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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 20, 2004 (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 incorporation 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 20, 2004 and March 22, 2003 2
Condensed Consolidated Statements of Cash Flows -
12 weeks ended March 20, 2004 and March 22, 2003 3
Condensed Consolidated Balance Sheets -
March 20, 2004 and December 27, 2003 4
Notes to Condensed Consolidated Financial Statements 5-11
Independent Accountants' Review Report 12
Item 2. Management's Financial Review 13-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Part II Other Information
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
0
PART I - FINANCIAL INFORMATION
Item 1.
Bottling Group, LLC
Condensed Consolidated Statements of Operations
in millions, unaudited
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
-------- --------
Net revenues.................................................................. $2,067 $1,874
Cost of sales................................................................. 1,051 927
----- -----
Gross profit.................................................................. 1,016 947
Selling, delivery and administrative expenses................................. 880 828
----- -----
Operating income.............................................................. 136 119
Interest expense.............................................................. 41 38
Interest income............................................................... 8 6
Other non-operating expenses, net............................................. - 3
----- -----
Income before income taxes.................................................... 103 84
Income tax expense............................................................ 6 8
----- -----
Income before cumulative effect of change in accounting principle............. 97 76
Cumulative effect of change in accounting principle, net of tax............... - 6
----- -----
Net income.................................................................... $ 97 $ 70
===== =====
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
20, 2004 22, 2003
-------- --------
Cash Flows - Operations
Net income.................................................................... $ 97 $ 70
Adjustments to reconcile net income to net cash provided by operations:
Depreciation................................................................ 124 117
Amortization................................................................ 3 2
Deferred income taxes....................................................... 2 3
Cumulative effect of change in accounting principle......................... - 6
Other non-cash charges and credits, net..................................... 32 38
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net................................................ (3) 52
Inventories, net........................................................ (67) (24)
Prepaid expenses and other current assets............................... 14 (49)
Accounts payable and other current liabilities.......................... (9) (135)
Income taxes payable.................................................... (16) 27
------ ------
Net change in operating working capital .................................... (81) (129)
------ ------
Pension contributions.................................................... (20) -
Other, net.............................................................. (10) (3)
------ ------
Net Cash Provided by Operations................................................. 147 104
------ ------
Cash Flows - Investments
Capital expenditures.......................................................... (102) (112)
Acquisitions of bottlers...................................................... - (82)
Sale of property, plant and equipment......................................... 1 1
Notes receivable from PBG..................................................... (50) (52)
------ ------
Net Cash Used for Investments................................................... (151) (245)
------ ------
Cash Flows - Financing
Short-term borrowings - three months or less.................................. 13 33
Net proceeds of long-term debt................................................ 9 -
Repayment of long-term debt................................................... (1,004) -
------ ------
Net Cash (Used for) Provided by Financing....................................... (982) 33
------ ------
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................... (1) (1)
------ ------
Net Decrease in Cash and Cash Equivalents....................................... (987) (109)
Cash and Cash Equivalents - Beginning of Period................................. 1,154 202
------ ------
Cash and Cash Equivalents - End of Period....................................... $ 167 $ 93
====== ======
Supplemental Cash Flow Information
Net third-party interest paid................................................... $ 56 $ 41
====== ======
Income taxes paid .............................................................. $ 20 $ 10
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
3
Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
(Unaudited)
March December
20, 2004 27, 2003
-------- --------
Assets
Current Assets
Cash and cash equivalents..................................................... $ 167 $ 1,154
Accounts receivable, less allowance of $71 at
March 20, 2004 and $72 at December 27, 2003............................. 968 994
Inventories................................................................... 441 374
Prepaid expenses and other current assets..................................... 192 194
Investment in debt defeasance trust .......................................... 168 168
------ ------
Total Current Assets.................................................... 1,936 2,884
Property, plant and equipment, net.............................................. 3,399 3,423
Other intangible assets, net.................................................... 3,558 3,562
Goodwill........................................................................ 1,391 1,386
Notes receivable from PBG....................................................... 1,556 1,506
Other assets.................................................................... 139 125
------ ------
Total Assets............................................................ $11,979 $12,886
====== ======
Liabilities and Owners' Equity
Current Liabilities
Accounts payable and other current liabilities................................ $ 1,117 $ 1,163
Short-term borrowings......................................................... 80 67
Current maturities of long-term debt.......................................... 179 1,178
------ ------
Total Current Liabilities............................................... 1,376 2,408
Long-term debt.................................................................. 3,514 3,497
Other liabilities............................................................... 633 628
Deferred income taxes........................................................... 452 451
------ ------
Total Liabilities....................................................... 5,975 6,984
------ ------
Owners' Equity
Owners' Equity............................................................... 6,507 6,409
Accumulated other comprehensive loss......................................... (498) (503)
Deferred compensation........................................................ (5) (4)
------ ------
Total Owners' Equity.................................................... 6,004 5,902
------ ------
Total Liabilities and Owners' Equity.................................. $11,979 $12,886
====== ======
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, has 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 conjunction with PBG's initial public offering and other subsequent
transactions, 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% as of March 20, 2004.
The accompanying Condensed Consolidated Balance Sheet at March 20, 2004 and
the Condensed Consolidated Statements of Operations and Cash Flows for the 12
weeks ended March 20, 2004 and March 22, 2003 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 27, 2003 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.
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.
Accordingly, we recognize our quarterly business results as outlined below:
Quarter U.S. & Canada Mexico & Europe
------- ------------- ----------------
First Quarter 12 weeks January and February
Second Quarter 12 weeks March, April and May
Third Quarter 12 weeks June, July and August
Fourth Quarter 16 weeks September, October
November and December
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.
5
Note 3 - New Accounting Standards
EITF 02-16
In January 2003, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 02-16, "Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor," addressing the recognition
and income statement classification of various cash consideration given by a
vendor to a customer. The consensus requires that certain cash consideration
received by a customer from a vendor is 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. Prior to 2003, 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. During
2003, we recorded a transition adjustment of $6 million, net of taxes of $1
million, 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.
FASB Staff Position FAS 106-1
During 2003, the Medicare Prescription Drug, Improvement and Modernization
Act of 2003 (the "Act") was passed into law. The reported postretirement benefit
obligation in our Condensed Consolidated Balance Sheet does not reflect the
effects of the Act. We do provide prescription drug benefits to
Medicare-eligible retirees but have elected to defer recognition of the Act
until the Financial Accounting Standards Board ("FASB") provides guidance
regarding its accounting treatment. This deferral election is permitted under
FASB Staff Position FAS 106-1. We do not believe the adoption of the Act will
have a material impact on our consolidated results of operations and financial
position.
Share-Based Payments
The FASB has issued an exposure draft proposing to expense the fair value
of share-based payments to employees beginning in 2005. We are currently
evaluating the impact of this proposed standard on our financial statements.
Note 4 - Stock-Based Compensation
During 2002, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 148 "Accounting for Stock-Based Compensation-Transition and
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 common stock at the grant date over the
amount the employee must pay for PBG's 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 PBG's 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:
6
(5)
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
--------- --------
Net income:
As reported..................................................................... $ 97 $ 70
Add: Total stock-based employee compensation expense
included in reported net income 1 2
Less: Total stock-based employee compensation expense determined
under fair-value based method for all awards (18) (18)
---- ----
Pro forma....................................................................... $ 80 $ 54
==== ====
Pro forma compensation cost measured for PBG stock options granted to
employees is amortized using a straight-line basis over the vesting period,
which is typically three years.
The fair value of PBG stock options used to compute pro forma net income
disclosures was estimated on the date of grant using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
-------- --------
Risk-free interest rate......................................................... 3.2% 2.9%
Expected life................................................................... 6 years 6 years
Expected volatility............................................................. 35% 37%
Expected dividend yield......................................................... 0.68% 0.17%
Note 5 - Inventories
March December
20, 2004 27, 2003
-------- --------
Raw materials and supplies...................................................... $ 163 $ 140
Finished goods.................................................................. 278 234
---- ----
$ 441 $ 374
==== ====
Note 6 - Property, plant and equipment, net
March December
20, 2004 27, 2003
-------- --------
Land............................................................................ $ 240 $ 241
Buildings and improvements...................................................... 1,190 1,185
Manufacturing and distribution equipment........................................ 3,064 3,028
Marketing equipment............................................................. 2,138 2,131
Other........................................................................... 175 176
----- -----
6,807 6,761
Accumulated depreciation........................................................ (3,408) (3,338)
------ ------
$ 3,399 $ 3,423
====== ======
7
Note 7 - Other intangible assets, net and Goodwill
March December
20, 2004 27, 2003
-------- --------
Intangibles subject to amortization:
Gross carrying amount:
Customer relationships and lists ...................................... $ 47 $ 42
Franchise rights....................................................... 23 23
Other identified intangibles........................................... 27 27
----- ------
97 92
Accumulated amortization:
Customer relationships and lists ...................................... (4) (3)
Franchise rights....................................................... (11) (10)
Other identified intangibles........................................... (13) (12)
----- ------
(28) (25)
----- ------
Intangibles subject to amortization, net........................................ 69 67
----- ------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights....................................................... 2,895 2,908
Distribution rights.................................................... 290 286
Trademarks............................................................. 210 207
Other identified intangibles........................................... 94 94
----- ------
Intangibles not subject to amortization................................ 3,489 3,495
----- ------
Total other intangible assets, net.............................................. 3,558 $3,562
===== =====
Goodwill........................................................................ $1,391 $1,386
===== =====
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 $3 million and $2 million for the twelve
weeks ended March 20, 2004 and March 22, 2003, respectively. 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
---------- ------------------
2004 2005 2006 2007 2008
---- ---- ---- ---- ----
Customer relationships and lists............. 17-20 years $2 $3 $3 $3 $3
Franchise rights............................. 5 years $3 $5 $2 $1 $-
Other identified intangibles................. 6 years $4 $4 $3 $2 $1
8
Note 8 - Pension and Postretirement Benefit Plans
Pension Benefits
Our U.S. employees participate in PBG's noncontributory defined benefit
pension plans, which cover substantially all full-time salaried employees, as
well as most hourly employees. Benefits generally are based on years of service
and compensation, or stated amounts for each year of service. All PBG qualified
plans are funded and contributions are made in amounts not less than minimum
statutory funding requirements and not more than the maximum amount that can be
deducted for U.S. income tax purposes. Our net pension expense for the defined
benefit plans for our operations outside the U.S. was not significant and is not
included in the tables presented below.
Our U.S. employees are also eligible to participate in PBG's 401(k) savings
plans, which are voluntary defined contribution plans. We make matching
contributions to the 401(k) savings plans on behalf of participants eligible to
receive such contributions. If a participant has one or more but less than 10
years of eligible service, our match will equal $0.50 for each dollar the
participant elects to defer up to 4% of the participant's pay. If the
participant has 10 or more years of eligible service, our match will equal $1.00
for each dollar the participant elects to defer up to 4% of the participant's
pay.
Components of our pension expense for the twelve weeks ended March 20, 2004
and March 22, 2003 are as follows:
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
-------- --------
Service cost................................................................. $ 10 $ 9
Interest cost................................................................ 16 14
Expected return on plan assets............................................... (19) (15)
Amortization of prior service cost........................................... 1 1
Amortization of net loss..................................................... 6 3
--- ---
Net pension expense for the defined benefit plans............................ 14 12
--- ---
Defined contribution plans expense........................................... 5 5
--- ---
Total pension expense recognized in the Condensed Consolidated
Statements of Operations..................................................... $ 19 $ 17
=== ===
9
Postretirement Benefits
PBG's postretirement plans provide medical and life insurance benefits
principally to U.S. retirees and their dependents. Employees are eligible for
benefits if they meet age and service requirements and qualify for retirement
benefits. The plans are not funded and since 1993 have included retiree cost
sharing.
Components of our postretirement benefits expense for the twelve weeks
ended March 20, 2004 and March 22, 2003 are as follows:
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
-------- ---------
Service cost................................................................. $ 1 $ 1
Interest cost................................................................ 4 4
Amortization of net loss..................................................... 1 1
--- ---
Net postretirement benefits expense recognized in the Condensed
Consolidated Statements of Operations........................................ $ 6 $ 6
=== ===
We expect to contribute $100 million to PBG's pension plans in 2004. As of
March 20, 2004, $20 million of contributions to PBG's pension plans have been
made.
Note 9 - 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.
Net Revenues 12 Weeks Ended
------------ --------------
March March
20, 2004 22, 2003
-------- --------
U.S........................................................................ $ 1,626 $ 1,496
Mexico..................................................................... 158 157
Other countries............................................................ 283 221
----- -----
$ 2,067 $ 1,874
===== =====
Long-Lived Assets March December
----------------- 20, 2004 27, 2003
-------- --------
U.S........................................................................ $ 7,270 $ 7,220
Mexico..................................................................... 1,446 1,432
Other countries............................................................ 1,327 1,350
----- -----
$10,043 $10,002
====== ======
10
Note 10 - Comprehensive Income
12 Weeks Ended
--------------
March March
20, 2004 22, 2003
-------- --------
Net income................................................................. $ 97 $ 70
Currency translation adjustment............................................ 2 (26)
Cash flow hedge adjustment................................................. 3 13
--- ---
Comprehensive income....................................................... $102 $ 57
=== ===
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.
Note 12 - Guarantees
PBG has a $500 million commercial paper program that is supported by two
$250 million credit facilities. Both credit facilities are guaranteed by us. One
of the credit facilities expires in April 2004, and the other credit facility
expires in April 2008. PBG is in the process of renegotiating these credit
facility contracts. PBG has used these credit facilities to support its
commercial paper program in 2004 and 2003.
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.
Note 13 - Subsequent Event
On March 30, 2004, we repaid our $160 million 9.75% senior notes by
liquidating our investments in our debt defeasance trust.
11
Independent Accountants' Review Report
--------------------------------------
Owners of
Bottling Group, LLC:
We have reviewed the accompanying condensed consolidated balance sheet of
Bottling Group, LLC and subsidiaries as of March 20, 2004, and the related
condensed consolidated statements of operations and cash flows for the twelve
weeks ended March 20, 2004 and March 22, 2003. 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 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 and subsidiaries as of December 27, 2003, 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 27, 2004, 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 27, 2003,
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 13, 2004
12
Item 2.
Management's Financial Review
- -----------------------------
Tabular dollars in millions
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 consolidated by PBG, has 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.
Management's Financial Review should be read in conjunction with the
accompanying unaudited financial statements and our Annual Report on Form 10-K
for the fiscal year ended December 27, 2003, which include additional
information about our accounting policies, practices and the transactions that
underlie our financial results.
Financial Performance Summary
- -----------------------------
12 Weeks Ended
--------------
March March %
20, 2004 22, 2003 Change
-------- -------- ------
Net revenues..................................................... $2,067 $1,874 10%
Operating income.................................................. 136 119 14%
Income before cumulative effect of change in
accounting principle 1............................................ 97 76 27%
Net income........................................................ 97 70 38%
1 - Cumulative effect of change in accounting principle for the twelve weeks
ended March 22, 2003, reflects the impact of adoption of EITF Issue No. 02-16.
See Note 3 - New Accounting Standards in the Notes to Condensed Consolidated
Financial Statements for more information.
Our income before the cumulative effect of change in accounting principle
increased 27% reflecting strong topline results. Our worldwide volume increased
5% in the first quarter due to our continued executional focus on building our
brands, introducing new products and packages and revitalizing our cold drink
business. There was solid volume growth across our territories in the U.S.,
Canada and Europe. In Mexico, physical case volume was down 2% for the quarter,
however, we saw improving trends in our eight-ounce equivalent case volume (one
eight-ounce case is equal to 192 U.S. fluid ounces of finished beverages),
resulting from the continued success of the upsizing initiatives of the
2.5-liter carbonated soft drink package and the 5.25-liter ELECTROPURA bottle.
From a net revenue perspective, we have remained committed to our pricing
principles, which center on consumer value and remaining competitive. This is
evident in our results, as worldwide net revenue per case increased 5%, which
includes two points of benefit from foreign currency.
For the remainder of 2004, we continue to expect solid worldwide operating
income growth in the mid-single digits versus the prior year. Based on stronger
than expected growth in the early part of the year, we are increasing our
expectations for full year worldwide volume growth to 2% to 3% and worldwide net
revenue per case growth to 2%.
13
Volume
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Total Worldwide Volume Change..................... 5 %
====
Our worldwide reported physical case volume increased 5% in the first
quarter of 2004, driven primarily from increases in the U.S., Canada and Europe,
partially offset by a decline in Mexico.
In the U.S., volume increased by 6%, reflecting balanced growth in both the
cold-drink and take-home channels of our business. From a brand perspective,
there was improvement in our diet portfolio and brand PEPSI, resulting from our
increased executional focus on colas. One of our priorities for 2004 is to
ensure we have the appropriate space allocation for brand PEPSI and DIET PEPSI.
During the quarter, we have added thousands of incremental racks in our large
and small format locations to increase the presence of our core carbonated soft
drink products. In addition, as consumers sought more variety, we saw strong
growth in AQUAFINA, coupled with product introductions such as PEPSI VANILLA and
TROPICANA juice drinks.
Outside the U.S., our volumes increased 4%, reflecting solid volume growth
from Canada and Europe, partially offset by a 2% decline in Mexico. Declines in
Mexico's physical case volume were broadly in line with our expectations
resulting from decreases in our carbonated soft drink and jug water categories.
However, our volume on an eight-ounce equivalent case basis, increased 2%,
resulting from the continued success of the upsizing initiatives of the
2.5-liter carbonated soft drink package and the 5.25-liter ELECTROPURA bottle.
In Europe, volume grew 15% in the quarter, led by strong performances in
Russia and Turkey, which both delivered volume growth of more than 20%. In
Russia, we had solid growth in our core brands, coupled with contributions from
new product and package introductions, including PEPSI X and our 5-liter AQUA
MINERALE package. In Turkey, there was improved execution in the marketplace,
particularly with our large format customers, resulting from the realignment of
our sales force and consolidation of our distributors.
Canada's base business volume increased 4% for the quarter driven by growth
in our large and small format segments. (The term "base business" reflects
territories that we owned and operated for comparable periods in both the
current year and the prior year.) Innovation contributed to the growth with the
successful launch of TROPICANA TWISTER and our eight-ounce can package.
Our worldwide volume in the second quarter of 2004 is expected to grow 2%
to 3%, reflecting growth in the United States of 2% to 3% and a continued strong
performance in Europe. In Mexico, we expect physical case volume declines in the
second quarter consistent with our first quarter's performance.
14
Net Revenues
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Volume impact........................................ 5 %
Rate / mix impact.................................... 3 %
Currency translation................................. 2 %
----
Total Worldwide Net Revenues Change............... 10 %
====
Net revenues were $2.1 billion for the first quarter of 2004, a 10%
increase over the similar period in the prior year. Approximately 79% of our net
revenues was generated in the United States, 8% of our net revenues was
generated in Mexico and the remaining 13% was generated outside the United
States and Mexico. The increase in net revenues in 2004 was driven by
improvements in volume and net revenue per case, coupled with favorable foreign
currency translations in Canada and Europe.
In the U.S., net revenues increased 9%, which includes a 1% increase from
acquisitions and over a 2% increase in net revenue per case. We have remained
committed to our pricing principles and were able to execute our planned rate
increases for the first quarter. Improvement in our net revenue per case was due
to both rate increases and the mix of products we sold, driven by a strong cold
drink performance and a package mix shift. We expect this trend of net price
increases to continue through the remainder of the year.
Net revenues outside the U.S. grew approximately 17%, reflecting the
favorable impact from foreign exchange, improvement in volume and the impact of
rate and mix. The combination of rate increases and the mix of products we sold
contributed four points of growth to net revenues outside the United States. The
increase in rate and mix was driven primarily by Mexico resulting from the
impact of higher priced packages.
We expect our worldwide net revenue per case to grow about 2% in the second
quarter of 2004.
Cost of Sales
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Volume impact........................................ 5 %
Cost per case impact................................. 6 %
Currency translation................................. 2 %
----
Total Worldwide Cost of Sales Change.............. 13 %
====
Cost of sales was $1.1 billion in the first quarter of 2004, a 13% increase
over the prior year. The increase in cost of sales was due primarily to volume
and cost per case increases coupled with the negative impact of foreign currency
translation in Canada and Europe.
In the U.S., cost of sales increased by 12%, which includes a 1% increase
from acquisitions and a 5% increase in cost per case. Increases in cost per case
have resulted from the impact of higher priced packages, including our
non-carbonated products, coupled with higher commodity costs, which we started
to encounter in the second and third quarters of last year.
Cost of sales outside the U.S. grew by 19%, reflecting the negative impact
from foreign currency translation, coupled with growth in volume and cost per
case increases of 7%. Cost per case increases outside the U.S. were driven by a
mix shift into higher priced packages, coupled with increases in certain
commodity costs.
15
We expect our worldwide cost of sales per case to grow 3% to 5% in the
second quarter and for the full year. While we will begin to lap some of the
commodity rate increases we experienced last year, we expect the unfavorable mix
impact we experienced in the first quarter to continue.
Selling, Delivery and Administrative Expenses
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Cost performance..................................... 4 %
Currency translation................................. 2 %
---
Total Worldwide Selling, Delivery and
Administrative Expenses Change.................... 6 %
===
Selling, delivery and administrative expenses were $880 million in the
first quarter of 2004, a 6% increase over the prior year. The increase in
selling, delivery and administrative expenses resulted from the negative impact
of foreign currency translation in Canada and Europe and an increase in our cost
performance. Our worldwide cost performance increased 4% resulting from
additional variable costs associated with volume growth and increases in
employee benefits and depreciation costs.
Selling, delivery and administrative expenses for the full year is expected
to grow in the low-single digits.
Operating Income
12 Weeks Ended
March 20, 2004 vs.
March 22, 2003
--------------
Gross margin rate/mix impact......................... 2 %
Volume............................................... 40 %
SD&A impact.......................................... (27)%
Currency translation................................. (1)%
----
Total Worldwide Operating Income Change........... 14 %
====
Operating income was $136 million in the first quarter of 2004,
representing a 14% increase over 2003. The increase in operating profit was
driven primarily by topline growth in the U.S, partially offset by higher
worldwide selling, delivery and administrative costs.
Operating profit in the second quarter is expected to grow in the
mid-single digits driven by the continued strong topline growth in the U.S.,
Europe and Canada.
Interest Expense
Interest expense increased by $3 million to $41 million, when compared with
2003, largely due to the additional $1.2 billion of debt issued during 2003.
This was partially offset by the lower effective interest rate achieved on our
fixed rate long-term debt from the use of interest rate swaps and the repayment
of $1 billion of our debt in February 2004.
Income Tax Expense
We are a limited liability company, taxable as a partnership for U.S. tax
purposes and, as such, generally pay no U.S. federal or state income taxes. We
allocate the federal and state distributable share of income, deductions and
credits to our owners based on percentage ownership. However, certain of our
domestic and foreign affiliates pay income taxes in their respective
jurisdictions. Such amounts are reflected in our Consolidated Statements of
Operations. Our effective tax rate for the first quarter of 2004 was 6% compared
with our effective tax rate of 10% in the first quarter of 2003. The decline in
our effective tax rate was primarily due to favorable mix on pre-tax income in
jurisdictions with lower effective tax rates.
16
Liquidity and Capital Resources
- -------------------------------
Cash Flows
Our net cash provided by operations of $147 million was driven by the
strong cash flow generated from the sale of our products. Net operating cash
flow in 2004 grew by $43 million over the prior year due to payments related to
the settlement of our New Jersey wage and hour litigation in the prior year and
timing of working capital payments, partially offset by the timing of pension
contributions during 2004.
Net cash used for investments decreased by $94 million to $151 million
reflecting lower acquisition spending.
Net cash used for financing increased by $1,015 million to $982 million
driven by the repayment of long-term debt and lower short-term borrowings.
For the full year in 2004, we expect capital expenditures to be between
$675 million and $700 million.
Liquidity and Capital Resources
We believe that our future cash flows from operations and borrowing
capacity will be sufficient to fund capital expenditures, acquisitions and
working capital requirements for PBG and us for the foreseeable future.
Additionally, we are currently in compliance with all debt covenants in our
indenture agreements and credit facilities.
PBG has a $500 million commercial paper program that is supported by two
$250 million credit facilities. Both credit facilities are guaranteed by us. One
of the credit facilities expires in April 2004, and the other credit facility
expires in April 2008. PBG is in the process of renegotiating these credit
facility contracts. PBG has used these credit facilities to support its
commercial paper program in 2004 and 2003.
During the first quarter we repaid our $1 billion 5.38% senior notes with
the proceeds we received from debt issued in the prior year.
Subsequent to quarter end, on March 30, 2004, we repaid our $160 million
9.75% senior notes by liquidating our investments in our debt defeasance trust.
Contractual Obligations
As of March 20, 2004, there have been no material changes outside the
normal course of business in the contractual obligations disclosed in Item 8 to
our Annual Report on Form 10-K for the fiscal year ended December 27, 2003,
under the caption "Contractual Obligations," other than the repayment of our
long-term debt as discussed above.
17
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:
o changes in our relationship with PepsiCo that could have a material
adverse effect on our business and financial results;
o restrictions imposed by PepsiCo on our raw material suppliers that could
increase our costs;
o decreased demand for our product resulting from changes in consumers'
preferences;
o an inability to achieve volume growth through product and packaging
initiatives;
o lower-than-expected net pricing resulting from marketplace competition
and competitive pressures that may cause channel and product mix to shift
from more profitable cold drink channels and packages;
o material changes from expectations in the cost of raw materials and
ingredients;
o an inability to achieve cost savings;
o an inability to achieve the expected timing for returns on cold drink
equipment and related infrastructure expenditures;
o material changes in expected levels of bottler incentive payments from
PepsiCo;
o changes in product category consumption;
o unfavorable weather conditions in our markets;
o unforeseen economic and political changes;
o possible recalls of our products;
o an inability to meet projections for performance in newly acquired
territories;
o changes in laws and regulations, including restrictions on the sale of
carbonated soft drinks in schools, changes in food and drug laws,
transportation regulations, employee safety rules, labor laws, accounting
standards, taxation requirements (including unfavorable outcomes from
audits performed by various tax authorities) and environmental laws;
o changes in our debt ratings; and
o material changes in expected interest and currency exchange rates and
unfavorable market performance of our pension plan assets.
18
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.
Item 4.
Controls and Procedures
- -----------------------
Bottling LLC's management carried out an evaluation (the "Evaluation"), as
required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange
Act"), with the participation of our Principal Executive Officer and our
Principal Financial Officer, of the effectiveness of our disclosure controls and
procedures, as of the end of the period covered by this report on Form 10-Q.
Based upon the Evaluation, the Principal Executive Officer and the Principal
Financial Officer concluded 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 our Exchange
Act reports filed with the SEC. In addition, there were no changes in our
internal control over financial reporting identified in connection with the
Evaluation that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
19
PART II - OTHER INFORMATION
Item 5.
Other Information
- -----------------
The financial statements of The Pepsi Bottling Group, Inc. ("PBG"),
included in PBG's Quarterly Report on Form 10-Q and filed with the SEC on April
28, 2004, are hereby incorporated by reference as required by the SEC as a
result of our guarantee of up to $1,000,000,000 aggregate principal amount of
PBG's 7% Senior Notes due in 2029.
Item 6.
Exhibits and Reports on Form 8-K
- --------------------------------
ITEM 6 (a). EXHIBITS
- --------------------
Exhibit No.
- -----------
15 Accountants' Acknowledgement
31.1 Certification by the Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Principal Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by the Principal Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by the Principal Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bottling Group, LLC
-------------------
(Registrant)
/s/ Andrea L. Forster
Date: April 26, 2004 ---------------------
-------------- Andrea L. Forster
Principal Accounting Officer
/s/ Alfred H. Drewes
Date: April 26, 2004 --------------------
-------------- Alfred H. Drewes
Principal Financial Officer