e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 29, 2007
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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)
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Delaware
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13-6167838 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number) |
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4000 Dain Rauscher Plaza, 60 South Sixth Street
Minneapolis, Minnesota
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55402 |
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(Address of principal executive offices)
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(Zip Code) |
(612) 661-4000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is shell company (as defined in Exchange Act Rule 12b-2).
Yes o No þ
As of October 26, 2007, the Registrant had 130,182,449 outstanding shares of common stock, par
value $0.01 per share, the Registrants only class of common stock.
PEPSIAMERICAS, INC.
FORM 10-Q
THIRD QUARTER 2007
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
PEPSIAMERICAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited and in millions, except per share data)
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Third Quarter |
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First Nine Months |
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2007 |
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2006 |
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2007 |
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2006 |
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Net sales |
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$ |
1,183.1 |
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$ |
1,064.2 |
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$ |
3,342.2 |
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$ |
2,977.9 |
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Cost of goods sold |
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699.2 |
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630.6 |
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1,977.0 |
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1,767.0 |
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Gross profit |
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483.9 |
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433.6 |
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1,365.2 |
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1,210.9 |
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Selling, delivery and administrative expenses |
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342.6 |
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323.6 |
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1,017.5 |
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928.5 |
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Special charges |
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1.3 |
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4.1 |
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2.2 |
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Operating income |
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140.0 |
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110.0 |
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343.6 |
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280.2 |
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Interest expense, net |
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27.3 |
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27.0 |
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79.1 |
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74.5 |
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Other (expense) income, net |
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(1.5 |
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(0.1 |
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1.4 |
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(4.1 |
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Income from continuing operations before income taxes, minority interest, and equity in net earnings of nonconsolidated companies |
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111.2 |
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82.9 |
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265.9 |
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201.6 |
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Income taxes |
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39.0 |
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30.0 |
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93.4 |
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75.1 |
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Minority interest |
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(0.7 |
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(0.3 |
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0.1 |
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Equity in net earnings of nonconsolidated companies |
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0.2 |
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5.6 |
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Income from continuing operations |
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71.5 |
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53.1 |
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172.2 |
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132.2 |
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Loss from discontinued operations, net of tax |
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2.1 |
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Net income |
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$ |
71.5 |
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$ |
53.1 |
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$ |
170.1 |
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$ |
132.2 |
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Weighted average common shares: |
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Basic |
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126.6 |
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126.6 |
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126.1 |
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128.2 |
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Incremental effect of stock options and awards |
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2.4 |
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1.8 |
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2.3 |
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2.0 |
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Diluted |
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129.0 |
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128.4 |
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128.4 |
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130.2 |
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Earnings per share: |
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Basic: |
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Income from continuing operations |
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$ |
0.56 |
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$ |
0.42 |
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$ |
1.37 |
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$ |
1.03 |
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Loss from discontinued operations |
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(0.02 |
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Total |
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$ |
0.56 |
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$ |
0.42 |
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$ |
1.35 |
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$ |
1.03 |
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Diluted: |
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Income from continuing operations |
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$ |
0.55 |
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$ |
0.41 |
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$ |
1.34 |
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$ |
1.02 |
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Loss from discontinued operations |
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(0.02 |
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Total |
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$ |
0.55 |
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$ |
0.41 |
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$ |
1.32 |
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$ |
1.02 |
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Cash dividends declared per share |
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$ |
0.13 |
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$ |
0.125 |
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$ |
0.39 |
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$ |
0.375 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
2
PEPSIAMERICAS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in millions, except per share data)
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End of |
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Third |
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End of |
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Quarter |
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Fiscal Year |
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2007 |
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2006 |
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ASSETS: |
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Current assets: |
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Cash and cash equivalents |
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$ |
172.6 |
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$ |
93.1 |
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Receivables, net |
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322.6 |
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267.1 |
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Inventories: |
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Raw materials and supplies |
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126.6 |
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104.2 |
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Finished goods |
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152.9 |
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128.8 |
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Total inventories |
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279.5 |
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233.0 |
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Other current assets |
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107.3 |
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81.9 |
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Total current assets |
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882.0 |
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675.1 |
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Property and equipment |
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2,718.1 |
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2,576.4 |
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Accumulated depreciation |
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(1,464.8 |
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(1,437.7 |
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Net property and equipment |
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1,253.3 |
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1,138.7 |
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Goodwill |
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2,418.3 |
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2,027.1 |
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Intangible assets, net |
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407.1 |
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299.9 |
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Other assets |
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68.0 |
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66.6 |
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Total assets |
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$ |
5,028.7 |
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$ |
4,207.4 |
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LIABILITIES AND SHAREHOLDERS EQUITY: |
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Current liabilities: |
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Short-term debt, including current maturities of long-term debt |
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$ |
192.5 |
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$ |
212.9 |
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Payables |
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217.8 |
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189.4 |
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Other current liabilities |
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327.8 |
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291.5 |
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Total current liabilities |
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738.1 |
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693.8 |
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Long-term debt |
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1,841.1 |
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1,490.2 |
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Deferred income taxes |
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256.1 |
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243.1 |
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Minority interest |
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235.4 |
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0.1 |
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Other liabilities |
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185.2 |
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175.6 |
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Total liabilities |
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3,255.9 |
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2,602.8 |
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Shareholders equity: |
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Preferred stock ($0.01 par value, 12.5 million shares authorized; no shares issued) |
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Common stock ($0.01 par value, 350 million shares authorized; 137.6 million shares issued - 2007 and 2006) |
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1,284.7 |
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1,283.4 |
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Retained income |
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645.8 |
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525.4 |
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Accumulated other comprehensive income |
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58.9 |
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21.7 |
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Treasury stock, at cost (10.1 million shares and 10.6 million shares, respectively) |
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(216.6 |
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(225.9 |
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Total shareholders equity |
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1,772.8 |
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1,604.6 |
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Total liabilities and shareholders equity |
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$ |
5,028.7 |
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$ |
4,207.4 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
PEPSIAMERICAS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in millions)
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First Nine Months |
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2007 |
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2006 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
170.1 |
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$ |
132.2 |
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Loss from discontinued operations |
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(2.1 |
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Income from continuing operations |
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172.2 |
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132.2 |
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Adjustments to reconcile to net cash provided by operating activities of continuing operations: |
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Depreciation and amortization |
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145.5 |
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146.2 |
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Deferred income taxes |
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(0.9 |
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3.5 |
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Special charges |
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4.1 |
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2.2 |
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Cash outlays related to special charges |
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(12.5 |
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(2.0 |
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Pension contributions |
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(0.7 |
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(10.0 |
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Equity in net earnings of nonconsolidated companies |
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(5.6 |
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Excess tax benefits from share-based payment arrangements |
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(9.2 |
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(6.4 |
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Gain on sale of non-core property |
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(10.2 |
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Gain on sale of investment |
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(0.9 |
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Marketable securities impairment |
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4.0 |
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Other |
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21.7 |
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14.8 |
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Changes in assets and liabilities, exclusive of acquisitions: |
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Increase in receivables |
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(19.9 |
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(62.7 |
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Increase in inventories |
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(11.9 |
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(25.0 |
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Increase in payables |
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10.9 |
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6.2 |
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Net change in other assets and liabilities |
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35.4 |
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34.5 |
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Net cash provided by operating activities of continuing operations |
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328.5 |
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227.0 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital investments |
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(143.3 |
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(127.7 |
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Franchises and companies acquired, net of cash acquired |
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(543.9 |
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(88.5 |
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Purchase of equity investment |
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(2.3 |
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Proceeds from sales of property |
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27.8 |
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6.8 |
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Proceeds from sales of investment |
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0.9 |
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Net cash used in investing activities |
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(661.7 |
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(208.5 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Net borrowings of short-term debt |
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(2.0 |
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84.6 |
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Proceeds from issuance of long-term debt |
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298.2 |
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247.4 |
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Repayment of long-term debt |
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(38.9 |
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(134.7 |
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Contribution from joint venture minority shareholder |
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216.8 |
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Treasury stock purchases |
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(59.4 |
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(150.7 |
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Excess tax benefits from share-based payment arrangements |
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9.2 |
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6.4 |
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Issuance of common stock |
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48.2 |
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23.0 |
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Cash dividends |
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(48.6 |
) |
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(43.3 |
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Net cash provided by financing activities |
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423.5 |
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32.7 |
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Net operating cash flows used in discontinued operations |
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(7.5 |
) |
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(11.5 |
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Effects of exchange rate changes on cash and cash equivalents |
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(3.3 |
) |
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(1.3 |
) |
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Change in cash and cash equivalents |
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|
79.5 |
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38.4 |
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Cash and cash equivalents at beginning of fiscal year |
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93.1 |
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116.0 |
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Cash and cash equivalents at end of third quarter |
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$ |
172.6 |
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$ |
154.4 |
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The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
PEPSIAMERICAS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Significant Accounting Policies
Quarterly reporting. The Condensed Consolidated Financial Statements included herein have
been prepared by PepsiAmericas, Inc. (referred to herein as PepsiAmericas, we, our and us)
without audit. Certain information and disclosures normally included in financial statements
prepared in accordance with United States generally accepted accounting principles (U.S. GAAP)
have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although we believe that the disclosures are adequate to make the information presented
not misleading. The year-end Condensed Consolidated Balance Sheet data was derived from audited
financial statements, but does not include all disclosures required by U.S. GAAP. These Condensed
Consolidated Financial Statements should be read in conjunction with the financial statements and
notes thereto included in our Annual Report on Form 10-K for the fiscal year 2006. In the opinion
of management, the information furnished herein reflects all adjustments (consisting only of
normal, recurring adjustments) necessary for a fair statement of results for the interim periods
presented.
Fiscal year. Our fiscal year consists of 52 or 53 weeks ending on the Saturday closest to
December 31st. Our 2006 fiscal year contained 52 weeks and ended December 30, 2006.
Our third quarter and first nine months of 2007 and 2006 were based on the thirteen and thirty-nine
weeks ended September 29, 2007 and September 30, 2006, respectively.
Beginning in fiscal year 2007, our Caribbean operations aligned their reporting calendar with
our U.S. operations. Previously, our Caribbean operations fiscal years ended on December 31. Our
U.S. operations report using a fiscal year that consists of 52 or 53 weeks ending on the Saturday
closest to December 31. The change to the Caribbean fiscal year was not material to our Condensed
Consolidated Financial Statements. Our Central Europe operations fiscal year ends on December 31
and therefore are not impacted by the 53rd week.
Our business is seasonal with the second and third quarters generating higher sales volumes
than the first and fourth quarters. Accordingly, the operating results of any individual quarter
may not be indicative of a full years operating results.
Use of accounting estimates. The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and use assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from these estimates.
Earnings per share. Basic earnings per share is based upon the weighted-average number of
common shares outstanding. Diluted earnings per share includes dilutive common stock equivalents
using the treasury stock method.
The following options and restricted stock awards were not included in the computation of
diluted earnings per share because they were antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
First Nine Months |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Shares under options outstanding |
|
|
|
|
|
|
1,338,700 |
|
|
|
|
|
|
|
|
|
Weighted-average exercise price per share |
|
$ |
|
|
|
$ |
22.63 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under nonvested restricted stock awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
941,956 |
|
Weighted-average grant date fair value per share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
24.31 |
|
Reclassifications. Certain amounts in the prior period Condensed Consolidated Financial
Statements have been reclassified to conform to the current years presentation.
5
Recently Issued Accounting Pronouncements. In February 2007, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115. FASB No. 159 provides guidance on the measurement of financial instruments and
certain other assets and liabilities at fair value on an instrument-by-instrument basis under a
fair value option provided by the FASB. SFAS No. 159 becomes effective at the beginning of fiscal
year 2008. We are currently evaluating the impact SFAS No. 159 will have on our Condensed
Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans. We have adopted the recognition provisions of SFAS No.
158, which required us to fully recognize the funded status associated with our defined benefit
plans. We will also be required to measure our plans assets and liabilities as of the end of our
fiscal year instead of our current measurement date of September 30. The measurement date
provisions will be effective as of the end of fiscal year 2008. We do not anticipate that the
impact of the measurement date provisions will have a material impact on our Condensed Consolidated
Financial Statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, to provide
enhanced guidance when using fair value to measure assets and liabilities. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures
about fair value measurements. SFAS No. 157 applies whenever other pronouncements require or
permit assets or liabilities to be measured by fair value and, while not requiring new fair value
measurements, may change current practices. SFAS No. 157 becomes effective at the beginning of
fiscal year 2008. We are currently evaluating the impact SFAS No. 157 will have on our Condensed
Consolidated Financial Statements.
We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109 (FIN 48) at the beginning of fiscal year 2007. FIN 48
provides guidance regarding the financial statement recognition and measurement of a tax position
either taken or expected to be taken in a tax return. It requires the recognition of a tax
position if it is more likely than not that the position would be sustained during an examination
based on the technical merits of the position. See Note 4 below for additional information,
including the effects of adoption on our Condensed Consolidated Balance Sheet.
2. Special Charges
In the third quarter and the first nine months of 2007, we recorded special charges of $1.3
million and $3.9 million, respectively, in the U.S. related to the strategic realignment of our
U.S. sales organization to further strengthen our customer focused go-to-market strategy. In
addition, during the first nine months of 2007 we recorded special charges of $0.2 million in
Central Europe, primarily related to a reduction in workforce. These special charges were
primarily for severance, related benefits and relocation costs.
In the first nine months of 2006, we recorded special charges of $2.2 million in Central
Europe, primarily related to a reduction in workforce. These special charges were primarily for
severance costs and related benefits.
The following table summarizes activity associated with the special charges (in millions):
|
|
|
|
|
2007 Charges |
|
|
|
|
Beginning of fiscal year 2007 |
|
$ |
11.1 |
|
Special charges |
|
|
4.1 |
|
Payment of special charges |
|
|
(12.5 |
) |
|
|
|
|
End of the first nine months of 2007 |
|
$ |
2.7 |
|
|
|
|
|
The total accrued liabilities remaining at the end of the third quarter of 2007 were comprised
of deferred severance payments, certain employee benefits, and other costs. We expect the
remaining special charge liability of $2.7 million to be paid using cash from operations during the
next twelve months; accordingly, such amounts are classified as Other current liabilities in the
Condensed Consolidated Balance Sheet.
6
3. Interest Expense, Net
Interest expense, net was comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Interest expense |
|
$ |
28.0 |
|
|
$ |
27.9 |
|
|
$ |
81.0 |
|
|
$ |
77.5 |
|
Interest income |
|
|
(0.7 |
) |
|
|
(0.9 |
) |
|
|
(1.9 |
) |
|
|
(3.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
$ |
27.3 |
|
|
$ |
27.0 |
|
|
$ |
79.1 |
|
|
$ |
74.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Income Taxes
The effective income tax rate, which is income tax expense expressed as a percentage of income
before income taxes, minority interest, and equity in net earnings of nonconsolidated companies, was
35.1 percent for the first nine months of 2007, compared to 37.3 percent in the first nine months
of 2006. The effective tax rate decreased from the prior year due, in part, to the mix of country
results and the associated lower in-country tax rates. Results in the first nine months of 2007
contain nine months of results for Romania compared to two months of such results in the comparable
prior year period. The effective income tax rate was also favorably impacted by the reorganization
of the legal entity structure in Central Europe in the second quarter of 2007, partly offset by the
unfavorable impact of interest related to uncertain tax positions.
We adopted FIN 48 at the beginning of fiscal year 2007. As of result of the implementation,
we recorded a $0.6 million increase to the beginning balance in retained earnings on the Condensed
Consolidated Balance Sheet. At the beginning of fiscal year 2007, we had approximately $25.9
million of total unrecognized tax benefits. Of this total, $15.4 million (net of the federal
benefit on state tax issues and interest) would favorably impact the effective income tax rate in
any future period, if recognized. We expect that the amount of gross unrecognized tax benefits for
positions which we have identified will decrease by $2.8 million
during the next twelve months. This expected decrease is due to the
expiration of statute of limitations and audit closures.
Upon adoption of FIN 48, our policy is to recognize interest and penalties related to income
tax matters in income tax expense. Formerly, interest was recorded in interest expense. We had
$4.1 million accrued for interest and no amount accrued for penalties as of the beginning of fiscal
year 2007.
We are subject to U.S. federal income tax, state income tax in multiple state tax
jurisdictions, and foreign income tax in our Central Europe and Caribbean tax jurisdictions. We
have concluded all U.S. federal income tax examinations for years through 2004. The following
table summarizes the years that are subject to examination for each primary jurisdiction at the end
of the third quarter of 2007:
|
|
|
|
|
Jurisdiction |
|
Subject to Examination |
Federal |
|
|
2005-2006 |
|
Illinois |
|
|
1999-2006 |
|
Indiana |
|
|
2003-2006 |
|
Iowa |
|
|
2003-2006 |
|
Romania |
|
|
2002-2006 |
|
Poland |
|
|
2001-2006 |
|
Czech Republic |
|
|
2003-2006 |
|
During the first nine months of 2007, our gross unrecognized tax benefits increased by $8.0
million, of which $4.6 million was due to tax positions from prior periods for which a deferred tax
asset was recorded. The impact to our effective tax rate consists of $1.5 million net unrecognized
tax benefits and $1.9 million of gross interest related to unrecognized tax benefits for the first
nine months of 2007.
7
5. Comprehensive Income
Comprehensive income was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
71.5 |
|
|
$ |
53.1 |
|
|
$ |
170.1 |
|
|
$ |
132.2 |
|
Foreign currency translation adjustment |
|
|
19.3 |
|
|
|
5.3 |
|
|
|
36.2 |
|
|
|
13.4 |
|
Net unrealized investment and hedging gains |
|
|
0.6 |
|
|
|
3.3 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
91.4 |
|
|
$ |
61.7 |
|
|
$ |
207.3 |
|
|
$ |
145.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment and hedging gains are presented net of income tax expense of $0.3
million and $2.0 million in the third quarter of 2007 and 2006, respectively, and net of income tax
expense of $0.5 million in the first nine months of 2007.
6. Goodwill and Intangible Assets
The changes in the carrying value of goodwill by geographic segment for the first nine months
of 2007 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Central |
|
|
|
|
|
|
|
|
|
U.S. |
|
|
Europe |
|
|
Caribbean |
|
|
Total |
|
Balance at beginning of fiscal year 2007 |
|
$ |
1,825.2 |
|
|
$ |
185.7 |
|
|
$ |
16.2 |
|
|
$ |
2,027.1 |
|
Acquisitions |
|
|
|
|
|
|
482.1 |
|
|
|
|
|
|
|
482.1 |
|
Purchase accounting adjustments |
|
|
(1.2 |
) |
|
|
(104.3 |
) |
|
|
|
|
|
|
(105.5 |
) |
Foreign currency translation adjustment |
|
|
|
|
|
|
14.7 |
|
|
|
(0.1 |
) |
|
|
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of first nine months of 2007 |
|
$ |
1,824.0 |
|
|
$ |
578.2 |
|
|
$ |
16.1 |
|
|
$ |
2,418.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset balances were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
End of Third |
|
|
End of Fiscal |
|
|
|
Quarter 2007 |
|
|
Year 2006 |
|
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
Gross carrying amount |
|
|
|
|
|
|
|
|
Franchise and distribution agreements |
|
$ |
3.3 |
|
|
$ |
3.3 |
|
Customer relationships and lists |
|
|
24.2 |
|
|
|
8.0 |
|
Other |
|
|
2.9 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
Total |
|
$ |
30.4 |
|
|
$ |
14.2 |
|
Accumulated amortization |
|
|
|
|
|
|
|
|
Franchise and distribution agreements |
|
$ |
(1.0 |
) |
|
$ |
(0.9 |
) |
Customer relationships and lists |
|
|
(4.1 |
) |
|
|
(1.3 |
) |
Other |
|
|
(0.8 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
(5.9 |
) |
|
$ |
(2.8 |
) |
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization, net |
|
$ |
24.5 |
|
|
$ |
11.4 |
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
Franchise and distribution agreements |
|
$ |
382.6 |
|
|
$ |
288.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
$ |
407.1 |
|
|
$ |
299.9 |
|
|
|
|
|
|
|
|
In fiscal year 2006, we acquired the remaining 51 percent interest in Quadrant-Amroq Bottling
Company Limited (QABCL or Romania). The process of valuing the assets, liabilities and
intangibles acquired in connection with the QABCL acquisition was completed in the second quarter
of 2007 and resulted in an allocation of $67.7 million to goodwill and $108.5 million to other
intangibles in Central Europe. We recorded $92.5 million and $16.0 million in franchise and
distribution agreements, and customer relationships and lists, respectively. Our franchise and
distribution agreements with PepsiCo do not expire, and as such, we have assigned an indefinite
life to this intangible asset. The customer relationships and lists are being amortized over 8
years.
8
In the second quarter of 2007, we completed the formation of a joint venture with PepsiCo,
Inc. (PepsiCo) for the purpose of acquiring the outstanding shares of Sandora, LLC (Sandora),
the leading juice company in Ukraine. Under the terms of the agreement, we hold a 60 percent
interest and PepsiCo holds a 40 percent interest in the joint venture. On August 20, 2007, the
joint venture completed its acquisition of 80 percent of the outstanding shares of Sandora. The
joint venture expects to exercise an option to acquire the remaining 20 percent interest in
November 2007 for $135.5 million of which 40 percent will be funded by PepsiCo. The acquisition
resulted in a preliminary allocation of $482.1 million to goodwill and no amounts have yet been
allocated to other intangible assets. We are in the process of valuing the assets, liabilities and
intangibles acquired in connection with the Sandora acquisition and anticipate that the valuation
will be completed in the first quarter of 2008.
Total amortization expense was $0.7 million and $0.3 million in the third quarter of 2007 and
2006, respectively. Total amortization expense was $3.1 million and $0.9 million in the first nine
months of 2007 and 2006, respectively. The increase in year to date amortization expense compared
to the prior year reflects amortization associated with the final QABCL valuation.
7. Acquisitions
In the third quarter of 2007, a joint venture formed by PepsiAmericas and PepsiCo acquired an
80 percent interest in Sandora. Under the terms of the joint venture agreement, we hold a 60
percent interest and PepsiCo holds a 40 percent interest in the joint venture. The joint venture
financial statements have been consolidated in our Condensed Consolidated Financial Statements.
PepsiCos equity, together with the equity of the 20 percent
shareholders of Sandora, was recorded as
minority interest at the end of the third quarter of 2007. The total purchase price of $543.9
million was net of cash received of $3.0 million, of which we funded 60 percent. Additionally, we
acquired $72.5 million of debt as part of the acquisition. Due to the timing of the receipt of
available financial information from Sandora, we record results from such operations on a one-month
lag basis, which resulted in approximately two weeks being recorded in the third quarter.
In the third quarter of 2007, we purchased a 20 percent interest in a joint venture that owns
Agrima JSC (Agrima). Agrima produces, sells and distributes PepsiCo branded products and other
beverages throughout Bulgaria. This investment was recorded under the equity method in accordance
with APB Opinion No. 18, The Equity Method of Accounting for Investment in Common Stock, and was
recorded in Other assets on the Condensed Consolidated Balance Sheet. Due to the timing of the
receipt of available financial information, we record equity in net earnings on a one-month lag
basis.
In fiscal year 2005, we acquired 49 percent of the outstanding stock of QABCL for $51.0
million. In fiscal year 2006, we acquired the remaining outstanding stock of QABCL for $81.9
million, net of $17.0 million cash acquired. We acquired $55.4 million of debt as part of the
acquisition, of which $51.1 million was repaid in December 2006. QABCL is a holding company that,
through subsidiaries, produces, sells and distributes Pepsi and other beverages throughout Romania
with distribution rights in Moldova. The increase in the purchase price for the remainder of QABCL
compared to the original investment was due to the improved operating performance subsequent to the
initial investment. Due to the timing of the receipt of available financial information from
QABCL, we record results from such operations on a one-month lag basis.
In fiscal year 2006, we completed the acquisition of Ardea Beverage Co., the maker of the
airforce Nutrisoda line of soft drinks, for $6.6 million in cash plus $3.6 million of additional
consideration that will be paid over the next three years.
The results of operations for the acquisitions described above are included in the Condensed
Consolidated Statements of Income since their respective dates of acquisition. These acquisitions
were not material to our consolidated results of operations at the date of the acquisitions;
therefore, pro forma financial information is not included in this note.
8. Debt
In the first nine months of 2007, we paid $11.6 million at maturity of the 8.25 percent note
due February 2007, and $27.3 million at maturity of the 3.875 percent note due September 2007.
In July 2007, we issued $300 million of notes with a coupon rate of 5.75 percent due July
2012. The securities are unsecured, senior debt obligations and rank equally with all other
unsecured and unsubordinated indebtedness. Net proceeds from this transaction were $297.2 million,
which reflected the discount reduction of $0.8 million and the debt issuance costs of $2.0 million. The net proceeds from the issuance of the notes were used
to fund the acquisition of Sandora, to repay commercial paper and for other general corporate
purposes. In the first nine months of 2007, we also borrowed $1.0 million in long-term debt in the
Bahamas.
9
We had $172.5 million of commercial paper borrowings at the end of the first nine months of
2007, compared to $164.5 million at the end of fiscal year 2006. The increase in commercial paper
borrowings was primarily for capital expenditures and general corporate purposes.
9. Financial Instruments
We use derivative financial instruments to reduce our exposure to adverse fluctuations in
commodity prices and interest rates. These financial instruments are over-the-counter instruments
and were designated at their inception as hedges of underlying exposures. We do not use derivative
financial instruments for speculative or trading purposes.
Cash Flow Hedges. In anticipation of a long-term debt issuance, we had entered into treasury
rate lock instruments and a forward starting swap agreement. We accounted for these treasury rate
lock instruments and forward starting swap agreement as cash flow hedges, as each hedged against
the variability of interest payments attributable to changes in interest rates on the forecasted
issuance of fixed-rate debt. These treasury rate locks and forward starting swap agreement are
considered highly effective in eliminating the variability of cash flows associated with the
forecasted debt issuance.
The following table summarizes the net derivative gains or losses deferred in Accumulated
other comprehensive income and reclassified to earnings in the first nine months of 2007 and 2006
(in millions):
|
|
|
|
|
|
|
|
|
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
Unrealized losses on derivatives at beginning of fiscal year |
|
$ |
(3.3 |
) |
|
$ |
(2.4 |
) |
Deferral of net derivative losses in accumulated other
comprehensive income |
|
|
(0.2 |
) |
|
|
(0.5 |
) |
Reclassification of net derivative gains (losses)
to earnings |
|
|
0.7 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
Unrealized losses on derivatives at end of first nine months |
|
$ |
(2.8 |
) |
|
$ |
(3.3 |
) |
|
|
|
|
|
|
|
Fair Value Hedges. Periodically, we enter into interest rate swap contracts to convert a
portion of our fixed rate debt to floating rate debt, with the objective of reducing overall
borrowing costs. We account for these swaps as fair value hedges, since they hedge against the
change in fair value of fixed rate debt resulting from fluctuations in interest rates. In the third
quarter of 2004, we terminated all outstanding interest rate swap contracts and received $14.4
million for the fair value of the interest rate swap contracts. Amounts included in the cumulative
fair value adjustment to long-term debt will be reclassified into earnings commensurate with the
recognition of the related interest expense. At the end of the first nine months of 2007 and the
end of fiscal year 2006, the cumulative fair value adjustments to long-term debt were $4.2 million
and $6.1 million, respectively.
Derivatives not Designated as Hedges. In the first nine months of 2007, we entered into
heating oil swap contracts to hedge against volatility in future cash flows on anticipated
purchases of diesel fuel. These derivative financial instruments were not designated as hedging
instruments, and therefore, we record unrealized gains and losses in the Condensed Consolidated
Statement of Income. Realized gains and losses were recorded in cost of goods sold and selling,
delivery, and administrative (SD&A) expenses, where the associated diesel fuel purchases are
recorded. Unrealized gains and losses were recorded in SD&A expenses. During the first nine
months of 2007, $1.3 million and $1.7 million of realized gains were recorded in cost of goods sold
and SD&A expenses, respectively, and $2.5 million of unrealized gains were recorded in SD&A
expenses.
10
Amounts recorded for all derivatives on the Condensed Consolidated Balance Sheets were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
End of |
|
End of Fiscal |
|
|
Third Quarter |
|
Year |
|
|
2007 |
|
2006 |
Unrealized gains: |
|
|
|
|
|
|
|
|
Commodities |
|
$ |
2.5 |
|
|
$ |
|
|
Interest rate instruments |
|
|
6.1 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
Unrealized losses: |
|
|
|
|
|
|
|
|
Commodities |
|
$ |
(0.1 |
) |
|
$ |
(0.6 |
) |
Interest rate instruments |
|
|
(6.1 |
) |
|
|
(6.8 |
) |
10. Pension and Other Postretirement Benefit Plans
Net periodic pension cost for the third quarter and first nine months of 2007 and 2006
included the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
Service cost |
|
$ |
0.8 |
|
|
$ |
0.9 |
|
|
$ |
2.4 |
|
|
$ |
2.8 |
|
Interest cost |
|
|
2.6 |
|
|
|
2.5 |
|
|
|
7.9 |
|
|
|
7.6 |
|
Expected return on plan assets |
|
|
(3.7 |
) |
|
|
(3.5 |
) |
|
|
(11.1 |
) |
|
|
(10.4 |
) |
Amortization of prior service cost |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Amortization of net loss |
|
|
0.7 |
|
|
|
1.0 |
|
|
|
2.1 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
0.5 |
|
|
$ |
1.0 |
|
|
$ |
1.5 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first nine months of 2007, we contributed $0.7 million to the plans. We anticipate
contributing $0.2 million to our plans in the fourth quarter of 2007.
11. Share-Based Compensation
In February 2007, we granted 990,978 restricted shares at a weighted-average fair value of
$22.11 on the date of grant to key members of U.S. and Caribbean management and members of our
Board of Directors under our 2000 Stock Incentive Plan (the Plan). We recognized compensation
expense of $4.5 million and $3.9 million in the third quarter of 2007 and 2006, respectively, and
$13.5 million and $10.6 million in the first nine months of 2007 and 2006, respectively, related to
grants made in 2007 and previous years. At the end of the first nine months of 2007, there were
2,481,449 unvested restricted shares outstanding.
In February 2007, we granted 83,675 restricted stock units at a weighted average value of
$22.11 on the date of grant to key members of our Central Europe management team under the Plan.
We recognized compensation expense of $1.4 million and $0.2 million in the third quarter of 2007
and 2006, respectively, and $2.6 million and $0.7 million in the first nine months of 2007 and
2006, respectively, related to restricted stock unit grants made in 2007 and previous years. At
the end of the first nine months of 2007, there were 227,765 unvested restricted stock units
outstanding.
12. Supplemental Cash Flow Information
Net cash provided by operating activities reflected cash payments and receipts for interest
and income taxes as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
First Nine Months |
|
|
2007 |
|
2006 |
Interest paid |
|
$ |
73.5 |
|
|
$ |
74.0 |
|
Interest received |
|
|
1.9 |
|
|
|
3.0 |
|
Income taxes paid, net of refunds |
|
|
91.4 |
|
|
|
63.5 |
|
11
13. Environmental and Other Commitments and Contingencies
Current Operations. We maintain compliance with federal, state and local laws and regulations
relating to materials used in production and to the discharge of wastes, and other laws and
regulations relating to the protection of the environment. The capital costs of such management and
compliance, including the modification of existing plants and the installation of new manufacturing
processes, are not material to our continuing operations.
We are defendants in lawsuits that arise in the ordinary course of business, none of which is
expected to have a material adverse effect on our financial condition, although amounts recorded in
any given period could be material to the results of operations or cash flows for that period.
We participate in a number of trustee-managed multi-employer pension and health and welfare
plans for employees covered under collective bargaining agreements. Several factors, including
unfavorable investment performance, changes in demographics and increased benefits to participants
could result in potential funding deficiencies, which could cause us to make higher future
contributions to these plans.
Discontinued Operations Remediation. Under the agreement pursuant to which we sold our
subsidiaries, Abex Corporation and Pneumo Abex Corporation (collectively, Pneumo Abex), in 1988
and a subsequent settlement agreement entered into in September 1991, we have assumed
indemnification obligations for certain environmental liabilities of Pneumo Abex, after any
insurance recoveries. Pneumo Abex has been and is subject to a number of environmental cleanup
proceedings, including responsibilities under the Comprehensive Environmental Response,
Compensation and Liability Act and other related federal and state laws regarding release or
disposal of wastes at on-site and off-site locations. In some proceedings, federal, state and local
government agencies are involved and other major corporations have been named as potentially
responsible parties. Pneumo Abex is also subject to private claims and lawsuits for remediation of
properties previously owned by Pneumo Abex and its subsidiaries.
There is an inherent uncertainty in assessing the total cost to investigate and remediate a
given site. This is because of the evolving and varying nature of the remediation and allocation
process. Any assessment of expenses is more speculative in an early stage of remediation and is
dependent upon a number of variables beyond the control of any party. Furthermore, there are often
timing considerations, in that a portion of the expense incurred by Pneumo Abex, and any resulting
obligation of ours to indemnify Pneumo Abex, may not occur for a number of years.
In fiscal year 2001, we investigated the use of insurance products to mitigate risks related
to our indemnification obligations under the 1988 agreement, as amended. The insurance carriers
required that we employ an outside consultant to perform a comprehensive review of the former
facilities operated or impacted by Pneumo Abex. Advances in the techniques of retrospective risk
evaluation and increased experience (and therefore available data) at our former facilities made
this comprehensive review possible. The consultants review was completed in fiscal year 2001 and
was updated in the fourth quarter of fiscal year 2005. We have recorded our best estimate of our
probable liability under our indemnification obligations using this consultants review and the
assistance of other professionals.
In the second quarter of 2007, we recorded a charge of $2.1 million, net of taxes, related to
revised estimates for environmental remediation, legal and related administrative costs. At the
end of the first nine months of 2007, we had $44.9 million accrued to cover potential
indemnification obligations, compared to $60.3 million recorded at the end of fiscal year 2006.
This indemnification obligation includes costs associated with approximately 15 sites in various
stages of remediation or negotiations. At the present time, the most significant remaining
indemnification obligation is associated with the Willits site, as discussed below, while no other
single site has significant estimated remaining costs associated with it. Of the total amount
accrued, $26.2 million was classified as a current liability at the end of the third quarter of
2007 and at the end of fiscal year 2006. The amounts exclude possible insurance recoveries and are
determined on an undiscounted cash flow basis. The estimated indemnification liabilities include
expenses for the investigation and remediation of identified sites, payments to third parties for
claims and expenses (including product liability and toxic tort claims), administrative expenses,
and the expenses of on-going evaluations and litigation. We expect a significant portion of the
accrued liabilities will be spent during the next 5 years.
Included in our indemnification obligations is financial exposure related to certain remedial
actions required at a facility that manufactured hydraulic and related equipment in Willits,
California. Various chemicals and metals contaminate this site. A final consent decree was issued
in August 1997 and amended in December 2000 in the case of the People of the State of California
and the City of Willits, California v. Remco Hydraulics, Inc. The final consent decree established
a trust (the Willits Trust) which is obligated to investigate and clean up this site. We are
currently funding the Willits Trust and the investigation and interim remediation costs on a
year-to-year basis as
required in the final amended consent decree. We have accrued $16.9 million for future remediation
and trust administration costs, with the majority of this amount to be spent over the next several
years.
12
Although we have certain indemnification obligations for environmental liabilities at a number
of sites other than the site discussed above, including Superfund sites, it is not anticipated that
additional expense at any specific site will have a material effect on us. At some sites, the
volumetric contribution for which we have an obligation has been estimated and other large,
financially viable parties are responsible for substantial portions of the remainder. In our
opinion, based upon information currently available, the ultimate resolution of these claims and
litigation, including potential environmental exposures, and considering amounts already accrued,
should not have a material effect on our financial condition, although amounts recorded in a given
period could be material to our results of operations or cash flows for that period.
Discontinued Operations-Insurance. During fiscal year 2002, as part of a comprehensive
program concerning environmental liabilities related to the former Whitman Corporation
subsidiaries, we purchased new insurance coverage related to the sites previously owned and
operated or impacted by Pneumo Abex and its subsidiaries. In addition, a trust, which was
established in 2000 with the proceeds from an insurance settlement (the Trust), purchased
insurance coverage and funded coverage for remedial and other costs (Finite Funding) related to
the sites previously owned and operated or impacted by Pneumo Abex and its subsidiaries.
Essentially all of the assets of the Trust were expended by the Trust in connection with the
purchase of the insurance coverage, the Finite Funding and related expenses. These actions have
been taken to fund remediation and related costs associated with the sites previously owned and
operated or impacted by Pneumo Abex and its subsidiaries and to protect against additional future
costs in excess of our self-insured retention. The original amount of self-insured retention (the
amount we must pay before the insurance carrier is obligated to begin payments) was $114.0 million
of which $48.4 million has been eroded, leaving a remaining self-insured retention of $65.6 million
at the end of the third quarter of 2007. The estimated range of aggregate exposure related only to
the remediation costs of such environmental liabilities is approximately $20 million to $45
million. We had accrued $23.6 million at the end of the third quarter of 2007 for remediation
costs, which is our best estimate of the contingent liabilities related to these environmental
matters. The Finite Funding may be used to pay a portion of the $23.6 million and thus reduces our
future cash obligations. Amounts recorded in our Condensed Consolidated Balance Sheets related to
Finite Funding were $11.9 million and $13.7 million at the end of the third quarter of 2007 and the
end of fiscal year 2006, respectively, and are recorded in Other assets, net of $4.2 million
recorded in Other current assets in each respective period.
In addition, we had recorded other receivables of $2.6 million and $7.8 million at the end of
the third quarter of 2007 and at the end of fiscal year 2006, respectively, for future probable
amounts to be received from insurance companies and other responsible parties. These amounts were
recorded in Other assets in the Condensed Consolidated Balance Sheets as of the end of each
respective period. Of this total, no portion of the receivable was reflected as current as of the
end of the third quarter of 2007 or at the end of fiscal year 2006.
On May 31, 2005, Cooper Industries, LLC (Cooper) filed and later served a lawsuit against
us, Pneumo Abex, LLC, and the Trustee of the Trust (the Trustee), captioned Cooper Industries,
LLC v. PepsiAmericas, Inc., et al., Case No. 05 CH 09214 (Cook Cty. Cir. Ct.). The claims involve
the Trust and insurance policy described above. Cooper asserts that it was entitled to access $34
million that previously was in the Trust and that was used to purchase the insurance policy.
Cooper claims that Trust funds should have been distributed for underlying Pneumo Abex asbestos
claims indemnified by Cooper. Cooper complains that it was deprived of access to money in the
Trust because of the Trustees decision to use the Trust funds to purchase the insurance policy
described above. Pneumo Abex, LLC, the corporate successor to our prior subsidiary, has been
dismissed from the suit.
During the second quarter of 2006, the Trustees motion to dismiss, in which we had joined,
was granted and three counts against us based on the use of Trust funds were dismissed with
prejudice, as were all counts against the Trustee, on the grounds that Cooper lacks standing to
pursue these counts because it is not a beneficiary under the Trust. We then filed a separate
motion to dismiss the remaining counts against us. Our motion was granted during the second
quarter of 2006 and all remaining counts against us were dismissed with prejudice. Cooper
subsequently filed a notice of appeal with regard to all rulings by the court dismissing the counts
against us and the Trustee. Prior to any oral argument, the appellate court on September 7,
2007 issued an opinion affirming the trial courts opinion. Cooper subsequently filed motion
papers asking the Illinois Supreme Court to accept a discretionary appeal of the rulings. The
Trustee then filed an opposition brief explaining why the Illinois Supreme Court should not allow
another appeal, and we joined in that brief. We expect that the Illinois Supreme Court to announce
in the fourth quarter of 2007 or the first quarter of 2008 whether it will allow Coopers request
for a further appeal.
13
Discontinued Operations-Product Liability and Toxic Tort Claims. We also have certain
indemnification obligations related to product liability and toxic tort claims that might emanate
out of the 1988 agreement with Pneumo Abex. Other companies not owned by or associated with us also
are responsible to Pneumo Abex for the financial burden of all asbestos product liability claims
filed against Pneumo Abex after a certain date in 1998, except for certain claims indemnified by
us. The sites and product liability and toxic tort claims included in the aggregate accrued
liabilities we have recorded are described more fully in our Annual Report on Form 10-K for the
fiscal year 2006. No significant changes in the status of those sites or claims occurred and we
were not notified of any significant new sites or claims during the first nine months of 2007.
14. Segment Reporting
We operate in one industry located in three geographic areas the U.S., Central Europe and
the Caribbean. We operate in 19 states in the U.S. Outside the U.S., we operate in Poland,
Hungary, the Czech Republic, Republic of Slovakia, Romania, Ukraine, Puerto Rico, Jamaica, the
Bahamas and Trinidad and Tobago. We have distribution rights in Moldova, Estonia, Latvia,
Lithuania and Barbados. Net sales and operating income for Ardea are included in the U.S.
geographic segment and for QABCL and Sandora are included in the Central Europe geographic segment
since their respective dates of consolidation.
The following tables present net sales and operating income of our geographic segments for the
third quarter and first nine months of 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
Net Sales |
|
|
Operating Income |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
U.S. |
|
$ |
877.9 |
|
|
$ |
841.5 |
|
|
$ |
90.8 |
|
|
$ |
90.1 |
|
Central Europe |
|
|
238.2 |
|
|
|
157.2 |
|
|
|
46.3 |
|
|
|
18.0 |
|
Caribbean |
|
|
67.0 |
|
|
|
65.5 |
|
|
|
2.9 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,183.1 |
|
|
$ |
1,064.2 |
|
|
$ |
140.0 |
|
|
$ |
110.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Nine Months |
|
|
|
Net Sales |
|
|
Operating Income |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
U.S. |
|
$ |
2,572.7 |
|
|
$ |
2,462.0 |
|
|
$ |
265.0 |
|
|
$ |
263.7 |
|
Central Europe |
|
|
588.2 |
|
|
|
337.5 |
|
|
|
76.9 |
|
|
|
14.7 |
|
Caribbean |
|
|
181.3 |
|
|
|
178.4 |
|
|
|
1.7 |
|
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,342.2 |
|
|
$ |
2,977.9 |
|
|
$ |
343.6 |
|
|
$ |
280.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Related Party Transactions
We are a licensed producer and distributor of Pepsi branded carbonated and non-carbonated soft
drinks and other non-alcoholic beverages in the U.S., Central Europe and the Caribbean. We operate
under exclusive franchise agreements with soft drink concentrate producers, including master
bottling and fountain syrup agreements with PepsiCo for the manufacture, packaging, sale and
distribution of Pepsi branded products. The franchise agreements exist in perpetuity and contain
operating and marketing commitments and conditions for termination. As of the end of the first nine
months of 2007, PepsiCo beneficially owned approximately 44 percent of PepsiAmericas outstanding
common stock.
We purchase concentrate from PepsiCo to be used in the production of PepsiCo branded
carbonated soft drinks and other non-alcoholic beverages. PepsiCo also provides us with various
forms of bottler incentives (marketing support programs) to promote Pepsis brands. These bottler
incentives cover a variety of initiatives, including direct marketplace, shared media and
advertising, to support volume and market share growth. There are no conditions or requirements
that could result in the repayment of any support payments we have received.
We manufacture and distribute fountain products and provide fountain equipment service to
PepsiCo customers in certain territories in accordance with various agreements. There are other
products that we produce and/or distribute through various arrangements with PepsiCo or partners of
PepsiCo. We also purchase finished beverage products from PepsiCo and certain of its affiliates
including tea, concentrate and finished beverage products from a Pepsi/Lipton partnership, as well
as finished beverage products from a Pepsi/Starbucks partnership.
14
PepsiCo provides various procurement services under a shared services agreement. Under such
agreement, PepsiCo negotiates with various suppliers the cost of certain raw materials by entering
into raw material contracts on our behalf. PepsiCo also collects and remits to us certain rebates
from the various suppliers related to our procurement volume. In addition, PepsiCo acts as our
agent in the execution of derivative contracts associated with certain anticipated raw material
purchases.
We have an existing arrangement with a subsidiary of Pohlad Companies related to the joint
ownership of an aircraft. This transaction is not material to our Condensed Consolidated Financial
Statements. Robert C. Pohlad, our Chairman and Chief Executive Officer, is the President and owner
of approximately 33 percent of the capital stock of Pohlad Companies.
See additional discussion of our related party transactions in our Annual Report on Form 10-K
for the fiscal year 2006.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements of expected
future developments, as defined in the Private Securities Litigation Reform Act of 1995. The
forward-looking statements in this Form 10-Q refer to the expectations regarding continuing
operating improvement and other matters. These forward-looking statements reflect our expectations
and are based on currently available data; however, actual results are subject to future risks and
uncertainties, which could materially affect actual performance. Risks and uncertainties that
could affect such performance include, but are not limited to, the following: competition,
including product and pricing pressures; changing trends in consumer tastes; changes in our
relationship and/or support programs with PepsiCo and other brand owners; market acceptance of new
product and package offerings; weather conditions; cost and availability of raw materials; changing
legislation; outcomes of environmental claims and litigation; availability of capital including
changes in our debt ratings; labor and employee benefit costs; unfavorable interest rate and
currency fluctuations; costs of legal proceedings; and general economic, business and political
conditions in the countries and territories where we operate. See Risk Factors in Item 1A. of our
Annual Report on Form 10-K for the fiscal year 2006 for additional information.
These events and uncertainties are difficult or impossible to predict accurately and many are
beyond our control. We assume no obligation to publicly release the result of any revisions that
may be made to any forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated events.
CRITICAL ACCOUNTING POLICIES
The preparation of the Condensed Consolidated Financial Statements in conformity with United
States generally accepted accounting principles requires management to use estimates. These
estimates are made using managements best judgment and the information available at the time these
estimates are made, including the advice of outside experts. For a better understanding of our
significant accounting policies used in preparation of the Condensed Consolidated Financial
Statements, please refer to our Annual Report on Form 10-K for fiscal year 2006. We focus your
attention on the following critical accounting policies:
Recoverability of Goodwill and Intangible Assets with Indefinite Lives. Goodwill and
intangible assets with indefinite useful lives are not amortized, but instead tested
annually for impairment or more frequently if events or changes in circumstances indicate
that an asset might be impaired.
Goodwill is tested for impairment using a two-step approach at the reporting unit level:
U.S., Central Europe and the Caribbean. First, we estimate the fair value of the
reporting units primarily using discounted estimated future cash flows. If the carrying
value exceeds the fair value of the reporting unit, the third step of the goodwill
impairment test is performed to measure the amount of the potential loss. Goodwill
impairment is measured by comparing the implied fair value of goodwill with its carrying
amount.
Our identified intangible assets with indefinite lives principally arise from the
allocation of the purchase price of businesses acquired and consist primarily of franchise
and distribution agreements. Impairment is measured as the amount by which the carrying
value of the intangible asset exceeds its estimated fair value. The estimated fair value
is generally determined on the basis of discounted future cash flows.
The impairment evaluation requires the use of considerable management judgment to
determine the fair value of the goodwill and intangible assets with indefinite lives using
discounted future cash flows, including estimates and assumptions regarding the amount and
timing of cash flows, cost of capital and growth rates.
Environmental Liabilities. We continue to be subject to certain indemnification
obligations under agreements related to previously sold subsidiaries, including potential
environmental liabilities (see Note 13 to the Condensed Consolidated Financial
Statements). We have recorded our best estimate of our probable liability under those
indemnification obligations, with the assistance of outside consultants and other
professionals. The estimated indemnification liabilities include expenses for the
remediation of identified sites, payments to third parties for claims and expenses
(including product liability and toxic tort claims), administrative expenses, and the
expense of on-going evaluations and litigation. Such estimates and the recorded
liabilities are subject to various factors, including possible insurance recoveries, the
allocation of liabilities among other potentially responsible parties, the advancement of
technology for means of remediation, possible changes in the scope of work at the
contaminated sites, as well as possible changes in related laws, regulations, and agency
requirements. We do not discount environmental liabilities.
16
Income Taxes. Our effective income tax rate is based on income, statutory tax rates and
tax planning opportunities available to us in the various jurisdictions in which we
operate. We have established valuation allowances against a portion of the non-U.S. net
operating losses and state-related net operating losses to reflect the uncertainty of our
ability to fully utilize these benefits given the limited carry forward periods permitted
by the various jurisdictions. The evaluation of the realizability of our net operating
losses requires the use of considerable management judgment to estimate the future taxable
income for the various jurisdictions, for which the ultimate amounts and timing of such
estimates may differ. The valuation allowance can also be impacted by changes in the tax
regulations.
Significant judgment is required in determining our unrecognized tax benefits and
associated contingent liabilities. We have recorded amounts related to unrecognized tax
benefits using managements best judgment and adjust the associated contingent liabilities
as warranted by changing facts and circumstances. A change in our tax liabilities in any
given period could have a significant impact on our results of operations and cash flows
for that period.
Casualty Insurance Costs. Due to the nature of our business, we require insurance
coverage for certain casualty risks. We are self-insured for workers compensation,
product and general liability up to $1 million per occurrence and automobile liability up
to $2 million per occurrence. The casualty insurance costs for our self-insurance program
represent the ultimate net cost of all reported and estimated unreported losses incurred
during the period. We do not discount casualty insurance liabilities.
Our liability for casualty costs is estimated using individual case-based valuations and
statistical analyses and is based upon historical experience, actuarial assumptions and
professional judgment. These estimates are subject to the effects of trends in loss
severity and frequency and are based on the best data available to us. These estimates,
however, are also subject to a significant degree of inherent variability. We evaluate
these estimates with our actuarial advisors on an annual basis and we believe that they
are appropriate and within acceptable industry ranges, although an increase or decrease in
the estimates or economic events outside our control could have a material impact on our
results of operations and cash flows. Accordingly, the ultimate settlement of these costs
may vary significantly from the estimates included in our Condensed Consolidated Financial
Statements.
17
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
PepsiAmericas, Inc. (we, our or us) manufactures, distributes, and markets a broad
portfolio of beverage products in the U.S., Central Europe and the Caribbean. We sell a variety of
brands that we bottle under franchise agreements with various brand owners, the majority with
PepsiCo or PepsiCo joint ventures. In some territories, we manufacture, package, sell and
distribute our own brands, such as Toma brands in Central Europe. We operate in a significant
portion of a 19 state region in the U.S. In Central Europe, we serve Poland, Hungary, the Czech
Republic, Republic of Slovakia, Romania and Ukraine, with distribution rights in Moldova, Estonia,
Latvia and Lithuania. In addition, we have an equity investment in Agrima JSC, which gives us a
market presence in Bulgaria. In the Caribbean, our territories include Puerto Rico, Jamaica, the
Bahamas, and Trinidad and Tobago, with distribution rights in Barbados. Managements Discussion
and Analysis of Financial Condition and Results of Operations should be read in conjunction with
the unaudited Condensed Consolidated Financial Statements and accompanying Notes in this Form 10-Q
and our Annual Report on Form 10-K for the year ended December 30, 2006.
In the discussions of our results of operations below, the number of bottle and can cases sold
is referred to as volume. Constant territory refers to the results of operations excluding the
non-comparable territories year-over-year. In the third quarter of 2007, this comparison excluded
one additional month of Quadrant-Amroq Bottling Company Limited (QABCL or Romania) results, as
we fully consolidated QABCL operating results starting in August 2006 and excludes the operating
results of Sandora LLC (Sandora). Net pricing is net sales divided by the number of cases and
gallons sold for our core businesses, which include bottles and cans (including bottle and can
volume from vending equipment sales), as well as food service. Changes in net pricing include the
impact of sales price (or rate) changes, as well as the impact of foreign currency translation and
brand, package and geographic mix. Net pricing and reported volume amounts exclude contract,
commissary, and vending (other than bottles and cans) revenue and volume. Contract sales represent
sales of manufactured product to other franchise bottlers and typically decline as excess
manufacturing capacity is utilized. Net pricing and volume also exclude activity associated with
beer and snack food products. Cost of goods sold per unit is the cost of goods sold for our core
businesses divided by the related number of cases and gallons sold.
Seasonality
Our business is seasonal with the second and third quarters generating higher sales volumes
than the first and fourth quarters. Accordingly, the operating results of any individual quarter
may not be indicative of a full years operating results.
Items Impacting Comparability
Acquisitions
QABCL is a holding company that, through its subsidiaries, produces, sells and distributes
Pepsi and other beverages throughout Romania and also has distribution rights in Moldova. In June
2005, we acquired a 49 percent interest in QABCL for a purchase price of $51.0 million. This
initial investment was recorded under the equity method in accordance with APB Opinion No. 18, The
Equity Method of Accounting for Investments in Common Stock. We recorded our share of QABCL
earnings in Equity in net earnings of nonconsolidated companies in the Condensed Consolidated
Statement of Income. Equity in net earnings of nonconsolidated companies was $0.2 million and $5.6
in the third quarter and first nine months of 2006, respectively.
In July 2006, we acquired the remaining 51 percent interest in QABCL for a purchase price of
$81.9 million, net of $17.0 million cash received. We acquired $55.4 million of debt as part of
the acquisition, of which $51.1 million was repaid in December 2006. QABCL is now a wholly-owned
subsidiary and was consolidated in the third quarter of 2006. The increased purchase price for the
remainder of QABCL was due to the improved operating performance subsequent to the initial
acquisition of our 49 percent minority investment. Due to the timing of the receipt of available
financial information from QABCL, we record results on a one-month lag basis.
In the second quarter of 2007, we completed the formation of a joint venture with PepsiCo to
acquire an 80 percent interest in Sandora, the leading juice company in Ukraine. Under the terms
of the joint venture agreement, we hold a 60 percent interest and PepsiCo holds a 40 percent
interest. On August 20, 2007, the joint venture completed its 80 percent acquisition of Sandora
and expects to acquire the remaining 20 percent interest in Sandora
in November 2007 for $135.5 million. We fully consolidated the results of operations of the joint
venture and report minority interest in our Condensed Consolidated Financial Statements. Due to
the timing of the receipt of available financial information, we record results on a one-month lag
basis.
18
Special Charges
In the third quarter and first nine months of 2007, we recorded special charges of $1.3 and
$3.9 million, respectively, in the U.S. related to the strategic realignment of our U.S. sales
organization to further strengthen our customer focused go-to-market strategy. In addition, we
recorded special charges of $0.2 million in Central Europe in the first nine months of 2007.
These special charges were primarily for severance, related benefits and relocation costs. In the
first nine months of 2006, we recorded special charges of $2.2 million in Central Europe primarily
related to a reduction in the workforce. These special charges were primarily for severance costs
and related benefits.
Marketable Securities Impairment
In the first nine months of 2007, we recorded an other-than-temporary impairment loss of $4.0
million related to an equity security that is classified as available-for-sale on our Condensed
Consolidated Balance Sheets. The loss was recorded in Other (expense) income, net on the
Condensed Consolidated Statement of Income.
Gain on Sale of Non-Core Property
In the first nine months of 2007, we recorded a gain of $10.2 million related to the sale of
non-core property, which consisted of railcars and locomotives. The gain was recorded in Other
(expense) income, net on the Condensed Consolidated Statement of Income.
Financial Results
Net income in the third quarter of 2007 was $71.5 million, or $0.55 per diluted common share,
compared to net income of $53.1 million, or $0.41 per diluted common share, in the third quarter of
2006. The increase in diluted earnings per share resulted primarily from organic growth in Central
Europe, including Romania, and foreign currency translation. We also recorded special charges,
which had a net impact of $0.01 per diluted common share.
We achieved net price increases in all geographic segments and volume growth in Central Europe
in the third quarter of 2007. The increases in net pricing offset cost of goods sold increases
caused by higher ingredient costs. In the U.S., we continued to show growth in non-carbonated
beverages, which accounted for approximately 23 percent of our sales volume during the third
quarter of 2007. Volume in Central Europe grew 25.2 percent during the third quarter of 2007 due
to the impact of acquisitions and growth in both carbonated soft drinks and non-carbonated
beverages.
Net income in the first nine months of 2007 was $170.1 million, or $1.32 per diluted common
share, compared to net income of $132.2 million, or $1.02 per diluted common share, in the first
nine months of 2006. The increase in diluted earnings per share resulted primarily from the
beneficial impact of an incremental investment in Romania, organic growth in both the U.S. and
Central Europe, including Romania, and foreign currency translation. During the first nine months
of 2007, we also recorded a gain on the sale of non-core property, partly offset by the marketable
securities impairment and special charges, which resulted in a net increase of $0.01 per diluted
common share, and the loss from discontinued operations, which had an unfavorable impact of $0.02
per diluted common share.
2007 Outlook
In fiscal year 2007, we expect reported diluted earnings per share to be in the range
of $1.62 to $1.65, including an estimated $0.03 dilution from the Sandora acquisition, anticipated
special charges of $0.04, and the impact from the marketable securities impairment and gain on sale
of non-core property.
We expect to improve average net selling price in the U.S. by approximately 5 percent for the
full year. We expect worldwide cost of goods sold per unit, on a constant territory basis, to
increase approximately 5.5 percent. Worldwide selling, delivery and administrative (SD&A)
expenses are expected to be higher than fiscal year 2006 by approximately 11.5 percent, with a 7.5
percent increase on a constant territory basis.
19
RESULTS OF OPERATIONS
2007 THIRD QUARTER COMPARED WITH 2006 THIRD QUARTER
The following is a discussion of our results of operations for the third quarter 2007 compared
to the third quarter of 2006.
Volume
Sales volume growth (decline) for the third quarter of 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
As reported |
|
2007 |
|
2006 |
U.S. |
|
|
(1.6 |
%) |
|
|
0.6 |
% |
Central Europe |
|
|
25.2 |
% |
|
|
50.5 |
% |
Caribbean |
|
|
(4.5 |
%) |
|
|
3.8 |
% |
Worldwide |
|
|
4.3 |
% |
|
|
9.0 |
% |
|
|
|
|
|
|
|
|
|
Constant territory |
|
2007 |
|
2006 |
U.S. |
|
|
(1.6 |
%) |
|
|
0.6 |
% |
Central Europe |
|
|
4.4 |
% |
|
|
13.1 |
% |
Caribbean |
|
|
(4.5 |
%) |
|
|
3.8 |
% |
Worldwide |
|
|
(0.4 |
%) |
|
|
2.8 |
% |
In the third quarter of 2007, worldwide volume increased 4.3 percent compared to the prior
year third quarter. The increase in worldwide volume was attributable to volume growth of 25.2
percent in Central Europe, primarily due to the incremental impact of acquisitions and constant
territory growth, which offset volume declines in the U.S. and Caribbean.
Volume in the U.S declined 1.6 percent in the third quarter of 2007 compared to the third
quarter of 2006 due, in part, to a carbonated soft drink volume decline of 4 percent. This rate of
decline was an improvement over previous quarters, due to growth in Trademark Mountain Dew volume
associated with the introduction of the Mountain Dew Game Fuel limited time offer. The shift into
the non-carbonated beverage category continued due to changing consumer preferences and represented
23 percent of our volume mix during the third quarter of 2007 compared to 21 percent in the prior
year. The non-carbonated beverage category, excluding water, grew 11 percent reflecting
double-digit growth in Trademark Lipton. Aquafina volume was flat compared to the third quarter of
2006, which included significant promotional activity. Single-serve volume grew over 1 percent due
mainly to innovation, driven by Diet Pepsi Max and Mountain Dew Game Fuel, and strong marketing
programs.
Volume in Central Europe increased 25.2 percent in the third quarter of 2007 compared to the
third quarter of 2006, driven by the incremental 20.8 percentage point contribution from
acquisitions. The remaining volume growth of 4.4 percent in Central Europe was due primarily to
volume growth in Romania. Both carbonated soft drink and non-carbonated beverage volumes in
Poland, Hungary, the Czech Republic and Republic of Slovakia were flat compared to the third
quarter of 2006 due to unseasonably poor weather in September 2007 and favorable weather conditions
in the prior year third quarter.
Volume in the Caribbean decreased 4.5 percent in the third quarter of 2007 compared to the
same period last year. The volume decline was driven primarily by soft economic conditions in
Puerto Rico, partly offset by volume growth in Jamaica. A decline in carbonated soft drink volume
was largely offset by non-carbonated beverage growth, led by Malta Polar and Tropicana.
20
Net Sales
Net sales and net pricing statistics for the third quarter of 2007 and 2006 were as follows
(dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
877.9 |
|
|
$ |
841.5 |
|
|
|
4.3 |
% |
Central Europe |
|
|
238.2 |
|
|
|
157.2 |
|
|
|
51.5 |
% |
Caribbean |
|
|
67.0 |
|
|
|
65.5 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
1,183.1 |
|
|
$ |
1,064.2 |
|
|
|
11.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Pricing Growth (Decline) |
|
|
|
|
as reported |
|
2007 |
|
2006 |
U.S. |
|
|
5.2 |
% |
|
|
1.3 |
% |
Central Europe |
|
|
22.1 |
% |
|
|
8.3 |
% |
Caribbean |
|
|
6.9 |
% |
|
|
4.6 |
% |
Worldwide |
|
|
6.5 |
% |
|
|
(0.2 |
%) |
|
|
|
|
|
|
|
|
|
Net Pricing Growthconstant |
|
|
|
|
territory |
|
2007 |
|
2006 |
U.S. |
|
|
5.2 |
% |
|
|
1.3 |
% |
Central Europe |
|
|
21.8 |
% |
|
|
8.5 |
% |
Caribbean |
|
|
6.9 |
% |
|
|
4.6 |
% |
Worldwide |
|
|
7.4 |
% |
|
|
1.5 |
% |
Net sales increased $118.9 million, or 11.2 percent, to $1,183.1 million in the third quarter
of 2007 compared to $1,064.2 million the third quarter of 2006. The increase was attributable to
worldwide rate gains, volume growth in Central Europe, acquisitions and the favorable impact of
foreign currency translation, which added approximately 2 percentage points of the increase.
Net sales in the U.S. for the third quarter of 2007 increased $36.4 million, or 4.3 percent,
to $877.9 million from $841.5 million in the prior year third quarter. The increase in net sales
was primarily due to a 5.2 percent increase in net pricing, partly offset by a volume decline of
1.6 percent. The increase in net pricing primarily reflected an improvement in rate of
approximately 4 percent. Mix also contributed approximately 1 percent growth to net pricing due to
stronger single-serve package and non-carbonated beverage performance.
Net sales in Central Europe for the third quarter of 2007 increased $81.0 million, or 51.5
percent, to $238.2 million from $157.2 million in the prior year third quarter. The increase was
partly due to acquisitions, which contributed approximately 24 percentage points of the increase.
The remaining increase in net sales was due to volume growth in Romania and an increase in net
pricing of 21.8 percent. Foreign currency translation contributed approximately 16 percentage
points to the increase in net pricing, and the remaining increase was primarily due to an
improvement in mix.
Net sales in the Caribbean increased $1.5 million, or 2.3 percent in the third quarter of 2007
to $67.0 million from $65.5 million in the prior year third quarter. The increase was a result of
an increase in net pricing of 6.9 percent, offset partly by a volume decline of 4.5 percent. The
increase in net pricing was mainly due to rate increases and growth in the single-serve package.
21
Cost of Goods Sold
Cost of goods sold and cost of goods sold per unit statistics for the third quarter of 2007
and 2006 were as follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
521.1 |
|
|
$ |
490.8 |
|
|
|
6.2 |
% |
Central Europe |
|
|
128.8 |
|
|
|
91.5 |
|
|
|
40.8 |
% |
Caribbean |
|
|
49.3 |
|
|
|
48.3 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
699.2 |
|
|
$ |
630.6 |
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold per Unit |
|
|
|
|
Increaseas reported |
|
2007 |
|
2006 |
U.S. |
|
|
6.7 |
% |
|
|
4.0 |
% |
Central Europe |
|
|
12.9 |
% |
|
|
7.2 |
% |
Caribbean |
|
|
5.8 |
% |
|
|
7.2 |
% |
Worldwide |
|
|
5.8 |
% |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
Cost of Goods Sold per Unit |
|
|
|
|
Increase constant territory |
|
2007 |
|
2006 |
U.S. |
|
|
6.7 |
% |
|
|
4.0 |
% |
Central Europe |
|
|
11.7 |
% |
|
|
8.2 |
% |
Caribbean |
|
|
5.8 |
% |
|
|
7.2 |
% |
Worldwide |
|
|
6.9 |
% |
|
|
4.1 |
% |
Cost of goods sold increased $68.6 million, or 10.9 percent, to $699.2 million in the third
quarter of 2007 from $630.6 million in the prior year third quarter. This increase was driven
primarily by acquisitions, higher ingredient costs and the unfavorable impact of foreign currency
translation, which added approximately 1 percentage point to the cost of goods sold increase. Cost
of goods sold per unit increased 5.8 percent in the third quarter of 2007 compared to the same
period in 2006.
In the U.S., cost of goods sold increased $30.3 million, or 6.2 percent, to $521.1 million in
the third quarter of 2007 from $490.8 million in the prior year third quarter. Cost of goods sold
per unit increased 6.7 percent in the U.S., primarily due to higher ingredient costs and a 1 percentage point increase in mix due to a shift to more expensive non-carbonated beverages.
In Central Europe, cost of goods sold increased $37.3 million, or 40.8 percent, to $128.8
million in the third quarter of 2007, compared to $91.5 million in the prior year third quarter.
Acquisitions contributed approximately 23 percentage points of the increase. Constant territory
volume growth of 4.4 percent and higher ingredient costs also contributed to the increase in cost
of goods sold. The remainder of the increase was due to the unfavorable impact of foreign currency
translation, which contributed approximately 9 percentage points to the increase in cost of goods
sold per unit.
In the Caribbean, cost of goods sold increased $1.0 million, or 2.1 percent, to $49.3 million
in the third quarter of 2007, compared to $48.3 million in the third quarter of 2006. The increase
was mainly driven by an increase in cost of goods sold per unit of 5.8 percent, attributable to
increases in the cost of ingredients.
22
Selling, Delivery and Administrative Expenses
Selling, delivery and administrative (SD&A) expenses and SD&A expense statistics for the
third quarter of 2007 and 2006 were as follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
SD&A Expenses |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
264.7 |
|
|
$ |
260.6 |
|
|
|
1.6 |
% |
Central Europe |
|
|
63.1 |
|
|
|
47.7 |
|
|
|
32.3 |
% |
Caribbean |
|
|
14.8 |
|
|
|
15.3 |
|
|
|
(3.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
342.6 |
|
|
$ |
323.6 |
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SD&A as Percent of Net Sales |
|
2007 |
|
2006 |
U.S. |
|
|
30.2 |
% |
|
|
31.0 |
% |
Central Europe |
|
|
26.5 |
% |
|
|
30.3 |
% |
Caribbean |
|
|
22.1 |
% |
|
|
23.4 |
% |
Worldwide |
|
|
29.0 |
% |
|
|
30.4 |
% |
In the third quarter of 2007, SD&A increased $19.0 million, or 5.9 percent, to $342.6 million
from $323.6 million in the comparable period of the previous year. The unfavorable impact of
foreign currency translation added approximately 2 percent points of the increase. As a percentage
of net sales, SD&A expenses decreased to 29.0 percent in the third quarter of 2007, compared to
30.4 percent in the prior year third quarter.
In the U.S., SD&A expenses increased $4.1 million, or 1.6 percent, to $264.7 million in the
third quarter of 2007, compared to $260.6 million in the prior year third quarter. SD&A expenses
increased in the third quarter of 2007 largely due to higher compensation and benefit costs, partly
offset by lower depreciation expense.
In Central Europe, SD&A expenses increased $15.4 million in the third quarter of 2007 compared
to the prior year third quarter. Acquisitions contributed approximately 14 percentage points of
the increase. The remainder of the increase was due to higher advertising and marketing costs, the
unfavorable impact of foreign currency translation and increased expenses associated with higher
volume.
In the Caribbean, SD&A expenses decreased $0.5 million, or 3.3 percent, to $14.8 million in
the third quarter of 2007 from $15.3 million in the prior year third quarter. The decrease was due
primarily to lower compensation and benefit costs associated with lower volume.
Special Charges
In the third quarter of 2007, we recorded special charges of $1.3 million in the U.S. related
to the strategic realignment of our U.S. sales organization to further strengthen our customer
focused go-to-market strategy. These special charges were primarily for severance, related
benefits and relocation costs.
Operating Income
Operating income for the third quarter of 2007 and 2006 was as follows (dollar amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
90.8 |
|
|
$ |
90.1 |
|
|
|
0.8 |
% |
Central Europe |
|
|
46.3 |
|
|
|
18.0 |
|
|
|
157.2 |
% |
Caribbean |
|
|
2.9 |
|
|
|
1.9 |
|
|
|
52.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
140.0 |
|
|
$ |
110.0 |
|
|
|
27.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating income increased $30.0 million, or 27.3 percent, to $140.0 million in the third
quarter of 2007, compared to $110.0 million in the third quarter of 2006. The favorable impact of
foreign currency transaction added approximately 9 percentage points to the growth in worldwide
operating income.
23
Operating income in the U.S. increased $0.7 million to $90.8 million in the third quarter of
2007 from $90.1 million in the third quarter of 2006. The increase was mainly due to net pricing
growth, which was partly offset by higher cost of goods sold, SD&A expenses and special charges.
Operating income in Central Europe increased $28.3 million to $46.3 million in the third
quarter of 2007, compared to $18.0 million in the prior year third quarter. This was partly due to
acquisitions, which contributed approximately 54 percentage points of this increase. The remainder
of the increase was due to volume growth, increases in net pricing and the beneficial impact of
foreign currency translation which contributed 37 percentage points of operating income growth.
Operating income in the Caribbean increased to $2.9 million in the third quarter of 2007, $1.0
million higher than the operating income of $1.9 million in the prior year third quarter.
Increases in net pricing and lower SD&A expenses contributed to this growth.
Interest Expense and Other Expenses
Net interest expense increased $0.3 million in the third quarter of 2007 to $27.3 million,
compared to $27.0 million in the third quarter of 2006. The increase was due to higher debt levels
due to our acquisitions during the third quarter of 2007, partly offset by lower interest expense
related to our securitization program.
We recorded other expense, net, of $1.5 million in the third quarter of 2007 compared to other
expense, net, of $0.1 million reported in the third quarter of 2006. The prior year amount
included a pre-tax gain of $0.9 million on the sale of real estate investments associated with
our non-operating entities.
Income Taxes
The effective income tax rate, which is income tax expense expressed as a percentage of income
before income taxes, minority interest, and equity in net earnings of nonconsolidated companies, was
35.1 percent for the third quarter of 2007, compared to 36.2 percent in the third quarter of 2006.
The effective tax rate decreased from the prior year due, in part, to the mix of our international
operations in the third quarter of 2007. The effective income tax rate was also favorably impacted
by a reorganization of the legal entity structure in Central Europe in the second quarter of 2007.
Equity in Net Earnings of Nonconsolidated Companies
In the third quarter of 2005, we acquired a 49 percent minority interest in the Romanian
entity, QABCL. Equity in net earnings of nonconsolidated companies was $0.2 million in the third
quarter of 2006. With the acquisition of the remaining 51 percent, we began fully consolidating
its results during the third quarter of 2006.
Net Income
Net income increased $18.4 million to $71.5 million in the third quarter of 2007, compared to
$53.1 million in the third quarter of 2006. The discussion of our operating results, included
above, explains the increase in net income.
24
RESULTS OF OPERATIONS
2007 FIRST NINE MONTHS COMPARED WITH 2006 FIRST NINE MONTHS
The following is a discussion of our results of operations for the first nine months of 2007
compared to the first nine months of 2006.
Volume
Sales volume growth (decline) for the first nine months of 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
As reported |
|
2007 |
|
2006 |
U.S. |
|
|
(1.6 |
%) |
|
|
0.9 |
% |
Central Europe |
|
|
46.9 |
% |
|
|
24.0 |
% |
Caribbean |
|
|
(4.9 |
%) |
|
|
1.1 |
% |
Worldwide |
|
|
6.7 |
% |
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
Constant territory |
|
2007 |
|
2006 |
U.S. |
|
|
(1.6 |
%) |
|
|
0.9 |
% |
Central Europe |
|
|
8.5 |
% |
|
|
9.7 |
% |
Caribbean |
|
|
(4.9 |
%) |
|
|
1.1 |
% |
Worldwide |
|
|
(0.1 |
%) |
|
|
2.2 |
% |
In the first nine months of 2007, worldwide volume increased 6.7 percent compared to the prior
year. The increase in worldwide volume was attributable to volume growth of 46.9 percent in
Central Europe, driven by the incremental impact of acquisitions and constant territory growth.
In the first nine months of 2007, U.S. volume declined 1.6 percent compared to the same period
in fiscal year 2006. The decline was driven by a 5 percent decrease in the carbonated soft drink
category. The shift into the non-carbonated beverage category continued due to changing consumer
preferences and represented 21 percent of our volume mix during the first nine months of 2007
compared to 19 percent in the prior year. The non-carbonated beverage category, excluding water,
grew approximately 19 percent driven primarily by Trademark Lipton. Aquafina volume grew 2 percent
during the first nine months of 2007.
Volume in Central Europe increased 46.9 percent in the first nine months of 2007 compared to
the same period in fiscal year 2006. The increase was primarily due to acquisitions, which
contributed approximately 38 percentage points of the increase. The remaining growth in Central
Europe was due to growth in the non-carbonated beverage category, driven by double-digit growth in
Trademark Lipton and juices and single-digit growth in the water category. Carbonated soft drink
volume grew in the mid single digits due to growth in Trademark Pepsi.
Volume in the Caribbean decreased 4.9 percent in the first nine months of 2007 compared to the
same period last year. The volume decline was driven primarily by soft economic conditions in
Puerto Rico, partly offset by volume growth in Jamaica. Carbonated soft drink volume declined 11
percent, driven mainly by the volume decline of Trademark Pepsi. Non-carbonated beverage growth,
led by Malta Polar and Tropicana, partly offset this volume decline.
25
Net Sales
Net sales and net pricing statistics for the first nine months of 2007 and 2006 were as
follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
2,572.7 |
|
|
$ |
2,462.0 |
|
|
|
4.5 |
% |
Central Europe |
|
|
588.2 |
|
|
|
337.5 |
|
|
|
74.3 |
% |
Caribbean |
|
|
181.3 |
|
|
|
178.4 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
3,342.2 |
|
|
$ |
2,977.9 |
|
|
|
12.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Pricing Growthas reported |
|
2007 |
|
2006 |
U.S. |
|
|
5.5 |
% |
|
|
1.3 |
% |
Central Europe |
|
|
20.1 |
% |
|
|
4.0 |
% |
Caribbean |
|
|
6.2 |
% |
|
|
5.5 |
% |
Worldwide |
|
|
5.2 |
% |
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
Net Pricing Growthconstant |
|
|
|
|
territory |
|
2007 |
|
2006 |
U.S. |
|
|
5.5 |
% |
|
|
1.3 |
% |
Central Europe |
|
|
19.1 |
% |
|
|
3.8 |
% |
Caribbean |
|
|
6.2 |
% |
|
|
5.5 |
% |
Worldwide |
|
|
6.6 |
% |
|
|
1.3 |
% |
Net sales increased $364.3 million, or 12.2 percent, to $3,342.2 million in the first nine
months of 2007 compared to $2,977.9 million the first nine months of 2006. The increase was
primarily due to worldwide rate gains, volume growth in Central Europe and the favorable impact of
foreign currency translation, which added approximately 2 percentage points of the increase
Net sales in the U.S. for the first nine months of 2007 increased $110.7 million, or 4.5
percent, to $2,572.7 million from $2,462.0 million in the first nine months of 2006. The increase
in net sales was due to a 5.5 percent increase in net pricing, driven primarily by rate increases,
partly offset by a volume decline of 1.6 percent. Package mix also positively contributed to net
pricing by approximately 1 percent due to stronger single-serve package and non-carbonated beverage
performance and lower take-home water volume.
Net sales in Central Europe for the first nine months of 2007 increased $250.7 million, or
74.3 percent, to $588.2 million from $337.5 million in the first nine months of 2006. The increase
was primarily due to acquisitions, which contributed approximately 43 percentage points of the
increase. The remainder of the increase was due to an increase in net pricing of 19.1 percent,
including approximately 14 percent contributed by the favorable impact of foreign currency
translation. The remaining increase in net pricing was mainly due to improvements in both rate and
mix.
Net sales in the Caribbean increased $2.9 million, or 1.6 percent, in the first nine months of
2007 to $181.3 million from $178.4 million in the prior year first nine months. The increase was a
result of an increase in net pricing of 6.2 percent, offset partly by a volume decline of 4.9
percent. The increase in net pricing was mainly due to rate increases and growth in the
single-serve package.
26
Cost of Goods Sold
Cost of goods sold and cost of goods sold per unit statistics for the first nine months of
2007 and 2006 were as follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
1,510.6 |
|
|
$ |
1,432.7 |
|
|
|
5.4 |
% |
Central Europe |
|
|
331.7 |
|
|
|
201.8 |
|
|
|
64.4 |
% |
Caribbean |
|
|
134.7 |
|
|
|
132.5 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
1,977.0 |
|
|
$ |
1,767.0 |
|
|
|
11.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold per Unit |
|
|
|
|
Increaseas reported |
|
2007 |
|
2006 |
U.S. |
|
|
6.1 |
% |
|
|
4.3 |
% |
Central Europe |
|
|
12.1 |
% |
|
|
2.7 |
% |
Caribbean |
|
|
5.7 |
% |
|
|
6.5 |
% |
Worldwide |
|
|
4.3 |
% |
|
|
3.3 |
% |
|
|
|
|
|
|
|
|
|
Cost of Goods Sold per Unit |
|
|
|
|
Increaseconstant territory |
|
2007 |
|
2006 |
U.S. |
|
|
6.1 |
% |
|
|
4.3 |
% |
Central Europe |
|
|
11.8 |
% |
|
|
3.2 |
% |
Caribbean |
|
|
5.7 |
% |
|
|
6.5 |
% |
Worldwide |
|
|
6.1 |
% |
|
|
4.0 |
% |
Cost of goods sold increased $210.0 million, or 11.9 percent, to $1,977.0 million in the first
nine months of 2007 from $1,767.0 million in the first nine months of 2006. This increase was
driven primarily by the impact of acquisitions, higher ingredient costs and the unfavorable impact
of foreign currency translation, which added approximately 1 percentage point to the increase.
Cost of goods sold per unit increased 4.3 percent in the first nine months of 2007 compared to the
same period in 2006.
In the U.S., cost of goods sold increased $77.9 million, or 5.4 percent, to $1,510.6 million
in the first nine months of 2007 from $1,432.7 million in the prior year. Cost of goods sold per
unit increased 6.1 percent in the U.S., due to price increases in ingredient costs and a 1
percentage point increase in mix due to a shift to more expensive non-carbonated beverages.
In Central Europe, cost of goods sold increased $129.9 million, or 64.4 percent, to $331.7
million in the first nine months of 2007, compared to $201.8 million in the prior year.
Acquisitions contributed approximately 38 percentage points of the increase. Constant territory
volume growth of 8.5 percent and higher ingredient costs also contributed to the increase of cost
of goods sold. The remainder of the increase was due to the unfavorable impact of foreign currency
translation, which contributed approximately 8 percentage points to the increase in cost of goods
sold per unit.
In the Caribbean, cost of goods sold increased $2.2 million, or 1.7 percent, to $134.7 million
in the first nine months of 2007, compared to $132.5 million in the first nine months of 2006. The
increase was mainly driven by an increase in cost of goods sold per unit of 5.7 percent,
attributable to increases in the price of ingredients and packaging, offset partly by a volume
decline of 4.9 percent.
27
Selling, Delivery and Administrative Expenses
SD&A expenses and SD&A expense statistics for the first nine months of 2007 and 2006 were as
follows (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
SD&A Expenses |
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
793.2 |
|
|
$ |
765.6 |
|
|
|
3.6 |
% |
Central Europe |
|
|
179.4 |
|
|
|
118.8 |
|
|
|
51.0 |
% |
Caribbean |
|
|
44.9 |
|
|
|
44.1 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
1,017.5 |
|
|
$ |
928.5 |
|
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SD&A as Percent of Net Sales |
|
2007 |
|
2006 |
U.S. |
|
|
30.8 |
% |
|
|
31.1 |
% |
Central Europe |
|
|
30.5 |
% |
|
|
35.2 |
% |
Caribbean |
|
|
24.8 |
% |
|
|
24.7 |
% |
Worldwide |
|
|
30.4 |
% |
|
|
31.2 |
% |
In the first nine months of 2007, SD&A expenses increased $89.0 million, or 9.6 percent, to
$1,017.5 million from $928.5 million in the comparable period of the previous year. The
unfavorable impact of foreign currency translation added approximately 2 percent points of the
increase. As a percentage of net sales, SD&A expenses decreased to 30.4 percent in the first nine
months of 2007, compared to 31.2 percent in the prior year first nine months.
In the U.S., SD&A expenses increased $27.6 million, or 3.6 percent, to $793.2 million in the
first nine months of 2007, compared to $765.6 million in the prior year first nine months. As a
percentage of net sales, SD&A expenses were 30.8 in the first nine months of 2007 compared to 31.1
percent in the prior year first nine months. SD&A expenses increased in the first nine months of
2007 due to higher compensation and benefit costs. Additionally, SD&A expenses in the first nine
months of 2007 included $5.4 million in both realized and unrealized gains in the fair value of
derivative financial instruments. These instruments are used to manage the risks associated with
the variability in the market price for forecasted purchases of diesel fuel. Comparisons between
periods were impacted by various items in the first nine months of 2006, including a $3.7 million
benefit recorded as a result of a change in our estimate of healthcare costs and a $9.0 million
benefit from lower medical costs, partly offset by a fixed asset charge of $6.5 million for
marketing and merchandising equipment.
In Central Europe, SD&A expenses increased $60.6 million, or 51.0 percent, to $179.4 million
from $118.8 million in the prior year first nine months. Acquisitions contributed approximately 28
percentage points of this increase. The remainder of the increase was due to the unfavorable
impact of foreign currency translation, volume growth and higher advertising and marketing
expenses. As a percentage of net sales, SD&A expenses decreased to 30.5 percent. This was
primarily due to the lower overall operating costs in Romania, which were lower than the other
markets in Central Europe.
In the Caribbean, SD&A expenses increased $0.8 million, or 1.8 percent, to $44.9 million in
the first nine months of 2007 from $44.1 million in the prior year first nine months. SD&A expense
as a percentage of net sales in the first nine months of 2007 was essentially flat compared to the
prior year.
Special Charges
In the first nine months of 2007, we recorded special charges of $3.9 million in the U.S.
related to the strategic realignment of our U.S. sales organization to further strengthen our
customer focused go-to-market strategy. In addition, we recorded special charges of $0.2 million
in Central Europe. These special charges were primarily for severance, related benefits and
relocation costs. In the first nine months of 2006, we recorded special charges of $2.2 million in
Central Europe primarily related to a reduction in the workforce. These special charges were
primarily for severance costs and related benefits.
28
Operating Income
Operating income for the first nine months of 2007 and 2006 was as follows (dollar amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
|
Change |
|
U.S. |
|
$ |
265.0 |
|
|
$ |
263.7 |
|
|
|
0.5 |
% |
Central Europe |
|
|
76.9 |
|
|
|
14.7 |
|
|
|
423.1 |
% |
Caribbean |
|
|
1.7 |
|
|
|
1.8 |
|
|
|
(5.6 |
%) |
|
|
|
|
|
|
|
|
|
|
|
Worldwide |
|
$ |
343.6 |
|
|
$ |
280.2 |
|
|
|
22.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
Operating income increased $63.4 million, or 22.6 percent, to $343.6 million in the first nine
months of 2007, compared to $280.2 million in the first nine months of 2006. The favorable impact
of foreign currency transaction added approximately 5 percentage points to the growth in worldwide
operating income.
Operating income in the U.S. increased $1.3 million to $265.0 million in the first nine months
of 2007. The increase was due to higher net pricing partly offset by volume declines, higher cost
of goods sold, higher SD&A expenses and special charges.
Operating income in Central Europe increased $62.2 million to $76.9 million in the first nine
months of 2007, compared to an operating income of $14.7 million in the prior year first nine
months. This was primarily due to acquisitions, which contributed over half of this growth. The
remainder of the growth was primarily due to operating income growth in Romanias constant
territory comparisons, volume growth, increases in net pricing and the beneficial impact of foreign
currency translation, which contributed approximately 25 percentage points of operating income
growth.
Operating income in the Caribbean decreased $0.1 million to $1.7 million in the first nine
months of 2007. The decline in operating income was caused by the soft economic environment in
Puerto Rico which was partly offset by operating income growth in Jamaica.
Interest Expense and Other Expenses
Net interest expense increased $4.6 million in the first nine months of 2007 to $79.1 million,
compared to $74.5 million in the first nine months of 2006, due primarily to higher interest rates
on floating rate debt and higher overall debt levels related to our acquisitions, partly offset by
lower interest expense related to our securitization program.
We recorded other income, net, of $1.4 million in the first nine months of 2007 compared to
other expense, net, of $4.1 million reported in the first nine months of 2006. The change in other
(expense) income, net, was due primarily to a $10.2 million gain on the sale of non-core property
and foreign currency transaction gains of $1.1 million recorded in the first nine months of 2007.
These items were partly offset by the $4.0 million other-than-temporary impairment loss related to
a marketable security investment.
Income Taxes
The effective income tax rate, which is income tax expense expressed as a percentage of income
before income taxes, minority interest and equity in net earnings of nonconsolidated companies, was
35.1 percent for the first nine months of 2007, compared to 37.3 percent in the first nine months
of 2006. The effective tax rate decreased from the prior year due, in part, to the mix of
international results and associated lower in-country tax rates. Results in the first nine months
of 2007 contain nine months of results for Romania compared to two months in the prior year. The
effective income tax rate was also favorably impacted by a reorganization of the legal entity
structure in Central Europe in the second quarter of 2007.
Equity in Net Earnings of Nonconsolidated Companies
In the second quarter of 2005, we acquired a 49 percent minority interest in a Romanian
entity, QABCL. Equity in net earnings of nonconsolidated companies was $5.6 million in the first
nine months of 2006. With the acquisition of the remaining 51 percent, we began fully
consolidating its results during the third quarter of 2006.
29
Loss on Discontinued Operations
In the first nine months of 2007, we recorded a charge of $2.1 million, net of taxes, related
to revised estimates for environmental remediation, legal and related administrative costs.
Net Income
Net income increased $37.9 million to $170.1 million in the first nine months of 2007,
compared to $132.2 million in the first nine months of 2006. The discussion of our operating
results, included above, explains the increase in net income.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Net cash provided by operating activities increased by $101.5 million
to $328.5 million in the first nine months of 2007, compared to $227.0 million in the first nine
months of 2006. This increase can mainly be attributed to higher net income and the favorable
year-over-year benefit from changes in primary working capital. The benefit in changes in primary
working capital was due to improvements in cash flows from all components of primary working
capital, which includes accounts receivable, inventory and accounts payable.
Investing Activities. Investing activities in the first nine months of 2007 included capital
investments of $143.3 million, which were $15.6 million higher than the prior year period primarily
due higher capital spending on machinery, and equipment and marketing equipment in the U.S. and
Central Europe.
Proceeds from the sale of property in the first nine months of 2007 were $27.8 million
compared to $6.8 million in the first nine months of 2006. In the first nine months of 2007, we
received proceeds of $20.7 million related to the sale of non-core property, which consisted of
railcars and locomotives.
In the third quarter of 2007, a PepsiAmericas and PepsiCo joint venture acquired an 80 percent
interest in Sandora. Under the terms of the joint venture agreement, we hold a 60 percent interest
and PepsiCo holds a 40 percent interest in the joint venture. The total purchase price of $543.9
million was net of cash received of $3.0 million, of which we funded 60 percent. Cash received by
our joint venture of $216.8 million from PepsiCo was reflected in financing activities.
Additionally, we acquired $72.5 million of debt as part of the acquisition, of which $52.7 million
was classified in Long-term debt in the Condensed Consolidated Balance Sheet. The joint venture
expects to exercise its option to acquire the remaining 20 percent interest in November 2007 for
$135.5 million.
In the third quarter of 2007, we purchased a 20 percent interest in a joint venture, which
owns Agrima JSC (Agrima). Agrima produces, sells and distributes PepsiCo branded products and
other beverages throughout Bulgaria.
Financing
Activities. Our total debt increased $330.5 million to
$2,033.6 million at the end
of the third quarter of 2007, from $1,703.1 million at the end of fiscal year 2006. The increase
in commercial paper borrowings described below was primarily for capital expenditures and general
corporate purposes. In the first nine months of 2007, we paid $11.6 million at maturity of the
8.25 percent note due February 2007 and $27.3 million at maturity of the 3.875 note due September
2007.
In July 2007, we issued $300 million of notes with a coupon rate of 5.75 percent due July
2012. The securities are unsecured, senior debt obligations and rank equally with all other
unsecured and unsubordinated indebtedness. Net proceeds from this transaction were $297.2 million,
which reflected the discount reduction of $0.8 million and the debt issuance costs of $2.0 million.
The net proceeds from the issuance of the notes were used to fund the acquisition of Sandora, to
repay commercial paper and for other general corporate purposes. In the first nine months of 2007,
we also borrowed $1.0 million in long-term debt in the Bahamas.
We utilize revolving credit facilities both in the U.S. and in our international operations to
fund short-term financing needs, primarily for working capital. In the U.S., we have an unsecured
revolving credit facility under which we can borrow up to an aggregate of $600 million. The
facility is for general corporate purposes, including commercial paper backstop. It is our policy
to maintain a committed bank facility as backup financing for our commercial paper program.
Accordingly, we have a total of $600 million available under our commercial paper program and
revolving credit facility combined. We had $172.5 million of commercial paper borrowings at the
end of the first nine months of 2007, compared to $164.5 million at the end of fiscal year 2006.
Internationally, excluding Sandora, we had revolving credit facility borrowings of $4.0 million at
the end of the third quarter of 2007
compared to $9.2 million at the end of fiscal year 2006. We
acquired $15.9 million of short-term
debt associated with Sandora, of which $4.2 million was paid during the third quarter of 2007.
30
During the first nine months of 2007 and 2006, we repurchased 2.7 million and 6.3 million
shares, respectively, of our common stock for $59.4 million and $150.7 million, respectively. The
issuance of common stock, including treasury shares, for the exercise of stock options resulted in
cash inflows of $48.2 million in the first nine months of 2007, compared to $23.0 million in the
first nine months of 2006.
Our Board of Directors declared a quarterly dividend of $0.13 per share on PepsiAmericas
common stock for the first, second and third quarters of 2007. The third quarter dividend was
payable October 1, 2007 to shareholders of record on
September 14, 2007. In the first nine months of 2007, we paid cash dividends of
$48.6 million, which included the fourth quarter of 2006 dividend of $15.9 million. The fourth
quarter of 2006 and first and second quarter of 2007 dividends were based on a dividend rate of
$0.125 and $0.13 per share, respectively. In the first nine months of 2006, we paid cash dividends of
$43.3 million, which included the fourth quarter 2005 dividend of $11.2 million. The fourth quarter
of 2005 and first and second quarter of 2006 dividends were based on a dividend rate of $0.085 and
$0.125 per share, respectively.
See the Annual Report on Form 10-K for fiscal year 2006 for a summary of our contractual
obligations as of the end of fiscal year 2006. There were no significant changes to such
contractual obligations in the first nine months of 2007. We believe that our operating cash flows
are sufficient to fund our existing operations and contractual obligations for the foreseeable
future. In addition, we believe that our operating cash flows, available lines of credit, and the
potential for additional debt and equity offerings will provide sufficient resources to fund our
future growth and expansion. There are a number of options available to us and we continue to
examine the optimal uses of our cash, including reinvesting in our existing business, repurchasing
our stock and acquisitions with an appropriate economic return.
Discontinued operations. We continue to be subject to certain indemnification obligations,
net of insurance, under agreements related to previously sold subsidiaries, including
indemnification expenses for potential environmental and tort liabilities of these former
subsidiaries. There is significant uncertainty in assessing our potential expenses for complying
with our indemnification obligations, as the determination of such amounts is subject to various
factors, including possible insurance recoveries and the allocation of liabilities among other
potentially responsible and financially viable parties. Accordingly, the ultimate settlement and
timing of cash requirements related to such indemnification obligations may vary significantly from
the estimates included in our financial statements. At the end of the third quarter of 2007, we
had recorded $44.9 million in liabilities for future remediation and other related costs arising
out of our indemnification obligations. This amount excludes possible insurance recoveries and is
determined on an undiscounted cash flow basis. In addition, we have funded coverage pursuant to an
insurance policy (the Finite Funding) purchased in fiscal year 2002, which reduces the cash
required to be paid by us for certain environmental sites pursuant to our indemnification
obligations. The Finite Funding amount recorded was $11.9 million at the end of the third quarter
of 2007, of which approximately $4 million is expected to be recovered in the next 12 months based
on our expenditures, and thus, is included as a current asset.
During the first nine months of 2007 and 2006, we paid, net of taxes, approximately $7.5
million and $11.5 million, respectively, related to such indemnification obligations, including the
offsetting benefit of insurance recovery settlements of $4.6 million and $5.7 million,
respectively, on an after-tax basis. We expect to spend approximately $25 million on a pre-tax
basis in fiscal year 2007 for remediation and other related costs, excluding possible insurance
recoveries and the benefit of income taxes (see Note 13 to the Condensed Consolidated Financial
Statements for further discussion of discontinued operations and related environmental
liabilities).
RELATED PARTY TRANSACTIONS
We are a licensed producer and distributor of Pepsi branded carbonated and non-carbonated soft
drinks and other non-alcoholic beverages in the U.S., Central Europe and the Caribbean. We operate
under exclusive franchise agreements with soft drink concentrate producers, including master
bottling and fountain syrup agreements with PepsiCo, Inc. for the manufacture, packaging, sale and
distribution of Pepsi branded products. The franchise agreements exist in perpetuity and contain
operating and marketing commitments and conditions for termination. As of the end of the first nine
months of 2007, PepsiCo beneficially owned approximately 44 percent of PepsiAmericas outstanding
common stock.
31
We purchase concentrate from PepsiCo to be used in the production of PepsiCo branded
carbonated soft drinks and other non-alcoholic beverages. PepsiCo also provides us with various
forms of bottler incentives (marketing support programs) to promote Pepsis brands. These bottler incentives cover a
variety of initiatives, including direct marketplace, shared media and advertising, to support
volume and market share growth. There are no conditions or requirements that could result in the
repayment of any support payments we have received.
We manufacture and distribute fountain products and provide fountain equipment service to
PepsiCo customers in certain territories in accordance with various agreements. There are other
products that we produce and/or distribute through various arrangements with PepsiCo or partners of
PepsiCo. We also purchase finished beverage products from PepsiCo and certain of its affiliates
including tea, concentrate and finished beverage products from a Pepsi/Lipton partnership, as well
as finished beverage products from a Pepsi/Starbucks partnership.
PepsiCo provides various procurement services under a shared services agreement. Under such
agreement, PepsiCo negotiates with various suppliers the cost of certain raw materials by entering
into raw material contracts on our behalf. PepsiCo also collects and remits to us certain rebates
from the various suppliers related to our procurement volume. In addition, PepsiCo acts as our
agent in the execution of derivative contracts associated with certain anticipated raw material
purchases.
We have an existing arrangement with a subsidiary of Pohlad Companies related to the joint
ownership of an aircraft. This transaction is not material to our Condensed Consolidated Financial
Statements. Robert C. Pohlad, our Chairman and Chief Executive Officer, is the President and owner
of approximately 33 percent of the capital stock of Pohlad Companies.
See additional discussion of our related party transactions in our Annual Report on Form 10-K
for the fiscal year 2006.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to various market risks, including risks from changes in commodity prices,
interest rates and currency exchange rates, which are addressed below. In addition, please see
Note 9 to the Condensed Consolidated Financial Statements.
Commodity Prices
We purchase commodity inputs such as aluminum for our cans, resin for our polyethylene
terephthalate (PET) bottles, natural gas, diesel fuel, unleaded gasoline, high fructose corn
syrup, and sugar to be used in our operations. These commodities are subject to price fluctuations
that may create price risk. Our ability to recover higher product costs through price increases to
customers may be limited due to the competitive pricing environment that exists in the soft drink
business. We use derivative financial instruments to hedge price fluctuations for a portion of
anticipated purchases of certain commodities used in our operations. We have policies governing
the hedging instruments we may use, including a policy to not enter into derivative contracts for
speculative or trading purposes.
At the end of the third quarter of 2007, we have economically hedged a portion of our
anticipated diesel fuel purchases through December 2007. The derivative instruments were not
designated as hedges for accounting purposes.
Interest Rates
In the first nine months of 2007, the risk from changes in interest rates was not material to
our operations because a significant portion of our debt issues represented fixed rate obligations.
At the end of the third quarter of 2007, approximately twenty percent of our debt issues were
variable rate obligations. Our floating rate exposure relates to changes in the six-month London
Interbank Offered Rate (LIBOR) rate and the federal funds rate. Assuming consistent levels of
floating rate debt with those held at the end of the third quarter of 2007, a 50 basis-point (0.5
percent) change in each of these rates would not have had a significant impact on our third quarter
and first nine months of 2007 interest expense. We had cash equivalents throughout the first nine
months of 2007, principally invested in money market funds, which were most closely tied to
overnight Federal Funds rates. Assuming a 50 basis-point change in the rate of interest associated
with our cash equivalents at the end of the third quarter 2007, interest income for the third
quarter and first nine months of 2007 would not have changed by a significant amount.
Currency Exchange Rates
Because we operate outside the U.S., we are subject to risk resulting from changes in currency
exchange rates. Currency exchange rates are influenced by a variety of economic factors including
local inflation, growth, interest rates and governmental actions, as well as other factors. Any
positive cash flows generated have been reinvested in operations, excluding repayments of
intercompany loans from the manufacturing operations in Poland and the Czech Republic. Our
investment in markets outside the U.S. has increased during the past several years and as such, our
exposure to currency risk has increased.
Based on net sales, non-U.S. operations represented approximately 26 percent and 23 percent of
our total operations in the third quarter and first nine months of 2007, respectively. Changes in
currency exchange rates impact the translation of the non-U.S. operations results from their local
currencies into U.S. dollars. If the currency exchange rates had changed by ten percent in the
third quarter and first nine months of 2007, we estimate the impact on reported operating income
for those periods would have been approximately $5 million and $10 million, respectively. Our
estimate reflects the fact that a portion of the non-U.S. operations costs are denominated in U.S.
dollars, including concentrate purchases. This estimate does not take into account the possibility
that rates can move in opposite directions and that gains in one category may or may not be offset
by losses from another category.
33
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that is designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that such
information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on this
evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of
September 29, 2007, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during
the quarter ended September 29, 2007 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
On August 20, 2007, a joint venture in which we hold a 60 percent interest completed the
purchase of 80 percent of Sandora, LLC (Sandora), and we are currently in the process of
integrating Sandora activities. The impact of the purchase of Sandora has not materially affected,
and is not reasonably likely to materially affect, our internal control over financial reporting.
However, as a result of our integration activities, controls will be periodically changed. We
believe we will be able to maintain sufficient controls over the substantive results of our
financial reporting throughout the integration process. In addition, we expect the scope of
managements assessment as of the end of our fiscal year to exclude the Sandora purchase, as
permitted under Frequently Asked Question No. 3 (September 24, 2007) regarding Release No.
34-47986, Managements Report on Internal Control Over Financial Reporting and Certification of
Disclosure in Exchange Act Periodic Reports (June 5, 2003).
34
PART II OTHER INFORMATION
Item 1. Legal Proceedings
No new material legal proceedings and no material changes to previously reported legal
proceedings to be reported for the third quarter of 2007.
Item 1A. Risk Factors
There have been no material changes with respect to the risk factors disclosed in Item 1A. of
our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
|
(c) |
|
Our share repurchase program activity for each of the three months and the quarter
ended September 29, 2007 was as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Total Number of |
|
Maximum Number |
|
|
Number of |
|
Shares Purchased |
|
of Shares that May |
|
|
Shares |
|
as Part of Publicly |
|
Yet Be Purchased |
|
|
Purchased |
|
Announced Plans |
|
Under the Plans or |
Period |
|
(1) |
|
or Programs (2) |
|
Programs (3) |
July 1 July 28, 2007
|
|
|
|
|
32,840,500 |
|
|
|
7,159,500 |
|
July 29 August 25, 2007
|
|
|
|
|
32,840,500 |
|
|
|
7,159,500 |
|
August 26 September 29, 2007
|
|
|
|
|
32,840,500 |
|
|
|
7,159,500 |
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended Sept. 29, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents shares purchased in open-market transactions pursuant to our
publicly announced repurchase program. |
|
(2) |
|
Represents cumulative shares purchased under previously announced share
repurchase authorizations by the Board of Directors. Share repurchases began in 1999
under an authorization for 15 million shares announced on November 19, 1999. These
amounts are not included in the table above. On December 19, 2002, the Board of
Directors authorized the repurchase of 20 million additional shares. The Board of
Directors later authorized the repurchase of 20 million additional shares as
announced on July 21, 2005. Share repurchase activity for the
last two authorizations is included in the table
above. |
|
(3) |
|
As noted above, on July 21, 2005 we announced that our Board of Directors
authorized the repurchase of 20 million additional shares under a previously
authorized repurchase program. This repurchase authorization does not have a
scheduled expiration date. |
Item 5. Other Information
|
(a) |
|
Item 8.01. Other Events. On October 25, 2007, our Board of Directors declared a
dividend of $0.13 per share on PepsiAmericas common stock. The dividend is payable January
2, 2008 to shareholders of record on December 14, 2007. Our Board of Directors reviews the
dividend policy on a quarterly basis. |
Item 6. Exhibits
See Exhibit Index.
35
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.
|
|
Dated: November 1, 2007 |
By: |
/s/ ALEXANDER H. WARE
|
|
|
|
Alexander H. Ware |
|
|
|
Executive Vice President and Chief
Financial Officer
(As Principal Financial Officer,
Chief
Accounting Officer and Duly Authorized Officer
of PepsiAmericas, Inc.) |
|
36
EXHIBIT INDEX
|
|
|
3.1
|
|
Restated Certificate of Incorporation (incorporated by reference to the Companys Registration Statement on Form S-8 (File No. 333-64292) filed on June 29, 2001). |
|
|
|
3.2
|
|
By-Laws, as amended and restated on December 14, 2006 (incorporated by reference to the Companys Current Report on Form 8-K (File No. 001-15019) filed on December 18, 2006). |
|
|
|
4.1
|
|
Form of 5.75% Note due 2012 (incorporated by reference to the Companys Current Report on Form 8-K (File No. 001-15019) filed on July 12, 2007). |
|
|
|
10.1
|
|
Shareholder Agreement between PAS Luxembourg s.a.r.l. and Linkbay Limited (PepsiCo Cyprus) and Sandora Holdings, B.V. dated as of August 14, 2007. |
|
|
|
10.2
|
|
Amended and Restated Stock Purchase Agreement by and among PepsiAmericas, Inc., PepsiCo, Inc., Igor Yevgenovych Bezzub, and Raimondas Tumenas dated as of August 17, 2007. |
|
|
|
10.3
|
|
Amended and Restated Stock Purchase Agreement by and among PepsiAmericas, Inc., PepsiCo, Sergiy Oleksandrovych Sypko, Olena Mykhailivna Sypko, Oleksiy Sergiyovich Sypko and Andriy Serviyovich Sypko dated as of August 17, 2007. |
|
|
|
10.4
|
|
Underwriting Agreement by and among PepsiAmericas, Inc., Citigroup Global Markets Inc. and Morgan Stanley & Co. Incorporated, as representatives of the several underwriters, dated July 11, 2007 (incorporated by reference to the Companys Current Report on Form 8-K (File No. 001-15019) filed on July 12, 2007). |
|
|
|
31.1
|
|
Chief Executive Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Chief Financial Officer Certification pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
37