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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 22, 2003 (12-weeks)
--------------------------
OR
- --- 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 333-80361-01
BOTTLING GROUP, LLC
-------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4042452
------------------------------ -------------------
(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
914-767-6000
------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Bottling Group, LLC
-------------------
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12-weeks ended March 22, 2003 and March 23, 2002 2
Condensed Consolidated Statements of Cash Flows -
12-weeks ended March 22, 2003 and March 23, 2002 3
Condensed Consolidated Balance Sheets -
March 22, 2003 and December 28, 2002 4
Notes to Condensed Consolidated Financial Statements 5-10
Independent Accountants' Review Report 11
Item 2. Management's Financial Review 12-14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 15
Item 4. Controls and Procedures 15
Part II Other Information 16-21
PART I - FINANCIAL INFORMATION
Item 1.
Bottling Group, LLC
Condensed Consolidated Statements of Operations
in millions, unaudited
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Net revenues........................................................... $1,874 $1,772
Cost of sales.......................................................... 927 942
----- -----
Gross profit........................................................... 947 830
Selling, delivery and administrative expenses.......................... 828 695
----- -----
Operating income....................................................... 119 135
Interest expense....................................................... 38 30
Interest income........................................................ 6 7
Other non-operating expenses, net...................................... 3 -
Minority interest...................................................... - 1
----- -----
Income before income taxes............................................. 84 111
Income tax expense..................................................... 8 4
----- -----
Income before cumulative effect of change in accounting principle...... 76 107
Cumulative effect of change in accounting principle, net of tax........ 6 -
----- ----
Net income............................................................. $ 70 $ 107
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
2
Bottling Group, LLC
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Cash Flows - Operations
Net income.................................................................. $ 70 $ 107
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 117 91
Amortization.............................................................. 2 2
Deferred income taxes..................................................... 3 2
Cumulative effect of change in accounting principle....................... 6 -
Other non-cash charges and credits, net................................... 38 50
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net................................................ 52 (21)
Inventories, net........................................................ (24) (9)
Prepaid expenses and other current assets............................... (49) 29
Accounts payable and other current liabilities.......................... (135) (67)
Income taxes payable.................................................... 27 -
----- -----
Net change in operating working capital .................................. (129) (68)
----- -----
Other, net.............................................................. (3) (8)
----- -----
Net Cash Provided by Operations.............................................. 104 176
----- -----
Cash Flows - Investments
Capital expenditures...................................................... (112) (110)
Acquisitions of bottlers.................................................. (82) (10)
Sale of property, plant and equipment..................................... 1 1
Notes receivable from PBG................................................. (52) (100)
----- -----
Net Cash Used for Investments................................................ (245) (219)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less............................. 33 (20)
----- -----
Net Cash Provided by (Used for) Financing................................... 33 (20)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents................ (1) -
----- -----
Net Decrease in Cash and Cash Equivalents................................... (109) (63)
Cash and Cash Equivalents - Beginning of Period............................. 202 262
----- -----
Cash and Cash Equivalents - End of Period................................... $ 93 $ 199
===== =====
Supplemental Cash Flow Information
Non-cash owner contribution................................................. $ - $ 24
===== =====
Net third-party interest paid............................................... $ 41 $ 60
===== =====
Net taxes paid.................................................................. $ 10 $ 10
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
3
Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
(Unaudited)
March December
22, 2003 28, 2002
-------- --------
Assets
Current Assets
Cash and cash equivalents................................................ $ 93 $ 202
Accounts receivable, less allowance of $72 at
March 22, 2003 and $67 at December 28, 2002........................ 880 922
Inventories.............................................................. 397 378
Prepaid expenses and other current assets................................ 166 161
------ ------
Total Current Assets............................................. 1,536 1,663
Property, plant and equipment, net......................................... 3,300 3,308
Intangible assets, net..................................................... 4,727 4,687
Notes receivable from PBG.................................................. 1,006 954
Investment in debt defeasance trust........................................ 171 170
Other assets............................................................... 120 125
------ ------
Total Assets.................................................... $10,860 $10,907
====== ======
Liabilities and Owners' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $ 986 $ 1,138
Short-term borrowings.................................................... 82 51
Current maturities of long-term debt..................................... 1,014 16
------ ------
Total Current Liabilities........................................ 2,082 1,205
Long-term debt............................................................. 2,532 3,535
Other liabilities.......................................................... 640 621
Deferred income taxes...................................................... 361 360
------ ------
Total Liabilities................................................ 5,615 5,721
Owners' Equity
Owners' net investment................................................... 5,859 5,782
Deferred compensation.................................................... (5) -
Accumulated other comprehensive loss..................................... (609) (596)
------ ------
Total Owners' Equity.............................................. 5,245 5,186
------ ------
Total Liabilities and Owners' Equity............................. $10,860 $10,907
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
4
Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions
- --------------------------------------------------------------------------------
Note 1 - Basis of Presentation
Bottling Group, LLC (collectively referred to as "Bottling LLC," "the
Company," "we," "our" and "us") is the principles operating subsidiary of The
Pepsi Bottling Group, Inc. ("PBG") and consists of substantially all of the
operations and assets of PBG. Bottling LLC, which is consolidated by PBG,
consists of bottling operations located in the United States, Mexico, Canada,
Spain, Greece, Russia, and Turkey.
In conjunction with PBG's initial public offering in 1999, PBG and PepsiCo,
Inc. ("PepsiCo") contributed bottling businesses and assets used in the bottling
businesses to Bottling LLC. As a result of the contribution of these assets, PBG
owns 93.2% of Bottling LLC and PepsiCo owns the remaining 6.8% at March 22,
2003.
The accompanying Condensed Consolidated Balance Sheet at March 22, 2003 and
the Condensed Consolidated Statements of Operations and Cash Flows for the
12-weeks ended March 22, 2003 and March 23, 2002 have not been audited, but have
been prepared in conformity with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. These Condensed Consolidated
Financial Statements should be read in conjunction with the audited consolidated
financial statements for the fiscal year ended December 28, 2002 as presented in
our Annual Report on Form 10-K. In the opinion of management, this interim
information includes all material adjustments, which are of a normal and
recurring nature, necessary for a fair presentation.
Beginning in 2003, Russia is no longer considered highly inflationary, and
as a result, changed its functional currency from the U.S. dollar to the Russian
ruble. There was no material impact on our consolidated financial statements as
a result of Russia's change in functional currency in 2003.
Our U.S. and Canadian operations report using a fiscal year that consists
of 52 weeks, ending on the last Saturday in December. Every five or six years a
53rd week is added. Our remaining countries report using a calendar year basis.
For the first quarter, our U.S. and Canadian operating results consisted of a
twelve-week period, while our operating results for our remaining countries
consisted of the months of January and February.
Certain reclassifications were made in our Condensed Consolidated Financial
Statements to 2002 amounts to conform to the 2003 presentation.
Note 2 - Seasonality of Business
The results for the first quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not
significantly impacted by business seasonality.
Note 3 - Inventories
March December
22, 2003 28, 2002
-------- --------
Raw materials and supplies................................ $153 $162
Finished goods............................................ 244 216
--- ---
$397 $378
=== ===
5
Note 4 - Property, plant and equipment, net
March December
22, 2003 28, 2002
-------- --------
Land................................................................... $ 228 $ 228
Buildings and improvements............................................. 1,128 1,126
Manufacturing and distribution equipment............................... 2,817 2,768
Marketing equipment.................................................... 2,036 2,008
Other.................................................................. 154 154
------ ------
6,363 6,284
Accumulated depreciation............................................... (3,063) (2,976)
------ ------
$ 3,300 $ 3,308
====== ======
Note 5 - Intangible assets, net
March December
22, 2003 28, 2002
-------- --------
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights.................................................... $ 22 $ 20
Other identifiable intangibles...................................... 25 24
------ ------
47 44
------ ------
Accumulated amortization:
Franchise rights.................................................... (6) (6)
Other identifiable intangibles...................................... (11) (9)
------ ------
(17) (15)
------ ------
Intangibles subject to amortization, net............................ 30 29
------ ------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights.................................................... 3,441 3,424
Goodwill............................................................ 1,214 1,192
Other identifiable intangibles...................................... 42 42
------ ------
Intangibles not subject to amortization............................. 4,697 4,658
------ ------
Total intangible assets, net........................................... $ 4,727 $ 4,687
====== ======
Total intangible assets increased by $40 million due to purchase price
allocations relating to our recent acquisitions of $68 million, offset by a
negative impact from currency translation adjustments of $26 million and
amortization of intangible assets of $2 million.
For intangible assets subject to amortization, we calculate amortization
expense on a straight-line basis over the period we expect to receive economic
benefit. Total amortization expense was $2 million for the twelve-weeks ended
March 22, 2003 and March 23, 2002. The weighted-average amortization period for
each category of intangible assets and their estimated aggregate amortization
expense expected to be recognized over the next five years are as follows:
Weighted-Average Estimated Aggregate Amortization Expense to be Incurred
---------------- -------------------------------------------------------
Amortization
------------
Period
------
Balance of Fiscal Year Ending
---------- ------------------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Franchise rights...................... 5 years $3 $4 $4 $2 $1
Other identifiable intangibles........ 7 years $3 $4 $3 $2 $1
6
Note 6 - Acquisitions
During 2003 we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from two PepsiCo franchise bottlers.
The following acquisitions occurred for an aggregate purchase price of $77
million in cash and liabilities of $7 million:
o Pepsi-Cola Buffalo Bottling Corp. of Buffalo, New York in February in 2003.
o Cassidy's Beverage Limited of New Brunswick, Canada in February in 2003.
As a result of these acquisitions, we have assigned $68 million of the
purchase price to intangible assets, of which $14 million was assigned to
goodwill and $54 million to franchise rights. The goodwill and franchise rights
are not subject to amortization. As part of our purchase of the Pepsi-Cola
Buffalo Bottling Corp., we may be required to pay to the prior owners up to $5
million over the next three years in accordance with the purchase agreement. The
final allocations of the purchase price for these acquisitions are still
preliminary and will be determined based on the fair value of assets acquired
and liabilities assumed as of the dates of acquisition.
These acquisitions were made to enable us to provide better service to our
large retail customers. We expect these acquisitions to reduce costs through
economies of scale.
In addition, the allocation of the purchase price for certain prior year
acquisitions, including our acquisition of Pepsi-Gemex, S.A. de. C.V of Mexico,
is still preliminary, pending final valuations on certain assets. The final
allocations of the purchase price will be determined based on the fair value of
assets acquired and liabilities assumed as of the dates of acquisition.
In the first quarter of 2003, we paid approximately $3 million to PepsiCo
for distribution rights relating to the SoBe brand in certain PBG-owned
territories in the United States, which are being amortized over their estimated
useful life of five years. In addition, we paid $2 million in the current year
for the final working capital settlements relating to acquisitions made in the
prior year.
Note 7 - Geographic Data
We operate in one industry, carbonated soft drinks and other ready-to-drink
beverages. We conduct business in all or a portion of the United States, Mexico,
Canada, Spain, Russia, Greece and Turkey.
12-Weeks Ended
--------------
Net Revenues March March
------------ 22, 2003 23, 2002
-------- --------
U.S............................................. $ 1,496 $ 1,580
Mexico.......................................... 157 -
Other countries................................. 221 192
----- -----
$ 1,874 $ 1,772
===== =====
Long-Lived Assets March December
----------------- 22, 2003 28, 2002
-------- --------
U.S............................................. $ 6,637 $ 6,531
Mexico.......................................... 1,509 1,586
Other countries................................. 1,178 1,127
----- -----
$ 9,324 $ 9,244
===== =====
Note 8 - Stock-Based Compensation
During 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 148 "Accounting for
Stock-Based Compensation--Transition and
7
Disclosure," which provides alternative methods of accounting for stock-based
compensation and amends SFAS No. 123 "Accounting for Stock-Based Compensation."
We measure stock-based compensation expense using the intrinsic value method in
accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and its related interpretations. Accordingly,
compensation expense for PBG stock option grants to our employees is measured as
the excess of the quoted market price of PBG common stock at the grant date over
the amount the employee must pay for the stock. Our policy is to grant PBG stock
options at fair value on the date of grant. As allowed by SFAS No. 148, we have
elected to continue to apply the intrinsic value-based method of accounting
described above, and have adopted the disclosure requirements of SFAS No. 123.
If we had measured compensation cost for the stock awards granted to our
employees under the fair value based method prescribed by SFAS No. 123, net
income would have been changed to the pro forma amounts set forth below:
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Net income:
As reported.............................................................. $ 70 $ 107
Add: Total stock-based employee compensation expense
included in reported net income.................................... 2 -
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards....................... (18) (23)
--- ---
Pro forma................................................................ $ 54 $ 84
=== ===
Pro forma compensation cost measured for stock options granted to employees
is amortized using a straight-line basis over the vesting period, which is
typically three years.
In the first quarter of 2003, we issued restricted PBG stock awards to
certain key senior management, which vest over periods ranging from three to
five years from the date of grant. These restricted stock awards are earned only
if the Company achieves certain performance targets over a three-year period.
These restricted share awards are considered variable awards pursuant to APB
Opinion 25, which requires the related compensation expense to be re-measured
each period until the performance targets are met and the amount of the awards
becomes fixed. When the restricted stock award was granted, deferred
compensation of approximately $6 million was recorded as a reduction to owners'
equity, and will be amortized on a straight-line basis over the vesting periods.
Note 9 - New Accounting Standards
In January 2003, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 02-16, "Accounting by a Reseller for Cash Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendor's
Products)," addressing the recognition and income statement classification of
various cash considerations given by a vendor to a customer. The consensus
requires that certain cash considerations received by a customer from a vendor
are presumed to be a reduction of the price of the vendor's products, and
therefore should be characterized as a reduction of cost of sales when
recognized in the customer's income statement, unless certain criteria are met.
EITF Issue No. 02-16 became effective beginning in our fiscal year 2003. In the
prior year we classified worldwide bottler incentives received from PepsiCo and
other brand owners as adjustments to net revenues and selling, delivery and
administrative expenses depending on the objective of the program. In accordance
with EITF Issue No. 02-16, we have classified certain bottler incentives as a
reduction of cost of sales beginning in 2003. We have recorded a transition
adjustment of $6 million, net of taxes, for the cumulative effect on prior
years. This adjustment reflects the amount of bottler incentives that can be
attributed to our 2003 beginning inventory balances. This accounting change did
not have a material effect on our income before cumulative effect of change in
accounting principle in the first twelve weeks of 2003 and is not expected to
have a material effect on such amounts for the balance of fiscal
8
2003. Assuming that EITF Issue No. 02-16 had been in place for all periods
presented, the following pro forma adjustments would have been made to our
reported results for the twelve weeks ended March 23, 2002:
As EITF 02-16 Pro Forma
-- ---------- ---------
Reported Adjustment Results
-------- ---------- -------
Net revenues................................................ $1,772 $ (59) $1,713
Cost of sales............................................... 942 (95) 847
Selling, delivery and administrative expenses............... 695 37 732
----- ---- -----
Operating income............................................ $ 135 $ (1) $ 134
===== ==== =====
Assuming EITF Issue No. 02-16 had been adopted for all periods presented,
pro forma net income for the twelve weeks ended March 22, 2003 and March 23,
2002, would have been as follows:
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Net income:
As reported............................................... $ 70 $ 107
Pro forma................................................. 76 106
During 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with the Exit or Disposal Activities.' SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. We do not anticipate that
the adoption of SFAS No. 146 will have a material impact on our Condensed
Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which addresses the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. We do not anticipate that the adoption
of FIN 45 will have a material impact on our Condensed Consolidated Financial
Statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses consolidation by
business enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
We do not anticipate that the adoption of FIN 46 will have a material impact on
our Condensed Consolidated Financial Statements.
Note 10 - Comprehensive Income
12-Weeks Ended
--------------
March March
22, 2003 23, 2002
-------- --------
Net income................................................. $ 70 $ 107
Currency translation adjustment............................ (26) -
Cash flow hedge adjustment................................. 13 12
--- ---
Comprehensive income....................................... $ 57 $ 119
=== ===
9
Note 11 - Contingencies
We are subject to various claims and contingencies related to lawsuits,
taxes and environmental and other matters arising out of the normal course of
business. We believe that the ultimate liability arising from such claims or
contingencies, if any, in excess of amounts already recognized is not likely to
have a material adverse effect on our results of operations, financial condition
or liquidity.
In the first quarter of 2003, we settled a lawsuit with the New Jersey
State Department of Labor and with current and former employees concerning
overtime wage issues. The amount of this settlement was approximately $28
million, which was fully provided for in our litigation reserves in our
Consolidated Balance Sheets at December 28, 2002.
Note 12 - Guarantees
PBG has a $500 million commercial paper program that is supported by two
$250 million credit facilities, which is guaranteed by us. One of the credit
facilities expires in May 2003 and the other credit facility expires in April
2004. At March 22, 2003, PBG had $87 million of commercial paper issued and
outstanding.
On March 8, 1999, PBG issued $1 billion of 7% senior notes due 2029, which
are guaranteed by us. We also guarantee that to the extent there is available
cash, we will distribute pro rata to all owners sufficient cash such that
aggregate cash distributed to PBG will enable PBG to pay its taxes and make
interest payments on the $1 billion 7% senior notes due 2029.
10
Independent Accountants' Review Report
--------------------------------------
Owners of
Bottling Group, LLC:
We have reviewed the accompanying condensed consolidated balance sheet of
Bottling Group, LLC as of March 22, 2003, and the related condensed consolidated
statements of operations and cash flows for the twelve weeks ended March 22,
2003 and March 23, 2002. These condensed consolidated financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Bottling Group, LLC as of December 28, 2002, and the related consolidated
statements of operations, changes in owners' equity, and cash flows for the
fifty-two week period then ended not presented herein; and in our report dated
January 28, 2003, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 28, 2002, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
April 22, 2003
11
Item 2.
Management's Financial Review
OVERVIEW
- --------
Bottling Group, LLC (collectively referred to as "Bottling LLC", "we",
"our" and "us") is the world's largest manufacturer, seller and distributor of
Pepsi-Cola beverages. We have the exclusive right to manufacture, sell and
distribute Pepsi-Cola beverages in all or a portion of the United States,
Mexico, Canada, Spain, Greece, Russia and Turkey. In first quarter of 2003,
approximately 80% of our net revenues were generated in the United States, 8% of
our net revenues were generated in Mexico and the remaining 12% generated
outside the United States and Mexico.
ITEMS THAT AFFECT HISTORICAL OR FUTURE COMPARABILITY
- ----------------------------------------------------
Gemex Acquisition
-----------------
In November 2002, we acquired all of the outstanding capital stock of
Pepsi-Gemex, S.A. de. C.V. of Mexico ("Gemex"). Our total acquisition cost
consisted of a net cash payment of $871 million and assumed debt of
approximately $305 million. The Gemex acquisition was made to allow us to
increase our markets outside the United States. Gemex was the largest Pepsi-Cola
bottler in Mexico and the largest bottler outside the United States of
Pepsi-Cola soft drink products based on sales volume. Gemex produced, sold and
distributed a variety of soft drink products under the Pepsi-Cola, Pepsi Light,
Pepsi Max, Pepsi Limon, Mirinda, 7 UP, Diet 7 UP, KAS, Mountain Dew, Power Punch
and Manzanita Sol trademarks, under exclusive franchise and bottling
arrangements with PepsiCo and certain affiliates of PepsiCo. Gemex also had
rights to produce, sell and distribute in Mexico soft drink products of other
companies and it produced, sold and distributed purified and mineral water in
Mexico under the trademarks Electropura and Garci Crespo, respectively. As a
result of the acquisition of Gemex, we own the Electropura and Garci Crespo
brands.
New Accounting Standards
------------------------
See Note 9 - New Accounting Standards, in our Notes to Condensed
Consolidated Financial Statements, for a detailed discussion of new accounting
standards that were adopted in 2003.
RESULTS OF OPERATIONS
- ---------------------
Volume
Our worldwide reported physical case volume increased 16% in the first
quarter of 2003, reflecting a 20% increase in volume resulting from our
acquisitions and a 4% decrease in volume from our base business (base business
reflects territories that have operating results in the current and prior year).
In the U.S., volume decreased by 4%, reflecting a 5% decrease in base business
volumes offset by a 1% increase resulting from acquisitions. Volume decreases in
the U.S. reflect declines in both our take home and cold drink businesses. U.S.
declines in trademark Pepsi were partially offset by strong growth from Aquafina
and Sierra Mist. Outside the U.S., our volumes increased 125% reflecting a 124%
increase from new volume due to acquisitions in Mexico, Turkey and Canada. Base
business volume outside the U.S. increased 1% due to double-digit growth in
Russia, which was partially offset by volume declines in Spain and volume in
Canada that was essentially flat.
12
Net Revenues
Reported net revenues were $1.9 billion for the first quarter in 2003, a 6%
increase over the prior year, which includes an 11% increase from acquisitions.
In our base business, we had a 2% increase in net revenue per case and a 1%
favorable impact from currency translations, partially offset by a 4% decrease
in volume and a more than 3% negative impact from the adoption of EITF Issue No.
02-16. Worldwide net revenue per case declined by 9%, reflecting negative
country mix, primarily from our acquisition territories in Mexico and Turkey,
and the impact of adopting EITF Issue No. 02-16.
In the U.S., reported net revenues decreased 5%, which includes a 1%
increase from acquisitions. In our base business, there was a 5% decrease in
volume and a 3% negative impact from the adoption of EITF Issue No. 02-16, which
was partially offset by rate increases of approximately 2%.
Reported net revenues outside the U.S. grew approximately 97%, which
includes a 93% increase from acquisitions. In our base business, there was a 9%
favorable impact of currency translations, partially offset by a 5% decrease
from the adoption of EITF Issue No. 02-16. Approximately 82% of the increase in
net revenues outside the U.S. was attributable to our acquisition in Mexico.
Worldwide net revenue per case is expected to be down in the low
double-digits in the second quarter and down in the high single digits for the
full year. The decline in our worldwide net revenue per case will be driven by
our acquisition in Mexico in November of the prior year and the adoption of EITF
Issue No. 02-16.
Cost of Sales
Cost of sales was $927 million in the first quarter of 2003, a 2% decrease
over the prior year, which includes a 10% increase from acquisitions. In our
base business, there was a 10% decrease resulting from the adoption of EITF
Issue No. 02-16 and a 4% decrease in volume, partially offset by a 1% negative
impact from currency translations and a 1% increase in cost of sales per case.
In the U.S., cost of sales decreased by 11%, which includes a 1% increase
from acquisitions. In our base business there was a 9% decrease from the
adoption of EITF Issue No. 02-16 and 5% decrease in volume, which was partially
offset by more than 1% increase in cost of sales per case. The increase in cost
of sales per case was driven by higher concentrate costs in the United States.
Cost of sales outside the U.S. grew by 65%, which includes a 76% increase
from acquisitions. In our base business, there was a 7% increase resulting from
the negative impact from currency translations and a 2% increase in our cost of
sales per case, partially offset by a 20% decrease resulting from the adoption
of EITF Issue No. 02-16. Approximately 62% of the increase in cost of sales
outside the U.S. was attributable to our acquisition in Mexico in the prior
year.
Selling, Delivery and Administrative Expenses
Selling, delivery and administrative expenses grew $133 million, or 19% in
the first quarter of 2003, which includes a 14% increase resulting from
acquisitions. In our base business there was a 5% increase from the adoption of
EITF Issue No. 02-16 and a 1% negative impact from currency translations, which
was partially offset by a 1% decline in selling, delivery and administrative
expenses resulting from additional accounts receivable reserves taken in the
prior year and current year productivity gains.
Operating Income
Operating income was $119 million in the first quarter of 2003,
representing a 12% decrease over first quarter of 2002. This decline reflects
the negative impact from lower volume, partially offset by higher pricing and
lower selling, delivery and administrative expenses. Our acquisitions did not
have a material impact on operating income in the first quarter of 2003.
We expect reported operating income during the second quarter to grow in
the mid-single digits with growth coming predominately from Mexico. For the full
year, reported operating income is expected to increase in the mid-teens with
Mexico contributing two-thirds of that growth.
13
Interest Expense
Interest expense increased by $8 million largely due to the additional
interest associated with the $1 billion 4 5/8% senior notes used to finance our
acquisition of Gemex in November 2002, partially offset by the favorable impact
of the interest rate swaps on $1.3 billion of our fixed rate long-term debt.
Income Tax Expense
Bottling LLC is a limited liability company, taxable as a partnership for
U.S. tax purposes and, as such, generally pays no U.S. federal or state income
taxes. The federal and state distributable share of income, deductions and
credits of Bottling LLC are allocated to Bottling LLC's owners based on
percentage ownership. However, certain domestic and foreign affiliates pay taxes
in their respective jurisdictions. The increase in the income tax expense during
the first quarter of 2003 is primarily due to our international acquisitions and
higher taxes in the United States.
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operations decreased by $72 million to $104 million
reflecting a decline in operating income coupled with the increased use of cash
from working capital, principally from the timing of payments, offset by an
increase in depreciation expense.
Net cash used for investments increased by $26 million to $245 million
reflecting higher acquisition spending, off set by declines in loans to PBG.
Net cash provided by financing increased by $53 million driven by increased
short-term borrowings.
Current Maturities of Long-Term Debt
We intend to refinance all or a portion of our $1 billion of 5 3/8% senior
notes upon their maturity in February 2004. We are currently in compliance with
all debt covenants in our indenture agreements.
Cautionary Statements
- ---------------------
Except for the historical information and discussions contained herein,
statements contained in this Form 10-Q may constitute forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are based on currently available competitive,
financial and economic data and our operating plans. These statements involve a
number of risks, uncertainties and other factors that could cause actual results
to be materially different. Among the events and uncertainties that could
adversely affect future periods are lower-than-expected net pricing resulting
from marketplace competition, material changes from expectations in the cost of
raw materials and ingredients, an inability to achieve the expected timing for
returns on cold drink equipment and related infrastructure expenditures,
material changes in expected levels of bottler incentive payments from PepsiCo,
material changes in our expected interest and currency exchange rates, an
inability to achieve cost savings, an inability to achieve volume growth through
product and packaging initiatives, competitive pressures that may cause channel
and product mix to shift from more profitable cold drink channels and packages,
weather conditions in Bottling LLC's markets, political conditions in Bottling
LLC's markets outside the United States and Canada, possible recalls of Bottling
LLC's products, an inability to meet projections for performance in newly
acquired territories, unfavorable market performance on our pension plan assets,
unfavorable outcomes from our U.S. Internal Revenue Service audits, and changes
in our debt ratings.
14
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
The overall risks to our international businesses include changes in
foreign governmental policies, and other political or economic developments.
These developments may lead to new product pricing, tax or other policies, and
monetary fluctuations which may adversely impact our business. In addition, our
results of operations and the value of the foreign assets are affected by
fluctuations in foreign currency exchange rates.
Foreign currency gains and losses reflect transaction gains and losses as
well as translation gains and losses arising from the re-measurement into U.S.
dollars of the net monetary assets of businesses in highly inflationary
countries. Beginning in 2003, Russia is no longer considered highly
inflationary, and changed its functional currency from the U.S. dollar to the
Russian ruble. The impact to our consolidated financial statements as a result
of Russia's change in functional currency in 2003 was not material.
We acquired Gemex in November 2002. Approximately 8% of our net revenues
were derived from Mexico in the first quarter of 2003. During the first quarter
of 2003, the Mexican peso declined by approximately 6%. Future movements in the
Mexican peso could have a material impact on our financial results.
Item 4.
Controls and Procedures
- -----------------------
Within 90 days prior to the date of this report, Bottling LLC carried out
an evaluation, under the supervision and with the participation of our
management, including the Principal Executive Officer and Managing Director and
the Principal Financial Officer of Bottling LLC, of the effectiveness of our
disclosure controls and procedures pursuant to the Exchange Act Rule 13a-14.
Based upon that evaluation, the Principal Executive Officer and Managing
Director and the Principal Financial Officer concluded, subject to the
limitations set forth below, that our disclosure controls and procedures are
effective in timely alerting them to material information relating to Bottling
LLC and its consolidated subsidiaries required to be included in Bottling LLC's
periodic filings with the SEC. In addition, subject to the limitations set forth
below, there were no significant changes in our internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date of our most recent evaluation.
Limitations on the Effectiveness of Controls
Our management, including the Principal Executive Officer and Managing
Director and the Principal Financial Officer, does not expect that our
disclosure controls or our internal controls will prevent all error and all
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues within our company have been detected. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and may not be detected.
15
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-------------------------------
ITEM 6 (a). EXHIBITS
- --------------------
Exhibit 99.1 Certification by the Principal Executive Officer and
Managing Director of Periodic Financial Report pursuant
to Section 906 of the Sarbanes - Oxley Act of 2002
Exhibit 99.2 Certification by the Principal Financial Officer of
Periodic Financial Report pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
Exhibit 99.3 PBG condensed consolidated financial statements and
notes thereto for the first quarter ended March 22,
2003
ITEM 6 (b). REPORTS ON FORM 8-K
- -------------------------------
None
16
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
BOTTLING GROUP, LLC
-------------------
(Registrant)
Date: May 5, 2003 /s/ Andrea L. Forster
----------- ---------------------
Andrea L. Forster
Principal Accounting Officer
Date: May 5, 2003 /s/ Alfred H. Drewes
----------- --------------------
Alfred H. Drewes
Principal Financial Officer
17
Form 10-Q Certification
I, John T. Cahill, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bottling Group,
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
18
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 5, 2003 /s/ John T. Cahill
----------- ------------------
John T. Cahill
Principal Executive Officer and
Managing Director
19
Form 10-Q Certification
I, Alfred H. Drewes, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bottling Group,
LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
20
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 5, 2003 /s/ Alfred H. Drewes
----------- --------------------
Alfred H. Drewes
Principal Financial Officer
21