, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLCs Current Report on Form 8-K dated November 13, 2003. | |
4.8
|
Indenture, dated as of March 30, 2006, by and between Bottling Group, LLC, as obligor, and JPMorgan Chase Bank, N.A., as trustee, which is incorporated herein by reference to Exhibit 4.1 to PBGs Quarterly Report on Form 10-Q for the quarter ended March 25, 2006. | |
4.9
|
Form of Note for the $800,000,000 5 1/2% Senior Notes due April 1, 2016, which is incorporated herein by reference to Exhibit 4.2 to PBGs Quarterly Report on Form 10-Q for the quarter ended March 25, 2006. | |
4.10
|
Indenture, dated as of October 24, 2008, by and among Bottling Group, LLC, as obligor, PepsiCo, Inc., as guarantor, and The Bank of New York Mellon, as trustee, relating to $1,300,000,000 6.95% Senior Notes due March 15, 2014, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLCs Current Report on Form 8-K dated October 21, 2008. | |
4.11
|
Form of Note for the $1,300,000,000 6.95% Senior Notes due March 15, 2014, which is incorporated herein by reference to Exhibit 4.2 to Bottling Group, LLCs Current Report on Form 8-K dated October 21, 2008. | |
4.12
|
Form of Note for the $750,000,000 5.125% Senior Notes due January 15, 2019, which is incorporated herein by reference to Exhibit 4.1 to Bottling Group, LLCs Current Report on Form 8-K dated January 14, 2009. | |
10.1
|
Private Limited Company Agreement of PR Beverages Limited dated as of March 1, 2007 among PBG Beverages Ireland Limited, PepsiCo (Ireland), Limited and PR Beverages Limited, which is incorporated herein by reference to Exhibit 10.1 to PBGs Quarterly Report on Form 10-Q for the quarter ended March 24, 2007. |
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EXHIBIT NO. | DESCRIPTION OF EXHIBIT | |
10.2 |
U.S. $1,200,000,000 First Amended and Restated Credit Agreement dated as of October 19, 2007 among The Pepsi Bottling Group, Inc., as borrower; Bottling Group, LLC, as guarantor; Citigroup Global Markets Inc. and HSBC Securities (USA) Inc., as joint lead arrangers and book managers; Citibank, N.A., as agent; HSBC Bank USA, N.A., as syndication agent; and certain other banks identified in the First Amended and Restated Credit Agreement, which is incorporated herein by reference to Exhibit 10.1 to PBGs Current Report on Form 8-K dated October 19, 2007 and filed October 25, 2007. | |
10.3 |
Insurance Policy between Bottling LLC and Woodlands Insurance Company, Inc., which is incorporated herein by reference to Exhibit 10.1 to Bottling LLCs Quarterly Report on Form 10-Q for the quarter ended June 14, 2008. | |
10.4 |
Form of Promissory Note between The Pepsi Bottling Group, Inc. and Bottling LLC, which is incorporated herein by reference to Exhibit 10.2 to Bottling LLCs Quarterly Report on Form 10-Q for the quarter ended June 14, 2008. | |
10.5 |
Distribution Agreement between PepsiCo Holdings LLC and Frito-Lay Manufacturing LLC effective as of January 1, 2009, which is incorporated herein by reference to Exhibit 10.5 to Bottling LLCs Annual Report on Form 10-K for the year ended December 27, 2008. | |
12* |
Computation of Ratio of Earnings to Fixed Charges. | |
21* |
Subsidiaries of Bottling Group, LLC. | |
31.1* |
Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* |
Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* |
Certification by the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* |
Certification by the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101* |
The following financial statements from Bottling Group, LLCs Annual Report on Form 10-K for the years ended December 26, 2009, December 27, 2008 and December 29, 2007, formatted in Extensive Business Reporting Language (XBRL): (i) Consolidated Statements of Operations, (ii) Consolidated Statements of Cash Flows, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Comprehensive Income (Loss), and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text. |
* | Filed herewith. |
88