FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended September 7, 2002 (36-weeks)
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the transition period from to
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Commission file number
BOTTLING GROUP, LLC
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(Exact name of registrant as specified in its charter)
Delaware 13-4042452
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(State or other jurisdiction of (I.R.S.
Employer incorporate or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
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(Address of principal executive offices) (Zip Code)
914-767-6000
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(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
--- ---
Bottling Group, LLC
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Index
Page No.
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 and 36-weeks ended September 7, 2002 and September 8, 2001 2
Condensed Consolidated Statements of Cash Flows -
36-weeks ended September 7, 2002 and September 8, 2001 3
Condensed Consolidated Balance Sheets -
September 7, 2002 and December 29, 2001 4
Notes to Condensed Consolidated Financial Statements 5-9
Independent Accountants' Review Report 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
Item 4. Controls and Procedures 14
Part II Other Information 15-20
-1-
PART I - FINANCIAL INFORMATION
Item 1.
Bottling Group, LLC
Condensed Consolidated Statements of Operations
in millions, unaudited
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
7, 2002 8, 2001 7, 2002 8, 2001
-------- -------- --------- ---------
Net Revenues............................................................... $2,455 $2,274 $6,436 $5,981
Cost of sales.............................................................. 1,337 1,222 3,464 3,212
----- ----- ----- -----
Gross Profit............................................................... 1,118 1,052 2,972 2,769
Selling, delivery and administrative expenses.............................. 780 767 2,227 2,176
----- ----- ----- -----
Operating Income........................................................... 338 285 745 593
Interest expense........................................................... 31 29 92 91
Interest income............................................................ 7 11 20 33
Foreign currency loss...................................................... 3 - 3 -
Minority interest.......................................................... 5 6 8 13
----- ----- ----- -----
Income before income taxes................................................. 306 261 662 522
Income tax expense before rate change...................................... 19 10 28 19
Income tax rate change benefit............................................. - (9) - (25)
----- ----- ----- -----
Net Income................................................................. $ 287 $ 260 $ 634 $ 528
===== ===== ===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
Bottling Group, LLC
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
36-weeks Ended
--------------
September September
7, 2002 8, 2001
------- -------
Cash Flows - Operations
Net income..................................................................... $ 634 $ 528
Adjustments to reconcile net income to net cash provided by operations:
Depreciation.............................................................. 291 257
Amortization.............................................................. 5 92
Other non-cash charges and credits, net................................... 84 84
Changes in operating working capital:
Accounts receivable..................................................... (281) (274)
Inventories............................................................. (35) (58)
Prepaid expenses and other current assets............................... 36 2
Accounts payable and other current liabilities.......................... 60 38
---- ----
Net change in operating working capital .................................. (220) (292)
---- ----
Net Cash Provided by Operations................................................... 794 669
---- ----
Cash Flows - Investments
Capital expenditures........................................................... (437) (397)
Acquisitions of bottlers....................................................... (19) (43)
Notes receivable from PBG...................................................... (256) (315)
Sale of property, plant and equipment.......................................... 4 4
Other, net..................................................................... (46) (24)
---- ----
Net Cash Used for Investments..................................................... (754) (775)
---- ----
Cash Flows - Financing
Short-term borrowings - three months or less................................... (76) 16
Proceeds from issuance of long-term debt....................................... 38 -
Payments of long-term debt..................................................... (3) (1)
---- ----
Net Cash (Used for) Provided by Financing......................................... (41) 15
---- ----
Effect of Exchange Rate Changes on Cash and Cash Equivalents......................
1 (4)
---- ----
Net Decrease in Cash and Cash Equivalents......................................... - (95)
Cash and Cash Equivalents - Beginning of Period................................... 262 318
---- ----
Cash and Cash Equivalents - End of Period......................................... $ 262 $ 223
==== ====
Supplemental Cash Flow Information
Non-cash owner contribution....................................................... $ 24 $ 74
==== ====
Third-party interest and income taxes paid........................................ $ 130 $ 134
==== ====
See accompanying notes to Condensed Consolidated Financial Statements.
-3-
Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
(Unaudited)
September December
7, 2002 29, 2001
--------- ---------
Assets
Current Assets
Cash and cash equivalents................................................ $ 262 $ 262
Accounts receivable, less allowance of $50 at
September 7, 2002 and $42 at December 29, 2001..................... 1,135 823
Inventories.............................................................. 376 331
Prepaid expenses and other current assets................................ 98 115
----- -----
Total Current Assets............................................. 1,871 1,531
Property, plant and equipment, net......................................... 2,783 2,543
Intangible assets, net..................................................... 3,739 3,684
Notes receivable from PBG.................................................. 1,093 837
Other assets............................................................... 97 82
----- -----
Total Assets.................................................... $9,583 $8,677
===== =====
Liabilities and Owners' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $1,090 $ 977
Short-term borrowings.................................................... 53 77
----- -----
Total Current Liabilities........................................ 1,143 1,054
Long-term debt............................................................. 2,356 2,299
Other liabilities.......................................................... 447 406
Deferred income taxes...................................................... 187 168
Minority interest.......................................................... 161 154
----- -----
Total Liabilities................................................ 4,294 4,081
Owners' Equity
Owners' net investment.................................................. 5,672 5,012
Accumulated other comprehensive loss.................................... (383) (416)
----- -----
Total Owners' Equity............................................. 5,289 4,596
----- -----
Total Liabilities and Owners' Equity............................ $9,583 $8,677
===== =====
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," "we,"
"our" and "us") is the principal 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, 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 93.0% of Bottling LLC and PepsiCo owns the remaining 7.0% at September 7,
2002.
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.
The accompanying Condensed Consolidated Balance Sheet at September 7, 2002
and the Condensed Consolidated Statements of Operations for the 12 and 36-weeks
ended September 7, 2002 and September 8, 2001 and Cash Flows for the 36-weeks
ended September 7, 2002 and September 8, 2001 have not been audited, but have
been prepared in conformity with generally accepted accounting principles 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 29, 2001 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.
Note 2 - Seasonality of Business
The results for the third 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
September December
7, 2002 29, 2001
--------- --------
Raw materials and supplies............. $139 $117
Finished goods......................... 237 214
---- ----
$376 $331
==== ====
-5-
Note 4 - Property, plant and equipment, net
September December
7, 2002 29, 2001
--------- --------
Land................................................................... $ 154 $ 145
Buildings and improvements............................................. 989 925
Manufacturing and distribution equipment............................... 2,550 2,308
Marketing equipment.................................................... 1,997 1,846
Other.................................................................. 140 121
----- -----
5,830 5,345
Accumulated depreciation............................................... (3,047) (2,802)
----- -----
$2,783 $2,543
===== =====
Note 5 - Intangible assets, net
September December
7, 2002 29, 2001
--------- --------
Intangibles subject to amortization:
Gross carrying amount:
Franchise rights.................................................... $ 19 $ 12
Other identifiable intangibles...................................... 44 39
----- -----
63 51
----- -----
Accumulated amortization:
Franchise rights.................................................... (4) (2)
Other identifiable intangibles...................................... (27) (25)
----- -----
(31) (27)
----- -----
Intangibles not subject to amortization:
Gross carrying amount:
Franchise rights.................................................... 3,626 3,585
Goodwill............................................................ 1,588 1,574
----- -----
5,214 5,159
----- -----
Accumulated amortization:
Franchise rights.................................................... (976) (971)
Goodwill............................................................ (531) (528)
----- -----
(1,507) (1,499)
------ -----
$3,739 $3,684
===== =====
Note 6 - Acquisitions
During 2002 we acquired the operations and exclusive right to manufacture,
sell and distribute Pepsi-Cola beverages from several different PepsiCo
franchise bottlers. The following acquisitions occurred for an aggregate
purchase price of $15 million in cash and $64 million of assumed debt:
o Fruko Mesrubat Sanayii A.S. of Turkey in March.
o Pepsi-Cola Bottling Company of Aroostook, Inc., of Presque Isle, Maine in
June.
o Seaman's Beverages Limited of the Canadian province of Prince Edward Island in
July.
Also in March 2002, PBG acquired the Pepsi-Cola bottling operations along
with the exclusive right to manufacture, sell and distribute Pepsi-Cola
beverages from Pepsi-Cola Bottling Company of Macon, Inc. in Georgia. In
connection with the acquisition, PBG contributed certain net assets acquired
totaling $24 million to Bottling LLC.
-6-
As a result of these acquisitions, we acquired $43 million of intangible
assets, $7 million was assigned to goodwill and $31 million to franchise rights
and other intangibles, all of which are not subject to amortization, and $5
million was assigned to other identifiable intangibles, which are subject to
amortization.
The Turkey and Prince Edward Island acquisitions were made to allow us to
strategically increase our markets outside the United States. Our domestic
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 2002, we paid approximately $4 million to PepsiCo for distribution
rights relating to the SoBe brand in certain PBG-owned territories in the United
States. These rights are subject to amortization.
In May 2002, PBG signed a non-binding agreement with Mr. Enrique C. Molina
Sobrino and PepsiCo, the two principal shareholders of the Mexican bottler
Pepsi-Gemex, S.A. de. C.V. ("Pepsi-Gemex") regarding the possible acquisition of
all of the shares of Pepsi-Gemex. On October 7, 2002, we commenced cash tender
offers in the United States and Mexico to complete the acquisition of
Pepsi-Gemex. The tender offers will expire at 5 p.m. (EDT) on November 4, 2002,
unless the offers are extended. Both Mr. Molina and PepsiCo have each agreed to
tender approximately 40 percent and 34.2 percent, respectively, of the total
outstanding capital stock of Pepsi-Gemex. Pepsi-Gemex's Board of Directors has
recommended that all other Pepsi-Gemex shareholders accept the offers and tender
their shares. The U.S. offer is for all global depositary shares ("GDS") at Ps
106.38 per GDS and for all series B shares and all ordinary participation
certificates ("CPO") held by holders who are not resident in Mexico at Ps 5.91
per series B share and Ps 17.73 per CPO. The Mexican offer is for all series B
shares and CPOs at the same prices offered in the U.S. tender offer. The tender
offers are conditioned upon, among other things, the number of shares, CPOs and
GDSs tendered and not withdrawn, that represent not less than 90 percent of all
outstanding shares of capital stock of Pepsi-Gemex on the expiration date. The
final tender offer price per share is based on the shares outstanding at the
date of the tender offer and Gemex's equity value of approximately 9.0 billion
Mexican pesos as disclosed in the tender offer documents filed with the U.S.
Securities and Exchange Commission and the Comision Nacional Bancaria y de
Valores of Mexico. A payment from PepsiCo to PBG of 172.7 million Mexican pesos
is being made in order to facilitate the purchase and ensure a smooth ownership
transition of Gemex. PBG will be financing the tender offers through temporary
issuances of commercial paper and/or temporary bridge financing in the amount up
to $1.2 billion and will be lending these funds to us. We expect to repay the
commercial paper and/or bridge financing through the subsequent issuance of long
term debt upon consummation of the tender offers.
During the fourth quarter, we signed a letter of intent to acquire the
Pepsi-Cola Buffalo Bottling Corp., based in Buffalo, NY. The transaction is
expected to close during the first quarter of 2003. Also in the fourth quarter,
we signed a letter of intent to acquire Kitchener Beverages Limited, based in
Kitchener, Ontario. This transaction is expected to close in the fourth quarter
of 2002.
Note 7 - Financial Instruments
As of September 7, 2002, our use of derivative instruments is limited to
interest rate swaps, forward contracts, futures and options on futures
contracts.
Cash Flow Hedge - We are subject to market risk with respect to the cost of
commodities because our ability to recover increased costs through higher
pricing may be limited by the competitive environment in which we operate. We
use futures contracts and options on futures in the normal course of business to
hedge the risk of adverse movements in commodity prices related to anticipated
purchases of aluminum and fuel used in our operations. These contracts, which
generally range from 1 to 12 months in duration, establish our commodity
purchase prices within defined ranges in an attempt to limit our purchase price
risk resulting from adverse commodity price movements and are designated as and
qualify for cash flow hedge accounting treatment.
-7-
The amount of deferred losses from our commodity hedging that we recognized
into income was $13 million during the first 36 weeks of 2002 and was not
significant over the same period in 2001. As a result of our commodity hedges, a
$21 million and $19 million deferred loss remained in accumulated other
comprehensive loss in our Condensed Consolidated Balance Sheets based on the
commodity rates in effect on September 7, 2002, and December 29, 2001,
respectively. Assuming no change in the commodity prices as measured on
September 7, 2002, $16 million of the deferred loss or $10 million on an
after-tax basis, will be recognized in cost of sales in our Condensed
Consolidated Statements of Operations over the next 12 months. The ineffective
portion of the change in fair value of these contracts was not material to our
results of operations in 2002 or 2001.
Fair Value Hedge - The fair value of our fixed-rate long-term debt is
sensitive to changes in interest rates. Interest rate changes would result in
gains or losses in the fair market value of our debt representing differences
between market interest rates and the fixed rate on the debt. At September 7,
2002 and December 29, 2001 our debt instruments primarily consisted of $2.3
billion of fixed-rate long-term senior notes of which we converted our $1.0
billion 5 3/8% fixed rate debt to floating rate debt through the use of interest
rate swaps. Our objective was to reduce our overall borrowing costs.
The interest rate swaps, which expire in 2004, are designated as and
qualify for fair value hedge accounting and are 100% effective in eliminating
the interest rate risk inherent in our long-term debt as the notional amount,
interest payment, and maturity date of the swap matches the notional amount,
interest payment and maturity date of the related debt. Accordingly, any market
risk or opportunity associated with the swaps are fully offset by the opposite
market impact on the related debt.
The change in fair value of the interest rate swaps in the first 36 weeks
was a gain of $12 million and $5 million in 2002 and 2001, respectively. The
fair value change of the swap agreement was recorded in interest expense, net in
our Condensed Consolidated Statements of Operations and in prepaid expenses and
other current assets in our Condensed Consolidated Balance Sheets. An offsetting
adjustment was recorded in interest expense, net in our Condensed Consolidated
Statements of Operations and in long-term debt in our Condensed Consolidated
Balance Sheets representing the change in fair value in long-term debt.
Equity Derivatives - We use equity derivative contracts with financial
institutions to hedge a portion of our deferred compensation liability, which is
based on our stock price. These prepaid forward contracts for the purchase of
PBG common stock are accounted for as natural hedges. The earnings impact from
these hedges is classified as selling, delivery and administrative expenses
consistent with the expense classification of the underlying hedged item.
At December 29, 2001 we had one prepaid forward contract outstanding. The
contract was for 608,000 shares of PBG stock with an exercise price of $23.02
per share. This contract was amended in the third quarter of 2002 to include an
additional 30,000 shares at an initial price of $25.01. Therefore, at September
7, 2002 the contract reflects 638,000 shares of PBG stock with an average
exercise price of $23.11. The contract expires in December 2002 with a one-year
renewal option.
Other Derivatives - During the third quarter, Bottling Group LLC entered
into an option contract to mitigate certain currency risks. Although this
instrument does not qualify for hedge accounting, it is deemed a derivative
since it contains a net settlement clause. We have amortized the premium as a
reduction of net income in our Condensed Consolidated Statement of Operations.
The option contract had no fair value at September 7, 2002.
-8-
Note 8 - New Accounting Standards
During 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") 142, "Goodwill and Other Intangible
Assets," which requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment.
Effective the first day of fiscal year 2002, we no longer amortize goodwill and
certain franchise rights, but evaluate them for impairment annually. We have
completed the initial impairment review required by SFAS 142 and have determined
that our intangible assets were not impaired. Had we adopted SFAS 142 on the
first day of 2001, our 2001 amortization expense would have been lowered by
approximately $30 million and $89 million in the quarter and year-to-date,
respectively.
Note 9 - Comprehensive Income
12-weeks Ended 36-weeks Ended
-------------- --------------
September September September September
7, 2002 8, 2001 7, 2002 8, 2001
--------- --------- --------- ---------
Net income................................................... $287 $260 $634 $528
Currency translation adjustment.............................. 4 2 31 (29)
Cash flow hedge accounting adjustment........................ (29) (9) (2) (11)
--- --- --- ---
Comprehensive income........................................ $262 $253 $663 $488
=== === === ===
Note 10 - Contingencies
We are involved in a lawsuit with current and former employees concerning
wage and hour issues in New Jersey. We are unable to predict the ultimate amount
of any costs or implications of this case at this time as legal proceedings are
ongoing.
We are subject to various claims and contingencies related to lawsuits,
taxes, 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.
Note 11 - Subsequent Event
On October 14, 2002, PBG contributed its 20.32% ownership interest in our
Canadian operations, in exchange for an increase in its equity interest in
Bottling LLC. As a result of this contribution, PBG's ownership interest in
Bottling LLC increased from 93.0% to 93.2%, and PepsiCo's ownership in Bottling
LLC decreased from 7.0% to 6.8%.
-9-
Independent Accountants' Review Report
--------------------------------------
Owners of
Bottling Group, LLC
We have reviewed the accompanying Condensed Consolidated Balance Sheet of
Bottling Group, LLC as of September 7, 2002, and the related Condensed
Consolidated Statements of Operations for the twelve and thirty-six weeks ended
September 7, 2002 and September 8, 2001 and the Condensed Consolidated
Statements of Cash Flows for the thirty-six weeks ended September 7, 2002 and
September 8, 2001. These Condensed Consolidated Financial Statements are the
responsibility of Bottling Group, LLC'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 to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, 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 29, 2001, and the related Consolidated
Statements of Operations, Cash Flows and Changes in Owners' Equity for the
fifty-two week period then ended not presented herein; and in our report dated
January 24, 2002, 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 29, 2001, is
fairly presented, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/S/ KPMG LLP
New York, New York
October 1, 2002
-10-
Item 2.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
- --------------------------------------------------------------------------------
Overview
Bottling Group, LLC (collectively referred to as "Bottling LLC," "we,"
"our" and "us") is the principal 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 93% owned by PBG and is fully
consolidated, consists of bottling operations located in the United States,
Canada, Spain, Greece, Russia and Turkey.
The following management's discussion and analysis should be read in
conjunction with our Condensed Consolidated Financial Statements and
accompanying footnotes along with the cautionary statements at the end of this
section.
Constant Territory
We believe that constant territory performance results are the most
appropriate indicators of operating trends and performance, particularly in
light of our stated intention of acquiring additional bottling territories, and
are consistent with industry practice. Constant territory operating results are
derived by adjusting current year results to exclude significant current year
acquisitions and adjusting prior year results to include the results of
significant prior year acquisitions as if they had occurred on the first day of
the prior fiscal year.
Use of EBITDA
EBITDA, which is computed as operating income plus the sum of depreciation
and amortization, is a key indicator management and the industry use to evaluate
operating performance. It is not, however, required under generally accepted
accounting principles and should not be considered an alternative to
measurements required by GAAP such as net income or cash flows.
Results of Operations
Reported Change Constant Territory Change
--------------- -------------------------
12-weeks 36-weeks 12-weeks 36-weeks
-------- -------- -------- --------
EBITDA........................ 9% 10% 6% 9%
Volume........................ 7% 5% 1% 2%
Net Revenue per Case.......... 1% 2% 3% 3%
EBITDA was $442 million and $1,041 million in the third quarter and first
36-weeks of 2002, representing a 9% and 10% increase over the same periods of
2001, respectively. On a constant territory basis, EBITDA growth was 6% for the
quarter and 9% year-to-date. In the quarter, constant territory EBITDA growth
was driven by worldwide net revenue per case growth of 3% and volume growth of
1%, offset by cost of sales growth of 5% and selling, delivery and
administrative expense growth of 3%. On a year-to-date basis, constant territory
EBITDA growth was driven by worldwide net revenue per case growth of 3% and
volume growth of 2%, offset by cost of sales growth of 5% and selling, delivery
and administrative expenses growth of 5%. Excluding the favorable impact of
currency translations, constant territory EBITDA grew 5% in the quarter and 8%
-11-
year-to-date on a worldwide basis. As we look to the fourth quarter and full
year, we expect our worldwide constant territory EBITDA growth rate to be about
15% for the quarter and 10% to 12% for the full year.
Volume
Our worldwide physical case volume increased 7% in the third quarter and 5%
in the first 36-weeks of 2002. Constant territory volume growth was 1% and 2% in
the third quarter and year-to-date, respectively, with the U.S. increasing by 1%
in the third quarter and 2% year-to-date. The U.S. results were modestly lower
than expected and reflect continued growth in take-home volume, particularly in
foodstores, as well as favorable cold drink performance in our convenience and
gas segment, offset by continued softness in our on-premise business. United
States volume growth continues to benefit from innovation, as well as the strong
growth of Aquafina, offset by declines in brand Pepsi. Outside the U.S., our
constant territory volume increased over 1% in the quarter and 3% year-to-date
as double-digit growth in Russia, which was driven by the strong performance of
Pepsi Twist, Pepsi Cherry and Aqua Minerale, was partially offset by volume
declines in Spain. As we look to the fourth quarter and the full year, we expect
U.S. constant territory volume growth to continue at approximately 1% for the
quarter and 2% for the full year and with worldwide constant territory volume
expected to be about 2% for both the quarter and the full year.
Net Revenues
Net revenues for the quarter grew $181 million, an 8% increase over the
prior year, with year-to-date net revenues up 8% as well. On a constant
territory basis, net revenues grew 4% in the quarter driven by volume growth of
1% and a 3% increase in net revenue per case. Excluding the favorable impact of
currency translations, worldwide net revenue per case grew 2% in the quarter. On
a year-to-date basis, constant territory net revenue grew 5% reflecting 2%
growth in volume and an increase in net revenue per case of 3%. Worldwide
constant territory net revenue per case growth in both periods was driven by the
U.S., which grew 3% reflecting price increases combined with favorable package
mix. Outside the U.S., constant territory net revenues were up approximately 7%
in the quarter, reflecting over 1% volume growth and over 5% net revenue per
case growth. On a year-to-date basis, our net revenues outside the U.S. grew 6%,
reflecting a 3% increase in both volume and net revenue per case. Excluding the
favorable impact of currency translations, net revenue per case outside the U.S.
grew 2% in both the quarter and year-to-date.
Cost of Sales
Cost of sales increased $115 million, or 9%, in the third quarter of 2002
and $252 million, or 8%, year-to-date. On a constant territory basis, cost of
sales grew 5% in the quarter driven by volume growth of 1% and a 4% increase in
cost of sales per case. On a year-to-date basis, constant territory cost of
sales grew 5% reflecting 2% growth in volume and a 3% increase in cost of sales
per case. The increase in cost of sales per case for both periods was driven by
higher U.S. concentrate costs, and mix shifts into higher cost packages.
Excluding the negative impact of currency translations, cost of sales per case
increased 3% in the quarter and less than 3% year-to-date.
Selling, Delivery and Administrative Expenses
Selling, delivery and administrative expenses grew 2% in both the third
quarter and first 36-weeks of 2002. Had we adopted SFAS 142 on the first day of
2001, amortization expense would have been lowered by $30 million and $89
million for the third quarter and year-to-date, respectively. Excluding the
impact of SFAS 142, constant territory selling, delivery and administrative
expenses grew 3% in the quarter and 5% year-to-date. This increase was primarily
driven by higher variable selling and delivery costs reflecting growth in our
business. Selling, delivery and administrative expenses were also favorably
-12-
impacted as we lapped higher labor costs associated with labor contract
negotiations from the third quarter last year. Excluding this favorable impact,
our underlying selling, delivery and administrative expense trend was consistent
with the first half of the 2002. Excluding the negative impact of currency
translations, selling, delivery and administrative expenses increased less than
3% in the quarter and remained at 5% year-to-date.
Interest income
Interest income decreased $4 million in the third quarter, and $13 million
for the first 36-weeks of 2002 as a result of lower market interest rates
received on our notes receivable from PBG, partially offset by a higher loan
balance with PBG.
Income Tax Expense Before Rate Change
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.
Income Tax Rate Change Benefit
In the second quarter of 2001, the Canadian Government enacted legislation
that reduced the federal corporate income tax rate from 28% to 21% over a
four-year period beginning January 1, 2001. In addition, certain provincial
income tax rates were also reduced. These rate changes reduced deferred tax
liabilities associated with our operations in Canada, and resulted in one-time
gains in the 12-weeks and 36-weeks ended September 8, 2001 of $9 million and $25
million, respectively.
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Net cash provided by operations increased $125 million to $794 million
reflecting strong EBITDA growth coupled with improved working capital.
Net cash used for investments decreased by $21 million primarily due to a
reduction of loans made to PBG, partially offset by increased capital
expenditures.
Net cash (used for) provided by financing increased by $56 million from a
source of cash of $15 million in 2001 to a use of cash of $41 million in 2002.
This increase in use of cash reflects the pay down of short-term borrowings
partially offset by issuances of long-term debt primarily outside the U.S. in
2002.
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 employee infrastructure expenditures,
material changes in expected levels of marketing support payments from PepsiCo,
Inc., an inability to meet projections for performance in newly acquired
territories, and unfavorable interest rate and currency fluctuations.
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
In March 2002 we acquired Fruko Mesrubat Sanayii A.S. in Turkey. 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. Turkey is considered a highly inflationary economy for accounting
purposes.
Item 4.
Controls and Procedures
- -----------------------
Within the 90 days prior to the date of this report, Bottling Group, LLC.
("the Company") carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in the Company's periodic SEC
filings relating to the Company (including its consolidated subsidiaries).
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these internal controls subsequent
to the date of our most recent evaluation.
-14-
PART II - OTHER INFORMATION
Item 5. Other Information
-----------------
In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added by Section 202 of the Sarbanes-Oxley Act of 2002, the Company is
responsible for disclosing any non-audit services approved by PBG's Audit and
Affiliated Transactions Committee (the "Committee") to be performed by KPMG LLP
("KPMG"), the Company's external auditor. Non-audit services are defined in the
Act as services other than those provided in connection with an audit or a
review of the financial statements of the Company. On August 13, 2002, the
Committee approved the engagement of KPMG for the following non-audit services:
(1) tax consulting services relating to acquisitions; (2) auditing of benefit
plans; (3) due diligence related to acquisitions; (4) preparation of pro forma
financial statements related to acquisitions; (5) technical assistance relating
to the internal audit of the Company's Information Technology function, provided
that such services are conducted under the direction and supervision of the
Director of Internal Audit; and (6) other non-audit services approved by the
Chairman of the Committee, provided that such services are approved by the
entire Committee at the next regularly scheduled Committee meeting.
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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: October 17, 2002 Andrea L. Forster
---------------- ----------------------------
Principal Accounting Officer
Date: October 17, 2002 Alfred H. Drewes
---------------- ----------------------------
Principal Financial Officer
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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
-17-
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: October 17, 2002 John T. Cahill
---------------- ---------------------------
Principal Executive Officer
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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
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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: October 17, 2002 Alfred H. Drewes
---------------- ---------------------------
Principal Financial Officer
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