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| PAS > SEC Filings for PAS > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
During the third quarter of 2009, we completed an impairment testing of our
Sandora and Sadochok trademark and tradenames. As a result of this testing, we
recorded a $17.4 million non-cash impairment charge ($7.9 million after taxes
and noncontrolling interests) based upon the findings of a strategic review of
our Ukraine business. In light of weakening macroeconomic conditions, we lowered
our expectations of the future performance, which reduced the value of these
indefinite life intangible assets. The fair value of our Sandora and Sadochock
brands was estimated using a multi-period royalty savings method, which reflects
the savings realized by owning the brands and, therefore, not having to pay a
royalty fee to a third party.
Environmental Liabilities. We continue to be subject to certain
indemnification obligations under agreements related to previously sold
subsidiaries, including potential environmental liabilities (see Note 15 to the
Condensed Consolidated Financial Statements). We have recorded our best estimate
of our probable liability under those indemnification obligations. 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 liability among other potentially responsible parties, the
advancement of technology for means of remediation, possible changes in the
scope of work at the contaminated sites, as well as possible changes in related
laws, regulations, and agency requirements. We do not discount environmental
liabilities.
Income Taxes. Our effective income tax rate is based on income, statutory
tax rates and tax planning opportunities available to us in the various
jurisdictions in which we operate. We have established valuation allowances
against a portion of the foreign net operating losses and state-related net
operating losses to reflect the uncertainty of our ability to fully utilize
these benefits given the limited carryforward periods permitted by the various
jurisdictions. The evaluation of the realizability of our net operating losses
requires the use of considerable management judgment to estimate the future
taxable income for the various jurisdictions, for which the ultimate amounts and
timing of such realization may differ. The valuation allowance can also be
impacted by changes in tax regulations.
Significant judgment is required in determining our uncertain tax
positions. We have established accruals for uncertain tax positions using
management's best judgment and adjust these liabilities as warranted by changing
facts and circumstances. A change in our uncertain tax positions in any given
period could have a significant impact on our results of operations and cash
flows for that period.
The effective income tax rate, which is income tax expense expressed as a
percentage of income from continuing operations before income taxes and equity
in net (earnings) loss of nonconsolidated companies, was 36.6 percent in the
first nine months of 2009 compared to 29.6 percent in the first nine months of
2008. The higher tax rate was due primarily to the impact of the deconsolidation
of our Caribbean business and a change in the geographic mix of earnings and the
associated varying statutory tax rates.
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 on a
quarterly 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.
Pension and Postretirement Benefits. Our pension and other postretirement
benefit obligations and related costs are calculated using actuarial
assumptions. Two critical assumptions, the discount rate and the expected return
on plan assets, are important elements of plan expense and liability
measurement. We evaluate these critical assumptions annually. Other assumptions
involve demographic factors such as retirement, mortality, turnover, health care
cost trends and rate of compensation increases.
The discount rate is used to calculate the present value of expected future
pension and postretirement cash flows as of the measurement date. We use
high-quality, long-term bond rates as a guideline for establishing this rate. A
lower discount rate increases the present value of benefit obligations and
increases pension expense. The expected long-term rate of return on plan assets
is based on current and expected asset allocations, as well as historical and
expected returns on various categories of plan assets. A lower-than-expected
rate of return on pension plan assets will increase pension expense.
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We manufacture, distribute, and market a broad portfolio of beverage
products primarily in the U.S. and Central and Eastern Europe ("CEE"). 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 Sandora, Sadochok and Toma. We also distribute snack foods in certain
markets. We serve a significant portion of 19 states throughout the central
region of the U.S. In CEE, we serve Ukraine, Poland, Romania, Hungary, the Czech
Republic, and Slovakia, with distribution rights in Moldova, Estonia, Latvia and
Lithuania. In addition, we have an equity investment in Agrima, which produces,
sells and distributes PepsiCo products and other beverages in Bulgaria.
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the unaudited Condensed
Consolidated Financial Statements and accompanying Notes in this Quarterly
Report on Form 10-Q and our Current Report on Form 8-K dated September 18, 2009.
In the first six months of 2009, we manufactured and distributed beverage
products in the Caribbean, including Puerto Rico, Jamaica and Trinidad and
Tobago, with distribution rights in the Bahamas and Barbados. On July 3, 2009,
we formed a strategic joint venture with The Central America Beverage
Corporation ("CABCORP") to combine our Caribbean operations, excluding the
Bahamas, with CABCORP's Central American operations, including Guatemala,
Honduras, El Salvador and Nicaragua. We own an 18 percent interest in the
CABCORP joint venture.
In the discussion of our results of operations below, the number of bottle
and can cases sold is referred to as volume. 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),
foodservice and export sales. Changes in net pricing include the impact of sales
price (or rate) changes, as well as the impact of foreign currency and brand,
package and geographic mix. Net pricing and reported volume amounts exclude
contract, commissary, and vending (other than bottles and cans) transactions.
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 snack food products.
Cost of goods sold per unit is the cost of goods sold for our core businesses,
excluding the impact of unrealized gains on derivatives not designated as
hedging instruments, divided by the related number of cases and gallons sold.
Changes in cost of goods sold per unit include the impact of cost changes, as
well as the impact of foreign currency and brand, package and geographic mix.
Financial Results
Net income attributable to PepsiAmericas, Inc. in the third quarter of 2009
was $63.5 million, or $0.51 per diluted common share, compared to $73.1 million,
or $0.58 per diluted common share, in the third quarter of 2008. Net income
attributable to PepsiAmericas, Inc. in the first nine months of 2009 was
$146.6 million, or $1.18 per diluted common share, compared to $188.6 million or
$1.48 per diluted common share, in the first nine months of 2008. In the third
quarter and first nine months of 2009, worldwide volume declined 13.1 percent
and 7.9 percent, respectively. Net pricing on a worldwide basis decreased
2.3 percent and 1.2 percent for the third quarter and first nine months of 2009,
respectively, and cost of goods sold per unit decreased 2.7 percent and
1.9 percent for the third quarter and first nine months of 2009, respectively.
Both measures were significantly impacted by foreign currency exchange rates.
The impact of foreign currency movements reduced earnings per diluted common
share by $0.31 in the third quarter of 2009 and $0.71 in the first nine months
of 2009. The deconsolidation of our Caribbean business reduced earnings per
diluted common share by $0.19 in the first nine months of 2009.
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
year's operating results.
Items Impacting Comparability
Special Charges
In the third quarter and first nine months of 2009, we recorded special
charges of $0.1 million and $8.4 million, respectively. In the third quarter and
first nine months of 2009, we recorded $0.1 million and $7.0 million,
respectively, of special charges in CEE related to the restructuring of our
Hungary operations, primarily for severance and fixed asset impairments. In the
first nine months of 2009, we recorded $1.4 million of special charges, net of
recoveries in the Caribbean and the U.S. related to restructuring and severance
costs.
In the third quarter and first nine months of 2008, we recorded special
charges of $7.1 million and $7.7 million, respectively. We recorded $5.9 million
of special charges in the Caribbean in the third quarter of 2008, which
consisted of a $2.9 million impairment charge related to a franchise right
intangible asset with an indefinite life and a $3.0 million impairment of fixed
assets. In the third quarter of 2008, we recorded $0.6 million in CEE related to
severance, leasehold improvement asset write-offs and lease termination
payments. In the third quarter and first nine months of 2008, we recorded
$0.6 million and $1.2 million, respectively, in the U.S. related to our
previously announced strategic realignment of the U.S. sales organization,
primarily for relocation costs.
Loss from Deconsolidation of Business
On July 3, 2009, we formed a strategic joint venture with CABCORP to
combine PepsiAmericas' Caribbean operations, excluding the Bahamas, with
CABCORP's Central American operations. Upon execution of the joint venture
agreement, we deconsolidated our Caribbean business resulting in a non-cash loss
of $25.8 million. This loss included the recognition of deferred losses
associated with cumulative translation adjustments of $19.2 million and
unrecognized pension losses of $6.5 million, which were previously included in
accumulated other comprehensive loss.
Beginning in the third quarter of 2009, earnings from the strategic joint
venture with CABCORP were recorded in "Equity in net (earnings) loss of
nonconsolidated companies" on the Condensed Consolidated Statements of Income
and operating results for the Bahamas are included in our U.S. geographic
segment. Due to the timing of the receipt of available financial information, we
record equity in net earnings from the joint venture on a one-month lag basis.
Unrealized Losses (Gains) on Derivatives
Unrealized losses (gains) on derivatives consist of the change in market
value of derivative instruments that were not designated as hedging instruments.
These derivative instruments are used to manage the risks associated with the
variability in the market price for forecasted purchases of certain commodities.
As a result of the subsequent change in the price of certain commodities, we
recognized this mark-to-market impact during the first nine months of the year
which will reverse out over the balance of the year as the forecasted purchases
occur.
In the third quarter of 2009, we recorded $0.6 million of unrealized gains
on derivatives in the U.S. related to commodity contracts; $1.2 million of
unrealized gains were recorded in cost of goods sold and $0.6 million of
unrealized losses were recorded in selling, delivery and administrative ("SD&A")
expenses. In the first nine months of 2009, we recorded $2.5 million of
unrealized gains on derivatives in the U.S. related to commodity contracts;
$2.2 million was recorded in cost of goods sold and $0.3 million was recorded in
SD&A expenses. In the third quarter of 2008, we recorded $0.7 million of
unrealized losses in SD&A expenses in the U.S. related to commodity contracts.
In the first nine months of 2008, we recorded $0.1 million of unrealized gains
on derivatives in cost of goods sold and $0.7 million of unrealized losses on
derivatives in SD&A expenses.
PepsiCo Merger Fees
On August 4, 2009, we announced that we entered into a merger agreement
with PepsiCo, whereby PepsiAmericas will be merged with and into a wholly owned
subsidiary of PepsiCo, subject to regulatory and shareholder approval. In the
third quarter and first nine months of 2009, we recorded $1.8 million and
$4.0 million, respectively, of fees associated with the pending merger with
PepsiCo in SD&A expenses in the U.S. geographic segment. In connection with this
merger transaction, we have retained certain external advisors and expect to
incur aggregate fees in the range of $25 million to $30 million.
Marketable Securities Impairment
In the first nine months of 2009, we recorded an other-than-temporary loss
of $2.1 million to write-off our remaining investment in an equity security,
Northfield Laboratories, Inc., that was classified as available-for-sale. The
loss was recorded in other expense, net.
Non-operating Assets Impairment
In the first nine months of 2009, we recorded a $4.9 million write down of
non-operating assets in the U.S. The loss was recorded in SD&A expenses in the
U.S. geographic segment.
Intangible Assets Impairment
In the third quarter of 2009, we recorded a $17.4 million impairment charge
($7.9 million after taxes and noncontrolling interests) on our Sandora and
Sadochok brands. This non-cash charge resulted from our determination that the
carrying value of these indefinite life intangible assets exceeded their fair
value.
RESULTS OF OPERATIONS
2009 THIRD QUARTER COMPARED WITH 2008 THIRD QUARTER
The following is a discussion of our results of operations for the third
quarter of 2009 compared to the third quarter of 2008.
Volume
Sales volume growth (decline) for the third quarter of 2009 and 2008 was as
follows:
Volume 2009 2008
U.S. (8.9%) (2.4%)
CEE (9.3%) 38.2%
Caribbean (100.0%) (15.5%)
Worldwide (13.1%) 7.9%
2009 compared to 2008
Volume Change U.S. CEE Worldwide
Constant territory volume (8.9%) (9.3%) (9.0%)
Deconsolidation of Caribbean -- -- (4.1%)
Change in volume (8.9%) (9.3%) (13.1%)
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In the third quarter of 2009, worldwide volume declined 13.1 percent due to
the difficult economic environment, the quarterly shift of the Fourth of July
holiday into the second quarter of 2009 and the deconsolidation of the Caribbean
business.
Volume in the U.S. decreased 8.9 percent in the third quarter of 2009
compared to the third quarter of 2008. Carbonated soft drink volume decreased
8 percent compared to the prior year period as a result of the holiday calendar
shift, as well as unusually soft post-holiday take-home volume. Non-carbonated
soft drinks decreased 11 percent, which reflected the continued decline in the
low-margin Aquafina take home package and Trademark Lipton. Single serve volume
continued to grow in the retail channel while softness in the foodservice
channels, particularly third party operators and vending, drove overall single
serve declines in the quarter.
Volume in CEE declined 9.3 percent in the third quarter of 2009 compared to
the third quarter of 2008, as difficult economic conditions continued in our
emerging markets, particularly Romania. These challenges were partially offset
by double digit volume growth in Poland during the third quarter of 2009.
Net Sales
Net sales and net pricing statistics for the third quarter of 2009 and 2008
were as follows (dollar amounts in millions):
Net Sales 2009 2008 Change
U.S. $ 854.6 $ 882.7 (3.2%)
CEE 279.0 382.4 (27.0%)
Caribbean - 62.4 (100.0%)
Worldwide $ 1,133.6 $ 1,327.5 (14.6%)
2009 compared to 2008
Net Sales Change U.S. CEE Worldwide
Volume impact* (7.5%) (8.6%) (7.9%)
Net price per case, excluding impact of foreign currency 5.5% 6.5% 5.8%
Impact of foreign currency -- (23.6%) (7.1%)
Deconsolidation of Caribbean -- -- (4.4%)
Non-core (1.2%) (1.3%) (1.0%)
Change in net sales (3.2%) (27.0%) (14.6%)
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* The amounts in this table represent the dollar impact on net sales due to changes in volume and are not intended to equal the absolute change in volume.
Net Pricing Growth (Decline)** 2009 2008 U.S. 5.5% 3.6% CEE (19.5%) 18.4% Worldwide (2.3%) 5.5% |
** Includes the
impact from
deconsolidation
and foreign
currency on
core net sales.
Net sales decreased $193.9 million, or 14.6 percent, to $1,133.6 million in
the third quarter of 2009 compared to $1,327.5 million in the third quarter of
2008. The decrease was driven by the unfavorable impact of foreign currency,
which was responsible for 7.1 percentage points of decline, and lower volume in
both the U.S. and CEE. The deconsolidation of the Caribbean business reduced net
sales by 4.4 percentage points.
Net sales in the U.S. for the third quarter of 2009 decreased
$28.1 million, or 3.2 percent, to $854.6 million from $882.7 million in the
prior year third quarter. The decrease in net sales was mainly due to lower
volume partly offset by 5.5 percent growth in net pricing, driven mainly by rate
increases to cover higher raw material costs.
Net sales in CEE for the third quarter of 2009 decreased $103.4 million, or
27.0 percent, to $279.0 million from $382.4 million in the third quarter of
2008. Foreign currency contributed 23.6 percentage points of the decrease, with
the remaining decrease primarily attributed to lower volume. The decrease in net
sales was offset partly by an increase in net pricing of 6.5 percent on a
currency-neutral basis, driven by increases in rate to cover higher raw material
costs and, in part, transactional currency headwinds.
Cost of Goods Sold
Cost of goods sold and cost of goods sold per unit statistics for the third
quarter of 2009 and 2008 were as follows (dollar amounts in millions):
Cost of Goods Sold 2009 2008 Change
U.S. $ 496.5 $ 521.1 (4.7%)
CEE 169.6 217.7 (22.1%)
Caribbean - 46.5 (100.0%)
Worldwide $ 666.1 $ 785.3 (15.2%)
2009 compared to 2008
Cost of Goods Sold Change U.S. CEE Worldwide
Volume impact* (7.3 %) (8.4 %) (7.6 %)
Cost per case, excluding impact of foreign currency 4.4 % 0.7 % 3.3 %
Impact of foreign currency -- (13.4 %) (4.0 %)
Unrealized gains on derivatives (0.2 %) -- (0.2 %)
Deconsolidation of Caribbean -- -- (5.8 %)
Non-core (1.6 %) (1.0 %) (0.9 %)
. . .
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