PEPSIAMERICAS, INC.
FORM 10-Q
THIRD QUARTER 2001
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2001
------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 001-15019
PEPSIAMERICAS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-6167838
-------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3501 Algonquin Road, Rolling Meadows, Illinois 60008
---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 818-5000
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /x/ NO / /
As of October 27, 2001, the Registrant had 155,878,981 outstanding shares of
common stock, par value $0.01 per share, the Registrant's only class of common
stock.
CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Income 2
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits 16
SIGNATURE 17
1
PEPSIAMERICAS, INC.
FORM 10-Q
THIRD QUARTER 2001
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
Third Quarter Nine Months
------------------------ ----------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Sales $ 847.1 $ 655.2 $ 2,409.3 $ 1,886.7
Cost of goods sold 507.6 386.2 1,449.7 1,109.4
--------- --------- --------- ---------
Gross profit 339.5 269.0 959.6 777.3
Selling, delivery and administrative expenses 240.4 180.9 699.9 552.1
Amortization expense 12.3 9.9 36.8 30.3
Special charges -- -- 4.6 --
Gain on pension curtailment -- -- (8.9) --
--------- --------- --------- ---------
Operating income 86.8 78.2 227.2 194.9
Interest expense, net (22.7) (21.8) (71.8) (63.4)
Other (expense) income, net (1.3) (1.2) (0.9) 1.8
--------- --------- --------- ---------
Income before income taxes 62.8 55.2 154.5 133.3
Income taxes 30.1 26.3 73.6 63.6
--------- --------- --------- ---------
Income from continuing operations 32.7 28.9 80.9 69.7
Income from discontinued operations, after taxes -- -- -- 8.9
--------- --------- --------- ---------
Net income $ 32.7 $ 28.9 $ 80.9 $ 78.6
========= ========= ========= =========
Weighted average common shares:
Basic 156.3 136.3 156.1 136.9
Incremental effect of stock options 0.6 0.6 0.8 0.4
--------- --------- --------- ---------
Diluted 156.9 136.9 156.9 137.3
========= ========= ========= =========
Income per share - basic:
Continuing operations $ 0.21 $ 0.21 $ 0.52 $ 0.51
Discontinued operations -- -- -- 0.06
--------- --------- --------- ---------
Net income $ 0.21 $ 0.21 $ 0.52 $ 0.57
========= ========= ========= =========
Income per share - diluted:
Continuing operations $ 0.21 $ 0.21 $ 0.52 $ 0.51
Discontinued operations -- -- -- 0.06
--------- --------- --------- ---------
Net income $ 0.21 $ 0.21 $ 0.52 $ 0.57
========= ========= ========= =========
Cash dividends per share $ -- $ -- $ 0.04 $ 0.04
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
2
PEPSIAMERICAS, INC.
FORM 10-Q
THIRD QUARTER 2001
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
End of End of
Third Quarter Fiscal Year
2001 2000
------------- -----------
(unaudited)
ASSETS:
Current assets:
Cash and equivalents $ 86.6 $ 51.2
Receivables 212.2 203.0
Inventories 181.2 164.0
Other current assets 59.6 58.8
---------- ----------
Total current assets 539.6 477.0
Property (at cost) 1,764.8 1,646.8
Accumulated depreciation (729.3) (642.1)
---------- ----------
Net property 1,035.5 1,004.7
---------- ----------
Intangible assets, net 1,716.8 1,740.7
Investments and other assets 125.9 113.2
---------- ----------
Total assets $ 3,417.8 $ 3,335.6
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current maturities of long-term debt $ 244.8 $ 513.3
Payables 251.9 199.1
Other current liabilities 149.6 174.6
---------- ----------
Total current liabilities 646.3 887.0
---------- ----------
Long-term debt 1,090.6 860.1
Deferred income taxes 80.5 47.0
Other liabilities 75.7 92.0
Shareholders' equity:
Preferred stock ($0.01 par value, 12.5 million shares authorized;
no shares issued) -- --
Common stock ($0.01 par value, 350 million shares authorized;
167.5 million shares issued) 1,543.1 1,546.8
Retained income 225.1 151.6
Accumulated other comprehensive loss:
Cumulative translation adjustment (31.3) (30.3)
Net unrealized investment and hedging (losses) gains (1.0) 1.6
---------- ----------
Accumulated other comprehensive loss (32.3) (28.7)
---------- ----------
Treasury stock (11.4 million shares - 2001 and 11.7 million
shares - 2000) (211.2) (220.2)
---------- ----------
Total shareholders' equity 1,524.7 1,449.5
---------- ----------
Total liabilities and shareholders' equity $ 3,417.8 $ 3,335.6
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
PEPSIAMERICAS, INC.
FORM 10-Q
THIRD QUARTER 2001
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
Nine Months
--------------------------------
2001 2000
---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 80.9 $ 69.7
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 149.1 120.6
Deferred income taxes 28.5 (0.7)
Gain on pension curtailment (8.9) --
Gain on sale of franchises, net of tax -- (1.4)
Special charges 4.6 --
Cash outlays related to special charges (17.8) (11.9)
Other (5.5) 0.5
Changes in assets and liabilities, exclusive of acquisitions and divestitures:
Increase in receivables (9.8) (9.0)
Increase in inventories (17.0) (8.1)
Increase (decrease) in payables 25.9 (23.7)
Net change in other assets and liabilities 17.9 (2.3)
---------- ----------
Net cash provided by operating activities 247.9 133.7
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Franchises and companies acquired, net of cash acquired (5.5) (2.5)
Proceeds from sales of franchises, net of cash divested -- 2.5
Capital investments, net of proceeds from asset sales (151.0) (129.3)
Proceeds from sales of investments 1.9 --
---------- ----------
Net cash used in investing activities (154.6) (129.3)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings of short-term debt (195.0) 115.9
Proceeds from issuance of long-term debt 352.7 --
Repayment of long-term debt (204.4) (75.7)
Dividends (6.2) (5.5)
Treasury stock purchases (6.6) (35.7)
Issuance of common stock 9.1 1.3
---------- ----------
Net cash (used in) provided by financing activities (50.4) 0.3
---------- ----------
Net cash used in discontinued operations (7.5) (18.5)
Effects of exchange rate changes on cash and equivalents -- (0.8)
---------- ----------
Change in cash and equivalents 35.4 (14.6)
Cash and equivalents at beginning of year 51.2 114.5
---------- ----------
Cash and equivalents at end of first nine months $ 86.6 $ 99.9
========== ==========
See accompanying notes to condensed consolidated financial statements.
4
PEPSIAMERICAS, INC.
FORM 10-Q
THIRD QUARTER 2001
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The condensed consolidated financial statements included herein have been
prepared by PepsiAmericas, Inc. (the "Company") without audit. Certain
information and note disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in
the United States have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although the
Company believes that the disclosures made are adequate to make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year 2000. In the opinion of
management, the information furnished herein reflects all adjustments
(consisting only of normal, recurring adjustments) necessary for a fair
statement of results for the interim periods presented.
2. The Company manufactures, packages, sells and distributes carbonated and
non-carbonated Pepsi-Cola beverages and a variety of other beverages in
the United States, Central Europe and the Caribbean. The Company is the
number-two anchor bottler in the Pepsi system and accounts for
approximately 21 percent of all Pepsi-Cola products sold in the United
States. The Company operates in a significant portion of a 17 state
region, primarily in the Central and Midwestern United States, and outside
the United States the Company operates in the Central European and
Caribbean markets in Poland, Hungary, the Czech Republic, Republic of
Slovakia, Puerto Rico, Jamaica, Bahamas, and Trinidad and Tobago. The
Company serves a total population of more than 117 million people, and its
business is highly seasonal. PepsiCo, Inc. holds a 36.7 percent equity
interest in the Company.
The following presents sales and operating income of the Company's
geographic segments for the third quarter and first nine months of 2001
and 2000 (in millions):
Third Quarter Nine Months
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------ ------------ ------------
Sales:
Domestic $ 719.5 $ 582.4 $ 2,071.7 $ 1,674.6
International 127.6 72.8 337.6 212.1
------------- ------------ ------------ ------------
Total $ 847.1 $ 655.2 $ 2,409.3 $ 1,886.7
============= ============ ============ ============
Operating income:
Domestic $ 87.1 $ 83.6 $ 241.3 $ 210.1
International (0.3) (5.4) (14.1) (15.2)
------------- ------------ ------------ ------------
Total $ 86.8 $ 78.2 $ 227.2 $ 194.9
============= ============ ============ ============
The significant changes in sales and operating income were due in part to
the transaction described in Note 4 below. There were no material changes
in total assets by geographic segment since fiscal year end 2000.
3. The Company's fiscal year consists of 52 or 53 weeks ending on the
Saturday closest to December 31; fiscal 2000 ended on December 30, 2000.
The Company's third quarters of 2001 and 2000 were based on the thirteen
weeks ended September 29, 2001 and September 30, 2000, respectively.
4. On November 30, 2000, the former PepsiAmericas, Inc. (the "former PAS")
merged into a wholly-owned subsidiary of Whitman Corporation. In January
2001, Whitman Corporation changed its name to PepsiAmericas, Inc. This
transaction is more fully described in the Company's 2000 Annual Report on
Form 10-K.
5
During the first quarter of 2001, the Company reached an agreement with
Crescent Distributing, LLC ("Crescent"), a wholly-owned subsidiary of
Poydras Street Investors LLC ("Poydras"). Under the agreement, the joint
venture between the Company and Poydras was terminated with Crescent
retaining sole ownership of the rights to the beer operations and related
assets and the Company assuming sole ownership of the rights to the soft
drink operations and related assets. The results derived from the beer
operations were not material to the Company's overall business.
The Company also acquired the Pepsi bottling operations in Trinidad and
Tobago on December 29, 2000. This transaction was accounted for under the
purchase method. Accordingly, the operating results have been included in
the consolidated financial statements since the date of acquisition. The
effect of this acquisition is not significant to the Company's operating
results, and consideration paid was not significant.
In the first quarter of 2000, the Company sold its operations in the
Baltics. This sale resulted in a gain of $2.6 million ($1.4 million after
taxes), which is reflected in "Other (expense) income, net" on the
Condensed Consolidated Statements of Income.
The pro forma condensed consolidated results of continuing operations
presented below for 2001 and 2000 assume the following:
o The territories and companies described above, with the exception of
Trinidad and Tobago, were acquired or divested as of the beginning of
fiscal 2000. Operating results for Trinidad and Tobago are only
included from the date of acquisition.
o The after tax gain from the sale of the Baltics in 2000 was excluded.
o The special charges and pension curtailment gain recorded in the first
quarter of 2001 were excluded, as well as other non-recurring items
recorded in 2000 by the Company and the former PAS.
o Interest expense has been adjusted to assume the interest rates in
effect for both years for the Company would have been in effect for
debt assumed from the former PAS business units.
Third Quarter Nine Months
------------------------------ -------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(unaudited and in millions, except per share data)
Sales $ 847.1 $ 823.7 $ 2,409.3 $ 2,361.9
Net income 32.7 30.2 78.3 69.7
Net income per share-basic 0.21 0.19 0.50 0.45
Net income per share-diluted 0.21 0.19 0.50 0.44
The above pro forma results are for informational purposes only and may
not be indicative of actual results that would have occurred had the
transactions described taken place as of the beginning of fiscal 2000.
5. The Company's comprehensive income is as follows:
Third Quarter Nine Months
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
(in millions)
Net income $ 32.7 $ 28.9 $ 80.9 $ 78.6
Foreign currency translation adjustment (1.5) (9.4) (1.0) (17.7)
Unrealized (losses) gains on investments and
hedging contracts (5.9) (3.4) (2.6) 1.5
----------- ----------- ----------- -----------
Comprehensive income $ 25.3 $ 16.1 $ 77.3 $ 62.4
=========== =========== =========== ===========
Unrealized (losses) gains on investments and hedging contracts are
presented net of tax (benefit) expense of ($5) million, ($2.1) million,
($1.8) million and $0.9 million, respectively.
6
6. Interest expense, net, is comprised of the following:
Third Quarter Nine Months
------------------------------- -------------------------------
2001 2000 2001 2000
------------- ------------ ------------- ------------
(in millions)
Interest expense $ (23.0) $ (22.0) $ (73.5) $ (64.4)
Interest income 0.3 0.2 1.7 1.0
------------- ------------ ------------- ------------
Interest expense, net $ (22.7) $ (21.8) $ (71.8) $ (63.4)
============= ============ ============= ============
7. Net cash provided by operating activities reflected cash payments and
receipts for interest and income taxes as follows:
Nine Months
------------------------------
2001 2000
------------ ------------
(in millions)
Interest paid $ 74.5 $ 67.9
Interest received 0.8 0.9
Income taxes paid, net of refunds 8.1 30.8
The reduction in income taxes paid resulted from the application of
overpayment of the 2000 income taxes to the Company's 2001 estimated
income tax payments in the first nine months of 2001.
8. As of the end of the third quarter of 2001, approximately 45 percent of
the Company's inventory consisted of raw materials and supplies, while 55
percent was finished goods. This compares to 50 percent raw materials and
supplies and 50 percent finished goods at fiscal year end 2000.
9. In the first quarter of 2001, the Company recorded a special charge of
$4.6 million ($2.8 million after taxes). The charge, related to further
organization changes resulting from the transaction with the former PAS,
was principally composed of severance and related benefits.
In the fourth quarter of 2000, the Company recorded a special charge of
$21.7 million ($13.2 million after taxes). The charge principally included
severance payments and related benefits for employees affected by the
integration of operations in connection with the acquisition of the former
PAS and is more fully explained in the Company's 2000 Annual Report on
Form 10-K.
The following table summarizes activity associated with the special
charges (in millions):
Accrued liabilities as of fiscal year end 2000
(all employee-related costs) $ 17.4
Special charge (employee-related costs) 4.6
Acceleration of stock awards vesting (1.2)
Expenditures for employee-related costs (17.8)
--------
Accrued liabilities at the end of the third quarter of 2001 $ 3.0
========
The 2001 and 2000 charges affected approximately 55 employees, of which 4
remain as of the end of the third quarter of 2001. The accrued liabilities
remaining as of the end of the third quarter of 2001 are comprised of
deferred severance payments and certain employee benefits. The Company
expects to pay a significant portion of the $3 million of employee related
costs, using cash from operations, during the next 12 months; accordingly,
such amounts are classified as other current liabilities.
7
10. In connection with the integration of former Whitman Corporation and
former PAS domestic benefit plans during the first quarter of 2001, the
Company will freeze pension benefit accruals for substantially all
salaried and non-union employees effective December 31, 2001. Employees
age 50 or older with 10 or more years of vesting service were
grandfathered such that they will continue to accrue benefits after
December 31, 2001 based on their final average pay as of December 31,
2001. As a result of the curtailment, the Company recognized a one-time
curtailment gain of $8.9 million ($5.4 million after taxes). The existing
domestic salaried and non-union pension plans will be replaced by an
additional Company contribution to the 401(K) plan.
11. The Company uses aluminum swap contracts to hedge against volatility in
future cash flows on anticipated aluminum can purchases, the prices of
which are indexed to aluminum market prices. Realized gains and losses on
aluminum hedge contracts are deferred until the related finished products
are sold. See "Quantitative and Qualitative Disclosures About Market Risk
- Commodity Prices." Effective at the beginning of fiscal 2001, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS Nos. 137 and 138. In connection with the adoption, the
Company recognized an asset for the fair value of aluminum hedges of $1.4
million and reclassified $0.4 million of previously deferred hedging
losses to accumulated other comprehensive income. Accordingly, the impact
of adopting SFAS No. 133, as amended, was an increase of $1 million in
accumulated other comprehensive income, all of which will be reclassified
into cost of goods sold during fiscal 2001.
During the third quarter of 2001, the Company entered into swap contracts
to hedge against volatility in future cash flows on anticipated diesel
fuel purchases, the prices of which are indexed to diesel fuel market
prices. Realized gains and losses on fuel hedge contracts are deferred
until the fuel is purchased. See "Quantitative and Qualitative Disclosures
About Market Risk - Commodity Prices."
As of the end of the third quarter of 2001, the Company had deferred $5
million of aluminum and fuel hedging losses in accumulated other
comprehensive income, a majority of which will be reclassified into
earnings during the next 12 months. The Company has hedged a portion of
its anticipated aluminum can and fuel purchases through the end of fiscal
2002.
During the third quarter of 2001, the Company entered into swap contracts
with an aggregate notional amount of $200 million to convert a portion of
its fixed rate debt to floating rate debt, with the objective of reducing
overall borrowing costs. These swaps are accounted for as fair value
hedges, since they hedge against the fair value of fixed rate debt
resulting from fluctuations in interest rates. The fair value of the
interest rate swaps as of the end of the third quarter of 2001 was $6.1
million, which is reflected in "Investments and other assets" on the
Condensed Consolidated Balance Sheets, with a corresponding increase in
"Long-term debt" representing the change in fair value of the fixed rate
debt. The fair value adjustment had no earnings impact since the swaps are
considered highly effective in eliminating the interest rate risk of the
fixed rate debt they are hedging; however, the benefit of floating
interest rates reduced the Company's borrowing costs during the third
quarter of 2001.
12. The Company continues to be subject to certain indemnification obligations
under agreements with previously sold subsidiaries, including potential
environmental liabilities. There is significant uncertainty in assessing
the Company's share of the potential liability for such indemnification.
The assessment and determination for cleanup at the various sites involved
is inherently speculative during the early stages, and the Company's
indemnification obligations for such costs is subject to various factors,
including possible secondary insurance recoveries and the allocation of
liabilities among many other potentially responsible and financially
viable parties.
At the end of the third quarter of 2001, the Company had accruals of $10.6
million to cover potential indemnification obligations, including $5
million classified as current liabilities. Such amounts are determined
using estimated undiscounted future cash requirements, and have not been
reduced by potential future insurance recoveries. During the second
quarter of 2000, a trust was established that will be used to satisfy a
portion of the future indemnification obligations. No payments were made
by the trust during the first nine months of 2001, and the trust held
$34.2 million as of the end of the third quarter of 2001.
8
The estimated liabilities include expenses for the remediation of
identified sites, payments to third parties for claims and expenses, and
the expenses of on-going evaluations and litigation. The estimates are
based upon the judgments of outside consultants and experts and their
evaluations of the characteristics and parameters of the sites, including
results from field inspections, test borings and water flows. The
estimates are based upon the use of current technology and remediation
techniques, and do not take into consideration any inflationary trends
upon such claims or expenses, nor do they reflect the possible benefits of
continuing improvements in remediation methods. The accruals also do not
provide for any claims for environmental liabilities or other potential
issues which may occur in the future.
The Company has contingent liabilities from various pending claims and
litigation on a number of matters, including indemnification claims under
agreements with previously sold subsidiaries for product liability and
toxic torts. The ultimate liability for these claims cannot be determined.
In the opinion of management, based upon information currently available,
the ultimate resolution of these claims and litigation, including
potential environmental exposures, and considering amounts already
accrued, should not have a material effect on the Company's financial
condition, although amounts recorded in a given period could be material
to the results of operations or cash flows for that period. Existing
environmental liabilities associated with the Company's continuing
operations are not material.
13. Basic earnings per share are based upon the weighted-average number of
common shares outstanding. Diluted earnings per share assume the exercise
of all options which are dilutive, whether exercisable or not. The
dilutive effects of stock options are measured under the treasury stock
method.
Options to purchase the following shares were not included in the
computation of diluted EPS because the exercise price was greater than the
average market price of the common shares during the related period:
Third Quarter Nine Months
------------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ -----------
Shares under options outstanding 7,616,399 7,497,963 7,516,399 8,610,776
Weighted-average exercise price
per share $ 18.83 $ 17.97 $ 18.89 $ 17.30
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
2001 THIRD QUARTER COMPARED WITH 2000 THIRD QUARTER
Due to the transaction with the former PAS completed in November 2000, the
Company believes that pro forma results provide a better indication of current
operating trends than reported results. Therefore, included within the following
discussion are explanations of both reported results and pro forma results.
Pro forma operating results assume the merger with the former PAS occurred
at the beginning of 2000 and exclude the impact of special charges and other
non-recurring items recorded in all periods presented. The Company's business is
highly seasonal; accordingly, the operating results of any individual quarter
may not be indicative of a full year's operating results.
Sales for the third quarter of 2001 and 2000 were as follows (in
millions):
Reported Pro Forma
--------------------- Percent --------------------- Percent
2001 2000 Change 2001 2000 Change
-------- -------- ------ -------- -------- ------
Domestic $ 719.5 $ 582.4 23.5 $ 719.5 $ 710.2 1.3
International 127.6 72.8 75.3 127.6 113.5 12.4
-------- -------- -------- --------
Total Sales $ 847.1 $ 655.2 29.3 $ 847.1 $ 823.7 2.8
======== ======== ======== ========
On a reported basis, sales increased $191.9 million, or 29.3 percent, in
the third quarter of 2001 compared to the third quarter of 2000, primarily
reflecting sales contributed by the additional territories acquired from the
former PAS. The balance of the growth in sales resulted primarily from higher
volume and improved pricing.
On a pro forma basis, sales increased $23.4 million, or 2.8 percent. The
growth in sales included an increase in domestic sales of $9.3 million and an
increase in international sales of $14.1 million. Excluding sales contributed in
2000 by the beer operations, which the Company divested in the first quarter of
2001, domestic sales increased $20.7 million, or 3 percent. The increase in
domestic sales resulted from improved pricing, with average revenue per unit up
2.5 percent, and a 1.1 percent increase in volume. Volume growth was driven by
continued strong performance by Aquafina and the introduction of Mountain Dew
Code Red and Pepsi Twist in the second quarter of 2001, as well as Sierra Mist,
which was introduced in the fourth quarter of 2000. Although in total
Pepsi-Cola, Diet Pepsi and Mountain Dew brands declined, total Pepsi-Cola
branded products, including Aquafina, Sierra Mist and Dole, grew approximately 2
percent from the third quarter of 2000. The higher international sales were due
to strong volume growth in Central Europe and the Caribbean, due in part to a
comparison with unusually soft volumes in Central Europe in the third quarter of
2000. Excluding sales in Trinidad and Tobago, territories acquired in December
2000, international sales were up $11.8 million, or 10.4 percent, on a 15.4
percent increase in volume and a 2.8 percent increase in average selling prices,
partially offset by a planned reduction in private label revenues.
The consolidated gross profit margin on a reported basis decreased to 40.1
percent of sales in the third quarter of 2001 compared with 41.1 percent of
sales in the third quarter of 2000, driven primarily by a lower domestic gross
profit margin attributable to the inclusion in 2001 of lower margin territories
of the former PAS.
On a pro forma basis, and excluding prior year results from the divested
beer operations, the consolidated gross profit margin of 40.1 percent was
unchanged from the third quarter of 2000. The domestic gross profit margin was
unchanged, as higher net selling prices were offset by higher concentrate and
packaging costs, due in part to a shift in mix towards more polyethylene
packaging. The international gross profit margin improved slightly due to higher
volumes and pricing improvements.
10
Reported selling, delivery and administrative ("SD&A") expenses
represented 28.4 percent of sales in the third quarter of 2001 compared with
27.6 percent in the third quarter of 2000. Domestic SD&A expenses as a percent
of sales increased as the benefits of cost reduction efforts initiated in the
fourth quarter of 2000 were offset by higher integration costs resulting from
the territories acquired from the former PAS, along with higher depreciation
resulting from continued capital investments. International SD&A expenses as a
percent of sales were lower than the prior year, reflecting the impact of the
lower cost structure of the Caribbean operations of the former PAS in the third
quarter of 2001, as well as the favorable impact of higher volumes in the third
quarter of 2001.
On a pro forma basis, and excluding prior year results from the divested
beer operations, SD&A expenses as a percent of sales in the third quarter of
2001 were 28.4 percent compared to 27.5 percent in the third quarter of 2000.
Domestic SD&A costs as a percent of sales were higher due to the factors
discussed. International SD&A expenses as a percent of sales were lower
primarily due to cost improvements and the benefits of volume growth in Central
Europe and the Caribbean.
As a result of the actions taken with respect to the merger with the
former PAS, which resulted in a special charge of $4.6 million ($2.8 million
after tax) recorded in the first quarter of 2001 and a special charge of $21.7
million ($13.2 million after tax) recorded in the fourth quarter of 2000, the
Company expects to realize annual savings of approximately $16 million,
primarily in 2002 and 2003. This includes reduced employee related costs in both
the existing territories and the territories of the former PAS and the benefits
of centralized procurement through PepsiCo. A portion of the charges recorded in
2000 and 2001 resulted from payments to former executives of the Company, which
will not result in future savings or benefits.
Operating income for the third quarter of 2001 and 2000 was as follows (in
millions):
Reported Pro Forma
--------------------- Percent --------------------- Percent
2001 2000 Change 2001 2000 Change
-------- -------- ------ -------- -------- ------
Domestic $ 87.1 $ 83.6 4.2 $ 87.1 $ 95.5 (8.8)
International (0.3) (5.4) 94.4 (0.3) (5.2) 94.2
-------- -------- -------- --------
Total Operating Income $ 86.8 $ 78.2 11.0 $ 86.8 $ 90.3 (3.9)
======== ======== ======== ========
In the third quarter of 2001, reported operating income increased $8.6
million, or 11 percent. Domestic reported operating income increased $3.5
million, or 4.2 percent, primarily due to the domestic operating income
contributed by the acquired territories. International markets incurred
operating losses of $0.3 million in the third quarter of 2001 compared to $5.4
million in the previous year. This favorable comparison was due primarily to the
volume growth in the current year, as previously discussed.
On a pro forma basis, operating income decreased $3.5 million, or 3.9
percent from the third quarter of 2000. Domestic operating income, excluding
2000 results from the divested beer operations, decreased $8.3 million, or 8.7
percent primarily due to higher integration costs and higher depreciation
resulting from continued capital investments. The decrease in domestic operating
income was partially offset by the improvement in operating losses incurred by
the international operations. International markets incurred losses of $0.3
million in the third quarter of 2001 compared to $5.2 million last year. This
improvement in operating losses was primarily related to improved volumes and
pricing.
Net interest expense increased $0.9 million in the third quarter of 2001
to $22.7 million. This increase was principally due to the increase in the
average outstanding net debt resulting from the transaction with the former PAS,
partially offset by lower interest rates on the Company's floating rate debt and
benefits of the interest rate swaps entered into during the third quarter of
2001.
The Company reported other expense of $1.3 million in the third quarter of
2001 compared to $1.2 million reported in the third quarter of 2000. There were
no significant items recorded in either period.
11
RESULTS OF OPERATIONS
2001 FIRST NINE MONTHS COMPARED WITH 2000 FIRST NINE MONTHS
Sales for the first nine months of 2001 and 2000 were as follows (in
millions):
Reported Pro Forma
--------------------- Percent --------------------- Percent
2001 2000 Change 2001 2000 Change
-------- -------- ------ -------- -------- ------
Domestic $2,071.7 $1,674.6 23.7 $2,071.7 $2,038.0 1.7
International 337.6 212.1 59.2 337.6 323.9 4.2
-------- -------- -------- --------
Total Sales $2,409.3 $1,886.7 27.7 $2,409.3 $2,361.9 2.0
======== ======== ======== ========
On a reported basis, sales increased $522.6 million, or 27.7 percent, in
the first nine months of 2001 compared to the first nine months of 2000,
primarily reflecting sales contributed by the additional territories acquired
from the former PAS. The balance of the growth in sales resulted from improved
pricing and volume growth.
On a pro forma basis, sales increased $47.4 million, or 2 percent. The
growth in sales included an increase in domestic sales of $33.7 million, or 1.7
percent, and an increase in international sales of $13.7 million, or 4.2
percent. Excluding results of the Company's divested beer operations, domestic
sales increased $58.4 million, or 2.9 percent. The increase in domestic sales
resulted from improved pricing, with average net revenue per unit up 2.9
percent, on a 0.5 percent increase in volume. Total Pepsi-Cola branded products
were stronger, growing over one percent, driven by Sierra Mist, which was
introduced in the fourth quarter of 2000, and second quarter 2001 introductions
of Mountain Dew Code Red and Pepsi Twist, as well as continued strong growth in
Aquafina. Excluding sales in Trinidad and Tobago, territories acquired in
December 2000, international sales were up $6.6 million, or 2 percent. The
higher international sales were due to a 6.3 percent increase in volume and a
2.6 percent increase in pricing, partially offset by a planned reduction in
private label revenues.
The consolidated gross profit margin on a reported basis decreased to 39.8
percent of sales in the first nine months of 2001 compared with 41.2 percent of
sales in the first nine months of 2000, driven primarily by a lower domestic
gross profit margin attributable to the inclusion in 2001 of lower margin
territories of the former PAS.
On a pro forma basis, and excluding results from the divested beer
operations, the consolidated gross profit margin decreased to 39.9 percent of
sales in the first nine months of 2001 from 40.1 percent in the first nine
months of 2000. The domestic gross profit margin was down slightly, as the
benefits of higher net selling prices were offset by increased concentrate and
packaging costs. The international gross profit margin was slightly lower due to
higher concentrate and packaging costs in the Caribbean.
Reported SD&A expenses represented 29 percent of sales in the first nine
months of 2001 compared with 29.3 percent in the first nine months of 2000. The
decline in the percentage of SD&A expenses was primarily attributable to the
impact of the lower cost structure of the Caribbean operations of the former PAS
in the first nine months of 2001.
On a pro forma basis, and excluding results from the divested beer
operations, SD&A expenses as a percent of sales in the first nine months of 2001
were 29.1 percent, unchanged from the first nine months of 2000. Domestic SD&A
costs as a percent of sales were slightly higher due primarily to higher
depreciation resulting from continued capital investments. International SD&A
costs as a percent of sales were lower due to cost improvements and the benefits
of volume growth in Central Europe and the Caribbean, partially offset by the
inclusion in the first nine months of 2000 of $2.1 million of favorable purchase
accounting adjustments for depreciation.
12
Operating income for the first nine months of 2001 and 2000 was as follows
(in millions):
Reported Pro Forma
--------------------- Percent --------------------- Percent
2001 2000 Change 2001 2000 Change
-------- -------- ------ -------- -------- ------
Domestic $ 241.3 $ 210.1 14.9 $ 237.0 $ 238.8 (0.8)
International (14.1) (15.2) 7.2 (14.1) (18.2) 22.5
-------- -------- -------- --------
Total Operating Income $ 227.2 $ 194.9 16.6 $ 222.9 $ 220.6 1.0
======== ======== ======== ========
In the first nine months of 2001, reported operating income increased
$32.3 million, or 16.6 percent. Included in the first nine months of 2001 were a
special charge of $4.6 million and a gain on pension curtailment of $8.9
million. Excluding these non-recurring items, reported operating income
increased $28 million, or 14.4 percent, primarily due to the domestic operating
income contributed by the acquired territories. Reported international operating
losses improved by $1.1 million due primarily to higher volumes and pricing,
partially offset by the addition in 2001 of operating losses of the Caribbean
territories acquired from the former PAS and the inclusion in the first nine
months of 2000 of favorable purchase accounting adjustments for depreciation.
On a pro forma basis, operating income increased $2.3 million, or one
percent from the first nine months of 2000. The improvement was primarily driven
by a $4.1 million improvement in international operating losses, reflecting the
benefits of higher volumes and improved pricing, partially offset by the
inclusion in the first nine months of 2000 of favorable purchase accounting
adjustments for depreciation. Excluding the divested beer operations, domestic
operating income decreased $1.1 million, or 0.5 percent, as higher depreciation
and concentrate and packaging costs more than offset the benefits of higher
volumes and improved pricing.
Net interest expense increased $8.4 million in the first nine months of
2001 to $71.8 million. This increase was principally due to the increase in the
average outstanding net debt resulting from the transaction with the former PAS,
partially offset by lower interest rates on the Company's floating rate debt and
benefits resulting from the interest rate swaps entered into during the third
quarter of 2001.
The Company reported other expense of $0.9 million in the first nine
months of 2001 compared to other income of $1.8 million reported in the first
nine months of 2000. Included in other income in the first nine months of 2000
was a gain of $2.6 million resulting from the sale of the franchise operations
in the Baltics. Absent this gain, other income was essentially unchanged from
the first nine months of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by continuing operations increased by $114.2 million to
$247.9 million in the first nine months of 2001. This increase was primarily due
to operating cash flow provided by the domestic operations acquired from the
former PAS and improved operating cash flow in the existing domestic
territories, as well as improvement in working capital management and lower
income tax payments in 2001, resulting from the application of overpayment of
the 2000 income taxes to the Company's 2001 estimated income tax payments in the
first nine months of 2001.
Investing activities of $5.5 million in the first nine months of 2001
included cash paid in connection with the dissolution of the joint venture
between the Company and Poydras through which the Company assumed sole ownership
of the soft drink operations in New Orleans, as well as payments related to the
acquisition of Trinidad and Tobago and a small domestic franchise acquisition.
The Company made capital investments of $151 million, net of proceeds from asset
sales, in its operations in the first nine months of 2001 compared with $129.3
million in the first nine months of 2000. This increase resulted from capital
spending in the acquired territories in 2001, partially offset by reduced
capital investments to support the Company's cold drink initiative, reflecting
the Company's focus on redeploying existing cold drink equipment, along with a
reduction in international spending. In addition, the Company is expanding its
refurbishment efforts by converting a production facility in Ft. Wayne, Indiana
to a refurbishment facility for cold drink equipment. Proceeds from the sales of
investments of $1.9 million in the first nine months of 2001 related to
miscellaneous land sales associated with the Company's non-operating real estate
subsidiaries.
13
The Company's total debt decreased $38 million to $1,335.4 million at the
end of the third quarter of 2001, from $1,373.4 million at the end of fiscal
2000. During February and March 2001, the Company issued $200 million and $150
million of notes with coupon rates of 5.95 percent due 2006 and 5.79 percent due
2013, respectively. The notes issued in March 2001 will be remarketed in March
2003, at which time the notes will either be mandatorily purchased and reissued
by the underwriter or mandatorily redeemed by the Company. Proceeds from these
notes were used to repay outstanding commercial paper. On August 1, 2001, the
Company announced that it would resume purchasing its common stock under a
previously authorized repurchase program, under which 11.4 million shares
remained available for repurchase at the end of the third quarter of 2001. The
Company repurchased 0.5 million shares of its common stock for $6.6 million in
the first nine months of 2001, compared to three million shares for $35.7
million in the first nine months of 2000. The Company declared an annual
dividend of four cents per share in the first quarter of 2001, which was paid in
the second quarter of 2001. This dividend rate was unchanged from the annual
dividend rate in 2000. The issuance of common stock from treasury shares for the
exercise of stock options resulted in cash inflows of $9.1 million in the first
nine months of 2001, compared to $1.3 million in the first nine months of 2000.
At the end of the third quarter of 2001, the Company had revolving credit
agreements with maximum borrowings of $750 million, which act as back-up for the
Company's commercial paper program, giving the Company a total of $750 million
available under the commercial paper program and revolving credit facilities
combined. Total commercial paper borrowings were $236.5 million at the end of
the third quarter of 2001. In November 2001, $250 million of the revolving
credit agreements expired and were not renewed by the Company; accordingly, the
Company currently has a total of $500 million available under the commercial
paper program and revolving credit facilities combined. The Company believes
that with its existing operating cash flows, available lines of credit, and the
potential for additional debt and equity offerings, it will have sufficient
resources to fund its future growth and expansion.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the purchase method of accounting to be used for
all business combinations initiated after June 30, 2001. The Company does not
expect SFAS No. 141 to significantly impact its consolidated financial
statements. SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Goodwill and other
intangible assets that have an indefinite life will not be amortized, but rather
will be tested for impairment annually or whenever an event occurs indicating
that the asset may be impaired. The Company will adopt SFAS No. 142 effective
the beginning of fiscal 2002 and expects to cease amortization of substantially
all intangible assets, which principally represent franchise rights granted in
perpetuity. The Company will test its intangible assets for impairment in fiscal
2002, as required by SFAS No. 142.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains forward-looking statements of
expected future developments, as defined in the Private Securities Litigation
Reform Act of 1995. The forward-looking statements in this Form 10-Q refer to
the expectations regarding continuing operating improvement and other matters.
These forward-looking statements reflect management's expectations and are based
on currently available data; however, actual results are subject to future risks
and uncertainties, which could materially affect actual performance. Risks and
uncertainties that could adversely affect such future performance include, but
are not limited to, the following: competition, including product and pricing
pressures; changing trends in consumer tastes; changes in the Company's
relationship and/or support programs with PepsiCo and other brand owners; market
acceptance of new product offerings; weather conditions; cost and availability
of raw materials; availability of capital; labor and employee benefit costs;
unfavorable interest rate and currency fluctuations; costs of legal proceedings;
outcomes of environmental claims and litigation; and general economic, business
and political conditions in the countries and territories where the Company
operates.
14
These events and uncertainties are difficult or impossible to predict
accurately and many are beyond the Company's control. The Company assumes no
obligation to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to various market risks, including risks from
changes in commodity prices, interest rates and currency exchange rates.
COMMODITY PRICES
The risk from commodity price changes relates to the Company's ability to
recover higher product costs through price increases to customers, which may be
limited due to the competitive pricing environment that exists in the soft drink
business. The Company uses swap contracts to hedge price fluctuations for a
portion of its aluminum and fuel requirements over a specified period of time.
Because of the high correlation between the commodity prices and the Company's
contractual cost of these products, the Company considers these hedges to be
highly effective. As of the end of the third quarter of 2001, the Company has
hedged a portion of its future aluminum and fuel requirements through the end of
fiscal 2002.
INTEREST RATES
In the first nine months of 2001, the risk from changes in interest rates
was not material to the Company's operations because a significant portion of
the Company's debt issues were fixed rate obligations. The Company's floating
rate exposure relates to changes in the six month LIBOR rate and the overnight
Federal Funds rate. Assuming consistent levels of floating rate debt with those
held at the end of the third quarter of 2001, a 50 basis point (0.5 percent)
change in each of these rates would have had an impact of approximately $1.7
million on the Company's interest expense in the first nine months of 2001.
During the third quarter of 2001, the Company entered into interest rate swaps
to convert a portion of its fixed rate debt to floating rate debt. The Company
had cash equivalents throughout the first nine months of 2001, principally
invested in money market funds and commercial paper, which were most closely
tied to overnight Federal Funds rates. Assuming a change of 50 basis points in
the rate of interest associated with the Company's cash equivalents at the end
of the third quarter of 2001, interest income would not have changed by a
significant amount.
CURRENCY EXCHANGE RATES
Because the Company operates in international franchise territories, it is
subject to exposure resulting from changes in currency exchange rates. Currency
exchange rates are influenced by a variety of economic factors including local
inflation, growth, interest rates and governmental actions, as well as other
factors. The Company currently does not hedge the translation risks of
investments in its international operations. Any positive cash flows generated
by international operations have been reinvested in the operations, or used to
repay intercompany loans from the manufacturing operations in Poland.
Based on sales, international operations represented approximately 14
percent of the Company's total operations in the first nine months of 2001.
Changes in currency exchange rates impact the translation of the results of
certain international operations from their local currencies into U.S. dollars.
If the currency exchange rates had changed by five percent in the first nine
months of 2001, the Company estimates the impact on reported operating income
would have been approximately $2 million. This estimate does not take into
account the possibility that rates can move in opposite directions and that
gains in one category may or may not be offset by losses from another category.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From approximately 1945 to 1995, various entities owned and operated a
hydraulic equipment facility which engaged in chrome plating in the
City of Willits, California. The plant site is contaminated by various
chemicals and metals. On August 23, 1999, an action entitled Donna M.
Avila, et al. v. Willits Environmental Remediation Trust, Remco
Hydraulics, Inc., M-C Industries, Inc., Pneumo Abex Corporation and
Whitman Corporation, Case No. C99-3941 CAL, was filed in United States
District Court for the Northern District of California. On January 16,
2001, a second action, entitled Pamela Jo Alrich, et al. v. Willits
Environmental Remediation Trust, et al., Case No. C 01 0266 SI,
against essentially the same defendants was filed in the same court.
In the two actions, individual plaintiffs claim that the Company is
liable for personal injury and/or property damage resulting from
environmental contamination at the facility. In July 2001, plaintiffs'
counsel asserted that hundreds of additional plaintiffs may be added
to the actions. As of the second quarter of 2001, there were
approximately 500 plaintiffs in the actions seeking an unspecified
amount of damages, punitive damages, injunctive relief and medical
monitoring damages from the Company; this number grew to approximately
1,000 plaintiffs during the third quarter. In August 2001, the Company
filed a motion to dismiss the amended complaints filed in these
lawsuits. In October 2001, the Company's motion to dismiss was granted
in part and the court ordered the plaintiffs to plead their remaining
claims with additional specificity. The Company is actively defending
the actions. At this time, the Company does not believe these actions
are material to the business or financial condition of the Company,
although the outcome of the actions cannot be predicted with
certainty.
Item 6. Exhibits.
(a). Exhibits.
12. Statement of Calculation of Ratio of Earnings to Fixed Charges.
(b). Reports on Form 8-K.
None
16
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEPSIAMERICAS, INC.
Date: November 13, 2001 By: /s/ G. MICHAEL DURKIN, JR.
----------------- --------------------------------------------
G. Michael Durkin, Jr.
Senior Vice President and Chief Financial
Officer
(As Chief Accounting Officer and Duly
Authorized Officer of PepsiAmericas, Inc.)
17