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 March 30, 2002
--------------
/ / 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)
3880 Dain Rauscher Plaza, 60 South Sixth Street
Minneapolis, Minnesota 55402
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 661-3883
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 April 26, 2002, the Registrant had 154,626,885 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 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 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURE 15
1
PEPSIAMERICAS, INC.
FORM 10-Q
FIRST QUARTER 2002
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
First Quarter
-------------------------------------
2002 2001
---------- ---------
Sales $ 737.0 $ 705.4
Cost of goods sold 443.1 428.3
---------- ---------
Gross profit 293.9 277.1
Selling, delivery and administrative expenses 235.0 222.3
Amortization expense -- 12.3
Special charges -- 4.6
Gain on pension curtailment -- (8.9)
---------- ---------
Operating income 58.9 46.8
Interest expense, net (18.2) (24.5)
Other (expense) income, net (2.4) 1.5
---------- ---------
Income before income taxes 38.3 23.8
Income taxes 14.9 11.0
---------- ---------
Net income $ 23.4 $ 12.8
========== =========
Weighted average common shares:
Basic 154.1 155.8
Incremental effect of stock options 0.4 1.0
---------- ---------
Diluted 154.5 156.8
========== =========
Net income per share - basic $ 0.15 $ 0.08
========== =========
Net income per share - diluted $ 0.15 $ 0.08
========== =========
Cash dividends per share $ 0.04 $ 0.04
========== =========
See accompanying notes to condensed consolidated financial statements.
2
PEPSIAMERICAS, INC.
FORM 10-Q
FIRST QUARTER 2002
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
End of End of
First Quarter Fiscal Year
2002 2001
-------------- --------------
(unaudited)
ASSETS:
Current assets:
Cash and equivalents $ 65.9 $ 64.4
Receivables 233.1 197.1
Inventories 172.1 173.4
Other current assets 60.0 45.9
------------ -------------
Total current assets 531.1 480.8
Property (at cost) 1,849.0 1,821.0
Accumulated depreciation (778.5) (753.9)
------------ -------------
Net property 1,070.5 1,067.1
------------ -------------
Intangible assets, net 1,749.6 1,749.3
Investments and other assets 119.6 122.1
------------ -------------
Total assets $ 3,470.8 $ 3,419.3
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Short-term debt, including current maturities of long-term debt $ 585.3 $ 255.2
Payables 215.7 216.5
Other current liabilities 157.6 181.0
------------ -------------
Total current liabilities 958.6 652.7
------------ -------------
Long-term debt 809.0 1,083.4
Deferred income taxes 75.7 68.9
Other liabilities 181.2 184.0
Shareholders' equity:
Preferred stock ($0.01 par value, 12.5 million shares authorized;
no shares issued) -- --
Common stock ($0.01 par value, 350.0 million shares authorized;
167.6 million shares issued) 1,541.6 1,546.7
Retained income 170.1 163.3
Accumulated other comprehensive loss:
Cumulative translation adjustment (28.1) (25.1)
Net unrealized investment gain and cash flow hedging losses (4.4) (4.7)
Minimum pension liability adjustment (4.1) (4.1)
------------ -------------
Accumulated other comprehensive loss (36.6) (33.9)
------------ -------------
Treasury stock (13 million shares - 2002 and
14 million shares - 2001) (228.8) (245.8)
------------ -------------
Total shareholders' equity 1,446.3 1,430.3
------------ -------------
Total liabilities and shareholders' equity $ 3,470.8 $ 3,419.3
============ =============
See accompanying notes to condensed consolidated financial statements.
3
PEPSIAMERICAS, INC.
FORM 10-Q
FIRST QUARTER 2002
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
First Quarter
------------------------------
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income from continuing operations $ 23.4 $ 12.8
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization 40.7 50.0
Deferred income taxes 5.8 3.8
Gain on pension curtailment -- (8.9)
Special charges -- 4.6
Cash outlays related to special charges (1.8) (11.8)
Other 2.9 (1.4)
Changes in assets and liabilities, exclusive of acquisitions and divestitures:
(Increase) decrease in receivables (36.0) 8.2
Decrease (increase) in inventories 1.3 (7.2)
(Decrease) increase in payables (0.8) 0.4
Net change in other assets and liabilities (34.6) (31.4)
----------- -----------
Net cash provided by operating activities 0.9 19.1
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Franchises and companies acquired, net of cash acquired (2.7) (5.1)
Capital investments, net of proceeds from asset sales (49.8) (37.7)
Proceeds from sales of investments -- 1.6
----------- -----------
Net cash used in investing activities (52.5) (41.2)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings of short-term debt 55.6 (205.2)
Proceeds from issuance of long-term debt -- 352.7
Repayment of long-term debt -- (127.7)
Issuance of common stock 1.1 6.6
----------- -----------
Net cash provided by financing activities 56.7 26.4
----------- -----------
Net cash used in discontinued operations (3.6) (5.3)
Effects of exchange rate changes on cash and equivalents -- (0.2)
----------- -----------
Change in cash and equivalents 1.5 (1.2)
Cash and equivalents at beginning of year 64.4 51.2
----------- -----------
Cash and equivalents at end of quarter $ 65.9 $ 50.0
=========== ===========
See accompanying notes to condensed consolidated financial statements.
4
PEPSIAMERICAS, INC.
FORM 10-Q
FIRST QUARTER 2002
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 footnote 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 2001. 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 operates
under exclusive franchise agreements with soft drink concentrate
producers, including "master" bottling and fountain syrup agreements with
PepsiCo, Inc. (PepsiCo) for the manufacture, packaging, sale and
distribution of PepsiCo branded products. See additional discussion of the
Company's related party transactions in the Company's Annual Report on
Form 10-K for the fiscal year 2001. There are similar agreements with
Cadbury Schweppes and other brand owners. The franchise agreements exist
in perpetuity and contain operating and marketing commitments and
conditions for termination. The Company is the number-two anchor bottler
in the Pepsi system and accounts for about 19 percent of all Pepsi-Cola
products sold in the United States. The Company operates in a significant
portion of an 18 state region, primarily in the Midwest, 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, the Bahamas, Barbados, and Trinidad and Tobago. The
Company serves an area with a total population of more than 117 million
people, and its business is highly seasonal. PepsiCo holds a 37 percent
equity interest in the Company.
The following presents sales and operating income of the Company's
geographic segments for the first quarters of 2002 and 2001 (in millions):
Sales Operating Income
--------------------------------- -------------------------
2002 2001 2002 2001
------------- ------------- ------------- ----------
Domestic $ 641.1 $ 614.4 $ 70.0 $ 59.2
International 95.9 91.0 (11.1) (12.4)
------------- ------------ ------------ ------------
Total $ 737.0 $ 705.4 $ 58.9 $ 46.8
============= ============ ============ ============
There were no material changes in total assets by geographic segment since
the end of fiscal year 2001.
3. The Company's fiscal year consists of 52 or 53 weeks ending on the
Saturday closest to December 31; fiscal 2001 ended on December 29, 2001.
The Company's first quarters of 2002 and 2001 were based on the thirteen
weeks ended March 30, 2002 and March 31, 2001, respectively.
4. In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," which changes the accounting for goodwill from an
amortization method to impairment-only approach. This change applies to
goodwill and other intangible assets with an indefinite life. The Company
adopted SFAS No. 142 effective the beginning of 2002 and has ceased
amortization of substantially all intangible assets beginning in the first
quarter of 2002. The Company estimates that had SFAS No. 142 been in
effect at the beginning of fiscal 2001, net income for the first quarter
of 2001 would have increased by $9.5 million, or $0.06 per share. The
Company will test its intangible assets for impairment in fiscal 2002, as
required, but does not currently expect to record an impairment charge.
5
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.
6. The Company's comprehensive income is as follows:
First Quarter
2002 2001
----------- ---------
(in millions)
Net income $ 23.4 $ 12.8
Foreign currency translation adjustment (3.0) (1.7)
Net unrealized investment and cash flow hedging gains (losses) 0.3 (0.5)
----------- ----------
Comprehensive income $ 20.7 $ 10.6
========== ==========
Net unrealized investment and cash flow hedging gains (losses) are
presented net of tax expense of $0.4 million in the first quarter of 2002
and net of a tax benefit of $0.5 million in the first quarter of 2001.
7. Interest expense, net, is comprised of the following:
First Quarter
2002 2001
----------- ---------
(in millions)
Interest expense $ (18.3) $ (25.7)
Interest income 0.1 1.2
---------- ---------
Interest expense, net $ (18.2) $ (24.5)
========== ==========
8. Net cash provided by operating activities reflected cash payments and
receipts for interest and income taxes as follows:
First Quarter
-------------------------
2002 2001
----------- ---------
(in millions)
Interest paid $ 27.1 $ 26.7
Interest received 0.1 0.4
Income taxes paid, net of refunds 7.3 0.6
9. As of the end of the first quarter of 2002, inventory was approximately 44
percent comprised of raw materials and supplies and 56 percent comprised
of finished goods and are consistent with the mix of inventory at the end
of fiscal year 2001.
10. In the fourth quarter of 2001, the Company recorded special charges
totaling $9.2 million ($5.7 million after tax) primarily for severance
costs and other costs related to changing the Company's marketing and
distribution strategy in Hungary, as well as for the write-down of
marketing equipment in the U.S. The write-down of marketing equipment was
recorded in conjunction with the start-up of the Ft. Wayne, Indiana
refurbishment operations.
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
PepsiAmericas was principally composed of severance and related benefits.
6
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 merger with the former
PepsiAmericas, which is more fully explained in the Company's 2001 Annual
Report on Form 10-K.
The following table summarizes activity associated with the special
charges (in millions):
2001 2000
Charge Charge Total
------ ------ -------
Accrued liabilities as of fiscal year end 2001
(all employee-related costs) $ 6.4 $ 1.7 $ 8.1
Expenditures for employee-related costs (1.8) -- (1.8)
------ ------ -------
Accrued liabilities at the end of the first quarter of 2002 $ 4.6 $ 1.7 $ 6.3
====== ====== =======
The 2001 and 2000 charges affected approximately 525 employees, of which
approximately 264 remain as of the end of the first quarter of 2002. The
accrued liabilities remaining as of the end of the first quarter of 2002
are comprised of deferred severance payments and certain employee
benefits. The Company expects to pay a significant portion of the $6.3
million of employee-related costs, using cash from operations, during the
next twelve months; accordingly, such amounts are classified as other
current liabilities.
11. In connection with the integration of the former Whitman Corporation and
former PepsiAmericas domestic benefit plans during the first quarter of
2001, the Company amended its pension plans to 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 this plan amendment, 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 were
replaced by an additional Company contribution to the 401(K) plan
beginning January 1, 2002.
12. The Company uses aluminum financial instruments 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 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 was reclassified into cost of goods sold during
fiscal 2001.
During the fourth quarter of 2001, the Company also began using financial
instruments to hedge against volatility in future cash flows on
anticipated fuel purchases, the prices of which are indexed to 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."
The Company has hedged a portion of its anticipated aluminum can and fuel
purchases through November 2003 and December 2002, respectively. As of the
end of the first quarter of 2002, the Company had deferred $2.6 million of
losses in accumulated other comprehensive income, a majority of which will
be reclassified into earnings during the next 18 months.
7
During the third quarter of 2001, the Company has also 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 first quarter of 2002 was ($1.6) million,
which is reflected in "Other liabilities" on the Condensed Consolidated
Balance Sheet, with a corresponding decrease 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.
13. 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
are inherently speculative during the early stages, and the Company's
indemnification obligations for such costs are subject to various factors,
including possible secondary insurance recoveries and the allocation of
liabilities among many other potentially responsible and financially
viable parties.
In the fourth quarter of fiscal year 2001, the Company engaged outside
consultants to assist it in estimating its liabilities. The outside
consultants provided the Company with an estimate of the most likely costs
of remediating the sites. Their estimates were based on their evaluations
of the characteristics and parameters of the sites, including results from
field inspections, test borings and water flows. Their 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
expense. Based upon these estimates, the Company recorded a charge to
discontinued operations in the fourth quarter of 2001 of $111 million ($71
million after taxes). The Company expects a significant portion of the
accrued liabilities will be disbursed during the next 10 years.
The significant sites included in the aggregate accrued liabilities the
Company has recorded are described more fully in the Company's Annual
Report on Form 10-K for the fiscal year 2001. No significant changes in
the status of those sites occurred and no significant new sites were
discovered during the first quarter of 2002.
At the end of the first quarter of 2002, the Company had accruals of
$126.3 million to cover potential indemnification obligations, including
$20 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 would be used to satisfy a
portion of the future indemnification obligations. The trust held $34.4
million as of the end of the first quarter of 2002. Receivables of $22.9
million for future amounts anticipated from insurance companies and other
responsible parties were included in investments and other assets on the
Company's Condensed Consolidated Balance Sheet as of the end of the first
quarter of 2002.
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.
8
14. 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 9.1 million shares and 7.7 million shares at a
weighted-average price of $17.89 and $18.90 per share that were
outstanding at the end of the first quarter of 2002 and 2001,
respectively, 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 quarter.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
RESULTS OF OPERATIONS
2002 FIRST QUARTER COMPARED WITH 2001 FIRST QUARTER
Due to the disposition of the beer business, as well as special charges
and other non-recurring items recorded in 2001, 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 exclude the activity associated with the
divested beer operations and the impact of special charges and other
non-recurring items from the first quarter of 2001. In addition, to improve
comparability, pro forma results assume amortization of goodwill and other
intangible assets with indefinite lives ceased as of the beginning of 2001
consistent with the accounting treatment prescribed by SFAS No. 142. 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 first quarter of 2002 and 2001 were as follows (in
millions):
Reported Percent Pro Forma Percent
---------------------- ---------------------
2002 2001 Change 2002 2001 Change
-------- --------- ------ -------- -------- ------
Domestic $ 641.1 $ 614.4 4.3 $ 641.1 $ 603.4 6.2
International 95.9 91.0 5.4 95.9 91.0 5.4
-------- -------- -------- --------
Total sales $ 737.0 $ 705.4 4.5 $ 737.0 $ 694.4 6.1
======== ======== ======== ========
On a reported basis, sales increased $31.6 million, or 4.5 percent, in the
first quarter of 2002 compared to the first quarter of 2001, primarily
reflecting increased volume in both the domestic and international markets and
improved pricing in the domestic markets. These improvements were offset by the
inclusion of sales from the divested beer operations in the first quarter of
2001, which totaled $11 million. On a pro forma basis excluding sales from beer
operations in the previous year, sales increased $42.6 million, or 6.1 percent.
On a pro forma basis, excluding sales from beer operations, the growth in
sales includes an increase in domestic sales of $37.7 million and an increase in
international sales of $4.9 million. The increase in domestic sales resulted
from improved pricing, up 2.4 percent, as well as increased volume, up 4.9
percent. Sales growth in the first quarter of 2002 benefited from the inclusion
of sales associated with the Easter holiday. It is estimated this accounted for
1.5 percent of growth. In 2001, such sales were included in the second quarter.
The improved pricing included a 2.0 percent improvement attributed to rate
increases and a 0.4 percent increase associated with mix. The volume growth is
primarily related to a 5.7 percent increase in Pepsi products. The growth in
Pepsi products was led by trademark Pepsi, up 2.6 percent, trademark Dew, up 8.1
percent, and Aquafina, which grew slightly better than 45 percent. The growth in
trademark Pepsi was driven by Pepsi Twist and Diet Pepsi, while the growth in
trademark Dew was entirely attributed to Code Red. In addition, Pepsi soft
drinks in the flavored category grew nearly 9.0 percent, driven by strong
double-digit growth in Sierra Mist. Cadbury branded products were up 1.1
percent, which was almost entirely attributed to regular and diet Dr Pepper.
Both can volume, up strong single digits, and 20-ounce non-returnable packages,
up 3.5 percent, were the main packages that drove volume growth in the quarter.
Both the large format (e.g., supermarkets and mass market retailers) and small
format (e.g., convenience stores and gas stations) channels had strong single
digit volume growth, offset by a continued decline in the on-premise channels
(e.g., schools and third-party operators). The increase in international sales
was driven by a 9.5 percent increase in volume, which included 14.1 percent
volume growth in Central Europe, offset by a 0.7 percent decrease in pricing
resulting from mix and a modest foreign currency impact.
10
The consolidated gross profit margin on a reported basis increased to 39.9
percent of sales in the first quarter of 2002 compared with 39.3 percent of
sales in the first quarter of 2001. The improvement was attributed to improved
margins in the international markets resulting from strong volume growth in
Central Europe and the inclusion of lower margin activity associated with the
beer operations in 2001. The domestic gross profit margin improved modestly with
the improved pricing being offset by increased packaging costs. Excluding prior
year results from the divested beer operations, the consolidated gross profit
margin of 39.9 percent of sales in the first quarter of 2002 was up from 39.6
percent in the first quarter of 2001.
Reported selling, delivery and administrative ("SD&A") expenses
represented 31.9 percent of sales in the first quarter of 2002 compared with
31.5 percent in the first quarter of 2001. Excluding prior year results from the
divested beer business, SD&A expenses as a percent of sales in the first quarter
of 2002 were 31.9 percent compared to 31.7 percent in the first quarter of 2001.
The increase in the percentage of SD&A expenses, on a pro forma basis, was
attributable to higher advertising and marketing expenses incurred in the first
quarter of 2002, due in part to the increased volumes, as well as increased
expenses for both the next generation selling system implementation and for the
roll-out of additional components of an enterprise-wide resource planning
system, primarily inventory and demand planning applications. The increase in
SD&A expenses also reflects higher depreciation associated with investments in
technology and cold drink equipment made during fiscal year 2001 and in the
first quarter of 2002.
Operating income for the first quarter of 2002 and 2001 was as follows (in
millions):
Reported Percent Pro Forma Percent
---------------------- ---------------------
2002 2001 Change 2002 2001 Change
-------- --------- ------ -------- -------- ------
Domestic $ 70.0 $ 59.2 18.2 $ 70.0 $ 66.9 4.6
International (11.1) (12.4) 10.5 (11.1) (12.1) 8.3
-------- -------- -------- --------
Total operating income $ 58.9 46.8 25.9 $ 58.9 $ 54.8 7.5
======== ======== ======== ========
In the first quarter of 2002, reported operating income increased $12.1
million, or 25.9 percent. The improvement in reported domestic operating income
includes the benefit of the change in accounting for goodwill from an
amortization method to an impairment-only approach. The Company ceased
amortizing goodwill and other intangible assets with indefinite lives at the
beginning of fiscal year 2002, while the previous year included amortization
expense of $12.3 million. In addition, the first of quarter of 2001 included a
gain associated with the curtailment of the existing salaried pension plans of
$8.9 million and special charges, primarily severance related to organizational
changes, of $4.6 million. Reported international operating losses improved by
$1.3 million, primarily due to strong volume growth and improved margins in the
Central European markets.
On a pro forma basis, operating income increased $4.1 million, or 7.5
percent, from the first quarter of 2001. Domestic operating income increased
$3.1 million, or 4.6 percent due to increased volume and improved pricing.
International operating losses improved $1 million, or 8.3 percent. As
previously noted, this improvement was due to strong volume growth and margin
improvement in the Central European markets.
Net interest expense decreased $6.3 million in the first quarter of 2002
to $18.2 million. This decrease was principally due to debt refinancing
completed during the latter part of the first quarter of 2001 and lower rates on
short-term borrowings. The Company also adjusted the mix of fixed rate versus
floating rate debt using interest rate swap agreements, which were favorable in
the current quarter.
The Company reported other expense of $2.4 million in the first quarter
of 2002 compared to income of $1.5 million reported in the first quarter of
2001. This change occurred due, in part, to losses recorded in non-operating
real estate entities in the current quarter, compared to income recorded in the
first quarter of 2001. The current quarter was also adversely impacted by
foreign currency losses.
11
The Company's effective tax rate in the first quarter of 2002 was 39.0
percent compared with 46.2 percent in the first quarter of 2001. Excluding the
special charges and credit recorded in the first quarter of 2001, the effective
tax rate was 48.0 percent. The decrease in the effective in the first quarter of
2002 was primarily due to the Company ceasing amortization of goodwill and other
intangible assets with indefinite lives. A majority of this amortization expense
was not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased by $18.2 million to
$0.9 million in the first quarter of 2002. This decrease was primarily due to
the increase in receivables in the first quarter of 2002 from sales associated
with the Easter holiday, which occurred in the last week of the current quarter,
and a decline in the receivables included in the securitization program. The
decline in receivables associated with the securitization program resulted
principally from the exclusion of Kmart's receivables being included in the
program, due to Kmart's bankruptcy.
Investing activities in the first quarter of 2002 included $2.7 million of
cash paid to acquire a full line vending company. Investing activities in the
first quarter of 2001 included $5.1 million paid in connection with the
transaction with Crescent (see Note 4), as well as payments related to the
acquisition of Trinidad and Tobago. The Company made capital investments of
$49.8 million, net of proceeds from asset sales, in its operations in the first
quarter of 2002 compared with $37.7 million in the first quarter of 2001. The
increase primarily resulted from investments in manufacturing capacity, both in
the domestic and international operations, as well as investments in cold drink
equipment and the development of a next generation selling system. The Company
expects to spend approximately $200 million in 2002 for its capital projects.
Proceeds from the sales of investments in the first quarter of 2001 related to
miscellaneous land sales associated with the Company's non-operating real estate
subsidiaries.
The Company's total debt increased $55.7 million to $1,394.3 million at
the end of the first quarter of 2002, from $1,338.6 million at the end of fiscal
2001. 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. The notes issued in
March 2001 are included in current maturities on the Condensed Consolidated
Balance Sheet at the end of the first quarter of 2002. Proceeds from these notes
were used to repay outstanding commercial paper. The issuance of common stock
from treasury shares for the exercise of stock options resulted in cash inflows
of $1.1 million in the first quarter of 2002, compared to $6.6 million in the
first quarter of 2001.
The Company has a revolving credit agreement with maximum borrowings of
$500 million, which acts as a back-up for the Company's $500 million commercial
paper program; accordingly, the Company has a total of $500 million available
under the commercial paper program and revolving credit facility combined. Total
commercial paper borrowings were $292 million at the end of the first quarter of
2002. 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.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains certain forward-looking
statements of expected future developments, as defined in the Private Securities
Litigation Reform Act of 1995. The forward-looking statements in this Form 10-Q
refer to the expectations regarding continuing operating improvement and other
matters. These forward-looking statements reflect 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.
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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 financial instruments 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 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 first quarter of 2002, the Company has
hedged a portion of its anticipated aluminum can and fuel purchases through
November 2003 and December 2002, respectively.
Interest Rates
In the first quarter of 2002, 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 first quarter of 2002, a 50 basis point (0.5 percent)
change in each of these rates would not have had a significant impact on the
Company's first quarter 2002 interest expense. The Company has 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 quarter of 2002,
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 first quarter of 2002, 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.
International operations, based on sales, represented approximately 13
percent of the Company's total operations in the first quarter of 2002. 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 quarter of
2002, the Company estimates the impact on reported operating income would not
have been significant. 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material changes to be reported.
Item 5. Other Information
On May 3, 2002, the Company announced that shareholders who
elected the contingent payment alternative in the Company's merger
with the former PepsiAmericas will not receive additional shares
of PepsiAmericas common stock based upon adjusted earnings before
interest, taxes, depreciation and amortization (EBITDA) of the
territories acquired in the merger for fiscal year 2001. The
Company's independent auditors issued a report to the Affiliated
Transaction Committee of the Board of Directors summarizing their
procedures performed on the Company's calculation of adjusted
EBITDA for the fiscal year 2001. The committee reviewed and
accepted the Company's calculation. As a result, the Company's
calculation became final and binding on PepsiAmericas and each of
the contingent payment record holders. In addition, the Company
announced that it expects contingent payment record holders will
not receive additional shares based upon expected adjusted EBITDA
of such territories for fiscal year 2002 or for the three-year
period which began on January 2, 2000. Whether such shares are
ultimately issued will be determined in accordance with the terms
of the merger agreement.
Item 6. Exhibits and Reports on Form 8-K.
(a). Exhibits.
12. Statement of Calculation of Ratio of Earnings to Fixed
Charges.
(b). Reports on Form 8-K.
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEPSIAMERICAS, INC.
Date: May 14, 2002 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.)
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