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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 June 12, 2004
-------------
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 and 24 weeks ended June 12, 2004 and June 14, 2003 2
Condensed Consolidated Statements of Cash Flows -
24 weeks ended June 12, 2004 and June 14, 2003 3
Condensed Consolidated Balance Sheets -
June 12, 2004 and December 27, 2003 4
Notes to Condensed Consolidated Financial Statements 5-12
Report of Independent Registered Public Accounting Firm 13
Item 2. Management's Financial Review 14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II Other Information
Item 1. Legal Proceedings 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
PART I - FINANCIAL INFORMATION
Item 1.
Bottling Group, LLC
Condensed Consolidated Statements of Operations
in millions, unaudited
12 Weeks Ended 24 Weeks Ended
-------------- --------------
June 12, June 14, June 12, June 14,
2004 2003 2004 2003
------ ------ ------ ------
Net revenues............................................................... $2,675 $2,532 $4,742 $4,406
Cost of sales.............................................................. 1,378 1,290 2,429 2,217
------ ------ ------ ------
Gross profit............................................................... 1,297 1,242 2,313 2,189
Selling, delivery and administrative expenses.............................. 1,024 966 1,904 1,794
------ ------ ------ ------
Operating income........................................................... 273 276 409 395
Interest expense........................................................... 37 40 78 78
Interest income............................................................ 7 6 15 12
Other non-operating expenses, net.......................................... 2 - 2 3
------ ------ ------ ------
Income before income taxes................................................. 241 242 344 326
Income tax expense......................................................... 16 13 22 21
------ ------ ------ ------
Income before cumulative effect of change in accounting
principle.................................................................. 225 229 322 305
Cumulative effect of change in accounting principle, net of
tax........................................................................ - - - 6
------ ------ ------ ------
Net income................................................................. $ 225 $ 229 $ 322 $ 299
====== ====== ====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
Bottling Group, LLC
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
24 Weeks Ended
--------------
June 12, June 14,
2004 2003
------ -----
Cash Flows - Operations
Net income................................................................ $ 322 $ 299
Adjustments to reconcile net income to net cash provided by operations:
Depreciation............................................................ 258 244
Amortization............................................................ 6 4
Deferred income taxes................................................... 8 10
Cumulative effect of change in accounting principle..................... - 6
Other non-cash charges and credits, net................................. 65 74
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net............................................... (242) (256)
Inventories, net....................................................... (126) (68)
Prepaid expenses and other current assets.............................. 5 (31)
Accounts payable and other current liabilities......................... 170 24
Income taxes payable................................................... (21) 8
------ -----
Net change in operating working capital ................................ (214) (323)
------ -----
Pension contributions.................................................. (51) -
Other, net............................................................. (20) (16)
------ -----
Net Cash Provided by Operations............................................ 374 298
------ -----
Cash Flows - Investments
Capital expenditures...................................................... (270) (282)
Acquisitions of bottlers.................................................. (7) (83)
Sale of property, plant and equipment..................................... 5 2
Notes receivable from PBG................................................. (196) (318)
------ -----
Net Cash Used for Investments.............................................. (468) (681)
------ -----
Cash Flows - Financing
Short-term borrowings - three months or less.............................. 86 84
Proceeds from issuance of long-term debt.................................. 17 248
Repayments of long-term debt.............................................. (1,007) (1)
------ -----
Net Cash (Used for) Provided by Financing.................................. (904) 331
------ -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents............... (2) 3
------ -----
Net Decrease in Cash and Cash Equivalents.................................. (1,000) (49)
Cash and Cash Equivalents - Beginning of Period............................ 1,154 202
------ -----
Cash and Cash Equivalents - End of Period.................................. $ 154 $ 153
====== =====
Supplemental Cash Flow Information
Net third-party interest paid.............................................. $ 97 $ 85
====== =====
Income taxes paid.......................................................... $ 36 $ 36
====== =====
See accompanying notes to Condensed Consolidated Financial Statements.
-3-
Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
(Unaudited)
June 12, December 27,
2004 2003
------- -------
Assets
Current Assets
Cash and cash equivalents................................................. $ 154 $ 1,154
Accounts receivable, less allowance of $67 at
June 12, 2004 and $72 at December 27, 2003.............................. 1,202 994
Inventories............................................................... 497 374
Prepaid expenses and other current assets................................. 185 194
Investment in debt defeasance trust....................................... - 168
------- -------
Total Current Assets................................................. 2,038 2,884
Property, plant and equipment, net......................................... 3,399 3,423
Other intangible assets, net............................................... 3,525 3,562
Goodwill................................................................... 1,389 1,386
Notes receivable from PBG.................................................. 1,702 1,506
Other assets............................................................... 120 125
------- -------
Total Assets..................................................... $12,173 $12,886
======= =======
Liabilities and Owners' Equity
Current Liabilities
Accounts payable and other current liabilities............................ $ 1,281 $ 1,163
Short-term borrowings..................................................... 150 67
Current maturities of long-term debt...................................... 27 1,178
------- -------
Total Current Liabilities............................................ 1,458 2,408
Long-term debt............................................................. 3,472 3,497
Other liabilities.......................................................... 650 628
Deferred income taxes...................................................... 433 451
------- -------
Total Liabilities.................................................... 6,013 6,984
------- -------
Owners' Equity
Owners' Equity............................................................ 6,733 6,409
Accumulated other comprehensive loss...................................... (569) (503)
Deferred compensation..................................................... (4) (4)
------- -------
Total Owners' Equity................................................. 6,160 5,902
------- -------
Total Liabilities and Owners' Equity............................. $12,173 $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 June 12, 2004.
The accompanying Condensed Consolidated Balance Sheet at June 12, 2004, the
Condensed Consolidated Statements of Operations for the twelve and twenty-four
weeks ended June 12, 2004 and June 14, 2003 and the Condensed Consolidated
Statements of Cash Flows for the twenty-four weeks ended June 12, 2004 and June
14, 2003 have not been audited, but have been prepared in conformity with
accounting principles generally accepted in the United States of America 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
Certain reclassifications were made in our Condensed Consolidated Financial
Statements to 2003 amounts to conform to the 2004 presentation.
Note 2 - Seasonality of Business
The results for the second 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 106-2
During the second quarter, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position FAS 106-2, "Accounting and Disclosure
Requirements Relating to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003". See Note 8 - Pension and Postretirement Benefit
Plans for further details regarding the impact of FASB Staff Position FAS 106-2.
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
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 the PBG's stock. Our policy
is to grant PBG stock options at fair value on the date of grant. As allowed by
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," 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, "Accounting for
Stock-Based Compensation." 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-
12 Weeks Ended 24 Weeks Ended
-------------- --------------
June 12, June 14, June 12, June 14,
2004 2003 2004 2003
----- ----- ----- -----
Net income:
As reported..................................................... $ 225 $ 229 $ 322 $ 299
Add: Total stock-based employee compensation expense
included in reported net income........................... - 2 1 4
Less: Total stock-based employee compensation expense determined
under fair-value based method for all awards.............. (16) (18) (34) (36)
----- ----- ----- -----
Pro forma....................................................... $ 209 $ 213 $ 289 $ 267
===== ===== ===== =====
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 24 Weeks Ended
-------------- --------------
June 12, June 14, June 12, June 14,
2004 2003 2004 2003
---- ---- ---- ----
Risk-free interest rate......................................... 3.1% 3.0% 3.2% 2.8%
Expected life................................................... 6 years 6 years 6 years 6 years
Expected volatility............................................. 35% 37% 35% 37%
Expected dividend yield......................................... 0.66% 0.22% 0.68% 0.17%
Note 5 - Inventories
June 12, December 27,
2004 2003
----- -----
Raw materials and supplies...................................... $ 178 $ 140
Finished goods.................................................. 319 234
----- -----
$ 497 $ 374
===== =====
-7-
Note 6 - Property, plant and equipment, net
June 12, December 27,
2004 2003
----- -----
Land............................................................ $ 253 $ 241
Buildings and improvements...................................... 1,211 1,185
Manufacturing and distribution equipment........................ 3,033 3,028
Marketing equipment............................................. 2,172 2,131
Other........................................................... 174 176
----- -----
6,843 6,761
Accumulated depreciation........................................ (3,444) (3,338)
----- -----
$ 3,399 $ 3,423
===== =====
Note 7 - Other intangible assets, net and Goodwill
June 12, December 27,
2004 2003
----- -----
Intangibles subject to amortization:
Gross carrying amount:
Customer relationships and lists ...................... $ 45 $ 42
Franchise rights....................................... 24 23
Other identified intangibles........................... 28 27
----- -----
97 92
----- -----
Accumulated amortization:
Customer relationships and lists ...................... (4) (3)
Franchise rights....................................... (12) (10)
Other identified intangibles........................... (15) (12)
----- -----
(31) (25)
----- -----
Intangibles subject to amortization, net........................ 66 67
----- -----
Intangibles not subject to amortization:
Carrying amount:
Franchise rights....................................... 2,883 2,908
Distribution rights.................................... 280 286
Trademarks............................................. 203 207
Other identified intangibles........................... 93 94
----- -----
Intangibles not subject to amortization.................... 3,459 3,495
----- -----
Total other intangible assets, net.............................. $ 3,525 $ 3,562
===== =====
Goodwill........................................................ $ 1,389 $ 1,386
===== =====
-8-
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 $6 million and $4 million for the
twenty-four weeks ended June 12, 2004 and June 14, 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
----------------
Amortization
------------
Period Estimated Aggregate Amortization Expense to be Incurred
------ -------------------------------------------------------
Balance of Fiscal Year Ending
---------- ------------------
2004 2005 2006 2007 2008
---- ---- ---- ---- ----
Customer relationships and lists......... 17-20 years $1 $3 $3 $3 $3
Franchise rights......................... 5 years $2 $5 $2 $1 $-
Other identified intangibles............. 6 years $3 $4 $3 $2 $1
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.
-9-
Components of our pension expense for the twelve and twenty-four weeks
ended June 12, 2004 and June 14, 2003 are as follows:
12 Weeks Ended 24 Weeks Ended
-------------- --------------
June 12, June 14, June 12, June 14,
2004 2003 2004 2003
---- ---- ---- ----
Service cost.................................................. $ 10 $ 9 $ 20 $ 17
Interest cost................................................. 16 14 32 29
Expected return on plan assets................................ (19) (16) (38) (31)
Amortization of prior service cost............................ 2 2 3 3
Amortization of net loss...................................... 5 3 11 6
---- ---- ---- ----
Net pension expense for the defined benefit plans............. 14 12 28 24
---- ---- ---- ----
Defined contribution plans expense............................ 5 4 10 9
---- ---- ---- ----
Total pension expense recognized in the Condensed
Consolidated Statements of Operations......................... $ 19 $ 16 $ 38 $ 33
==== ==== ==== ====
We expect to contribute $100 million to PBG's pension plans in 2004. As of
June 12, 2004, $51 million of contributions to PBG's pension plans have been
made.
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 and
twenty-four weeks ended June 12, 2004 and June 14, 2003 are as follows:
12 Weeks Ended 24 Weeks Ended
-------------- --------------
June 12, June 14, June 12, June 14,
2004 2003 2004 2003
---- ---- ---- ----
Service cost.................................................. $ 1 $ 1 $ 2 $ 2
Interest cost................................................. 4 4 9 9
Amortization of net loss...................................... 1 1 2 1
---- ---- ---- ----
Net postretirement benefits expense recognized in the
Condensed Consolidated Statements of Operations............... $ 6 $ 6 $ 13 $ 12
==== ==== ==== ====
On May 19, 2004, FASB Staff Position No. FAS 106-2 ("FSP") was issued by
FASB to provide guidance relating to the prescription drug subsidy provided by
the Medicare Prescription Drug, Improvement and Modernization Act of 2003
("Act"). We currently provide postretirement benefits to a group of retirees
(employees who retired prior to 1993) with little or no cost sharing. For these
retirees, the prescription drug benefit provided by us would be considered to be
actuarially equivalent to the benefit provided under the Act. Therefore, we have
retroactively applied the FSP to the date of enactment. As a result:
o The obligation (Accumulated Projected Benefit Obligation) decreased by
$11.7 million, and
-10-
o The net periodic postretirement benefits cost decreased by $0.3 million
for twelve and twenty-four weeks ended June 12, 2004
We also provide postretirement benefits to another group of retirees
(employees who retired after 1992) with cost sharing. At present, due to the
lack of clarifying regulations related to the Act, we cannot determine if the
benefit provided by us would be considered actuarially equivalent to the benefit
provided under the Act.
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 24 Weeks Ended
- ------------ -------------- --------------
June 12, June 14, June 12, June 14,
2004 2003 2004 2003
------- ------- ------ ------
U.S.......................................................... $ 1,909 $ 1,797 $ 3,535 $ 3,293
Mexico....................................................... 276 308 434 465
Other countries.............................................. 490 427 773 648
------- ------- ------ ------
$ 2,675 $ 2,532 $ 4,742 $ 4,406
======= ======= ====== ======
Long-Lived Assets June 12, December 27,
- ----------------- 2004 2003
------- ------
U.S.......................................................... $ 7,407 $ 7,220
Mexico....................................................... 1,422 1,432
Other countries.............................................. 1,306 1,350
------- -------
$ 10,135 $ 10,002
======= =======
Note 10 - Comprehensive Income
12 Weeks Ended 24 Weeks Ended
-------------- --------------
June 12, June 14, June 12, June 14,
2004 2003 2004 2003
------- ------- ------ ------
Net income................................................... $ 225 $ 229 $ 322 $ 299
Currency translation adjustment.............................. (63) 178 (61) 152
Cash flow hedge adjustment .................................. (8) - (5) 13
------- ------- ------ ------
Comprehensive income......................................... $ 154 $ 407 $ 256 $ 464
======= ======= ====== ======
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.
-11-
Note 12 - Guarantees
PBG has a $500 million commercial paper program that is supported by a
credit facility which is guaranteed by us. During the second quarter, PBG has
renegotiated their two $250 million credit facilities into one $500 million
credit facility, which expires in April 2009. 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.
-12-
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
Owners of
Bottling Group LLC:
We have reviewed the accompanying condensed consolidated balance sheet of
Bottling Group, LLC and subsidiaries as of June 12, 2004, the related condensed
consolidated statements of operations for the twelve week and twenty-four week
periods ended June 12, 2004 and June 14, 2003, respectively, and the related
condensed consolidated statements of cash flows for the twenty-four week periods
ended June 12, 2004 and June 14, 2003. These condensed consolidated financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the Public
Company Accounting Oversight Board (United States). 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 the
standards of the Public Company Accounting Oversight Board (United States), 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 reviews, 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 standards established by the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheet of Bottling Group, LLC and subsidiaries as of December 27, 2003,
and the related consolidated statements of operations, cash flows and changes in
owners' equity for the fiscal year 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
July 8, 2004
-13-
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 24 Weeks Ended
-------------- --------------
June 12, June 14, % June 12, June 14, %
2004 2003 Change 2004 2003 Change
------ ------ ------ ----- ----- ------
Net revenues........................ $2,675 $2,532 6% $4,742 $4,406 8%
Operating income.................... 273 276 (1)% 409 395 4%
Income before cumulative
effect of change in accounting
principle 1......................... 225 229 (2)% 322 305 6%
Net income.......................... 225 229 (2)% 322 299 8%
1 - Cumulative effect of change in accounting principle for the twenty-four
weeks ended June 14, 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.
Net income for the quarter decreased by 2% to $225 million due to operating
income declines in Mexico, partially offset by strong topline results in the
United States. Worldwide volume increased 2% in the second quarter reflecting
solid volume growth in the U.S. and Europe, partially offset by volume declines
in Mexico. Worldwide net revenue per case growth increased 4% in the second
quarter, exceeding our expectations. We have remained committed to our pricing
principles, and continue to seek opportunities for net revenue per case gains by
leveraging both rate and mix strategies.
For the full year 2004, both volume and net revenue per case are expected
to grow 2% to 3%. Our cost of goods sold per case is expected to grow 3% to 5%
for the full year of 2004. We expect our full year outlook of operating profits
for Mexico to be at the lower end of our guidance of $75 million to $85 million.
-14-
Volume
12 Weeks Ended 24 Weeks Ended
June 12, 2004 vs. June 12, 2004 vs.
June 14, 2003 June 14, 2003
-------------- ---------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
----- ----- -------- ----- ----- --------
Volume change....................... 2 % 3 % 1 % 3 % 4 % 2 %
Our reported worldwide physical case volume increased 2% in the second
quarter and 3% in the first twenty-four weeks of 2004, when compared with
similar periods of 2003. The increase in reported worldwide volume was driven by
strong growth in the U.S. and Europe, partially offset by volume declines in
Mexico.
In the U.S., our reported volume increased by 3% in the second quarter and
4% on a year-to-date basis due to growth in both the cold-drink and take-home
channels of our business. As consumers continue to seek a greater variety of
beverages, we have seen corresponding growth in our non-carbonated beverage
portfolios, driven by AQUAFINA and TROPICANA juice drinks. Additionally,
Trademark PEPSI has continued to show positive results reflecting solid
contributions from our diet portfolio as well as the addition of PEPSI VANILLA.
In Europe, volume grew 10% in the second quarter and 12% on a year-to-date
basis, driven by strong performances in Russia and Turkey. In Russia, we had
solid growth in our core brands, coupled with contributions from new product
introductions, including TROPICANA juice drinks and LIPTON ICED TEAS. In Turkey,
there was continued improved execution in the marketplace, particularly with our
large format customers, resulting primarily from an improvement in our selling
and distribution capabilities.
Excluding the impact of acquisitions, Mexico's volume declined 7% in the
second quarter and 5% on a year-to-date basis, which was below our expectations.
Mexico's volume declines were driven primarily by softness in our jug water
business. As jug water comprises 40% of Mexico's volume, one of our priorities
is to develop this key component our business. There were also declines in our
carbonated soft drink volume in Mexico, however, we saw continued positive
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 upsizing
initiatives of the 2.5-liter carbonated soft drink package.
Our worldwide volume in the second half of 2004 is expected to grow 2%,
reflecting growth in the United States of 1% and a continued strong performance
in Europe. In Mexico, for the second half of 2004, we expect physical case
volume declines in the low single digits.
-15-
Net Revenues
12 Weeks Ended 24 Weeks Ended
June 12, 2004 vs. June 12, 2004 vs.
June 14, 2003 June 14, 2003
------------- -------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
------ ---- -------- ------ ---- ---------
Volume impact................................... 2 % 3 % 1 % 3 % 4 % 2 %
Net price per case impact (rate/mix)............ 4 % 3 % 2 % 4 % 3 % 3 %
Effect of currency translations................. 0 % 0 % 1 % 1 % 0 % 3 %
------ ------ ------ ------ ------ ------
Total Net Revenues change.................. 6 % 6 % 4 % 8 % 7 % 8 %
====== ====== ====== ====== ====== ======
Net revenues were $2.7 billion for the second quarter and $4.7 billion for
the first twenty-four weeks in 2004, a 6% and 8% respective increase over
similar periods in 2003. The increases in net revenues for the quarter and on a
year-to-date basis were driven by improvements in volume and growth in net
revenue per case of 4%.
In the U.S., net revenues increased 6% in the second quarter and 7% for the
first twenty-four weeks of 2004, when compared with the similar periods of 2003.
The increases in net revenues in the U.S. were driven by growth in both volume
and net price per case. The 3% increase in net price per case in the U.S. for
the quarter and on a year-to-date basis was due to a combination of rate
increases and mix benefits. Net price per case in the U.S. continues to benefit
from the strong cold drink growth, which is our most profitable business. This
growth was driven by the additional space we allocated to our core soft drinks,
as well as the introduction of new products including the launch of TROPICANA
juice drinks and PEPSI VANILLA.
Net revenues outside the U.S. grew approximately 4% in the second quarter
and 8% for the first twenty-four weeks of 2004. The increases in net revenues
outside the U.S. for the quarter and on a year-to-date basis were driven by
volume and net price per case growth in Europe and Canada coupled with the
favorable impact of foreign exchange. This growth was partially offset by a 10%
and 7% decline in net revenues in Mexico for the quarter and the first
twenty-four weeks of 2004, respectively, due primarily to decreases in volume
and the devaluation of the Mexican peso.
In the second quarter, approximately 71% of our net revenues was generated
in the U.S., 10% of our net revenues was generated in Mexico and the remaining
19% was generated outside the U.S. and Mexico. On a year-to-date basis,
approximately 75% of our net revenues was generated in the U.S., 9% of our net
revenues was generated in Mexico and the remaining 16% was generated outside the
U.S. and Mexico.
We expect our worldwide net revenue per case to grow about 2% in the second
half of the year in 2004, driven by 2% to 3% net revenue per case growth in the
United States as we leverage both our rate and mix strategies.
-16-
Cost of Sales
12 Weeks Ended 24 Weeks Ended
June 12, 2004 vs. June 12, 2004 vs.
June 14, 2003 June 14, 2003
-------------- ----------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
----- ---- -------- ----- ---- --------
Volume impact.................................. 2 % 3 % 1 % 3 % 4 % 2 %
Costs per case impact.......................... 4 % 4 % 5 % 5 % 5 % 5 %
Currency translation........................... 1 % 0 % 1 % 2 % 0 % 4 %
----- ----- ----- ----- ----- -----
Total Cost of Sales change................ 7 % 7 % 7 % 10 % 9 % 11 %
===== ===== ===== ===== ===== =====
Cost of sales was $1.4 billion in the second quarter and $2.4 billion for
the first twenty-four weeks of 2004, a 7% and 10% respective increase over
similar periods in 2003. The growth in cost of sales on a quarter and
year-to-date basis was driven primarily by volume and costs per case increases,
coupled with the negative impact of foreign currency translation.
In the U.S., cost of sales grew 7% in the second quarter and 9% for the
first twenty-four weeks of 2004, due to volume growth and increases in costs per
case. The increases in costs per case resulted from the impact of higher priced
products, including our non-carbonated products, coupled with higher commodity
costs.
Cost of sales outside the U.S. grew approximately 7% in the second quarter
and 11% for the first twenty-four weeks of 2004, reflecting increases in costs
per case in Europe and Mexico, coupled with volume growth in Europe and the
negative impact from foreign currency translation. Costs per case increases
outside the U.S. were driven by a mix shift into higher priced products and
packages, coupled with increases in certain commodity costs.
For the full year of 2004, we expect our worldwide cost of sales per case
to grow 3% to 5% as we continue to sell higher cost products.
Selling, Delivery and Administrative Expenses
12 Weeks Ended 24 Weeks Ended
June 12, 2004 vs. June 12, 2004 vs.
June 14, 2003 June 14, 2003
------------- -------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
---- ---- -------- ----- ---- --------
Cost impact.................................... 6 % 5 % 6 % 5 % 5 % 6 %
Currency translation........................... 0 % 0 % 2 % 1 % 0 % 4 %
------ ----- ----- ----- ----- -----
Total SD&A change......................... 6 % 5 % 8 % 6 % 5 % 10 %
====== ===== ===== ===== ===== =====
Selling, delivery and administrative expenses were $1.0 billion in the
second quarter and $1.9 billion for the first twenty-four weeks of 2004, a 6%
increase over similar periods in 2003. The increase in selling, delivery and
administrative expenses in the U.S. resulted from additional variable costs
associated with volume growth and increased casualty insurance expenses. The
increases in selling, delivery and administrative expenses outside the U.S. were
driven primarily by
-17-
higher operating costs in Mexico, Russia and Turkey, coupled with the negative
impact of foreign currency translation.
Selling, delivery and administrative expenses for the full year is expected
to grow in the low-single digits.
Operating Income
Operating income was $273 million in the second quarter, a 1% decrease over
the similar period in 2003. For the quarter, the decrease in operating income
was driven by operating income declines in Mexico, partially offset by a 7%
increase in the United States. The increase in operating income in the U.S. was
due to strong topline growth partially offset by higher cost of sales and
selling, delivery and administrative expenses. For the first twenty-four weeks
of 2004, operating income was $409 million, a 4% increase over the similar
period in 2003, reflecting a 9% increase in operating income in the U.S.,
partially offset by declines in Mexico.
Interest Expense
Interest expense decreased by $3 million in the second quarter and remained
flat for the first twenty-four weeks of 2004, when compared with similar periods
of 2003, largely due to lower effective interest rates achieved on our long-term
debt.
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 twenty-four weeks ended 2004 and 2003 was
6.6% and 6.4%, respectively.
Liquidity and Financial Condition
- ---------------------------------
Cash Flows
Net operating cash provided by operations grew by $76 million to $374
million in the first half of 2004 due to higher profits, lapping of payments
related to the settlement of our New Jersey wage and hour litigation in 2003 and
working capital improvements. These upsides were partially offset by the timing
of pension contributions during 2004.
Net cash used for investments decreased by $213 million to $468 million,
principally reflecting less notes receivable provided to PBG and lower
acquisition spending.
Net cash used for financing increased by $1,235 million to $904 million
driven primarily by the repayment of our $1.0 billion note in February 2004 and
lower proceeds from long-term borrowings.
For the full year in 2004, we expect capital expenditures to be between
$675 million and $700 million.
-18-
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.
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.
PBG has a $500 million commercial paper program that is supported by a
credit facility, which is guaranteed by us. During the second quarter, PBG
renegotiated their two $250 million credit facilities into one $500 million
credit facility, which expires in April 2009. PBG has used these credit
facilities to support its commercial paper program in 2004 and 2003.
During the second quarter, we repaid our $160 million 9.75% senior notes by
liquidating our investments in our debt defeasance trust.
On June 22, 2004, we signed a letter of intent to purchase the Auburn,
Maine-based Pepsi bottling operation of Seltzer and Rydholm, Inc. We expect to
close in the fall of 2004.
Contractual Obligations
As of June 12, 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.
-19-
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.
-20-
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.
-21-
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
- -----------------
On July 14, 2004, Bottling LLC accepted three criminal misdemeanor pleas
from the Onondaga District Attorney's Office and from the State of New York
Attorney General's Office relating to allegations that certain of Bottling LLC's
warehouses and distribution centers improperly discharged certain substances
into either storm drain systems or into publicly owned treatment works without
the requisite permits. The substances consisted of fountain syrup, outdated
beverage products, water used to wash vehicles, waste water from cleaning floors
or spills from vehicle maintenance activities. The pleas provided for a $200,000
penalty and the funding of an existing environmental program to remediate Lake
Onondaga for the benefit of that community in the amount of $2.78 million.
Item 5.
Other Information
- -----------------
The financial statements of PBG, included in PBG's Quarterly Report on Form
10-Q and filed with the SEC on July 21, 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.
4.1 U.S. $500,000,000 5-Year Credit Agreement dated as of April 28, 2004
among The Pepsi Bottling Group Inc., Bottling Group, LLC, JP Morgan
Chase Bank as Agent, Banc of America Securities LLC and Citigroup
Global Markets Inc., as Joint Lead Arrangers and Book Managers and
Bank of America, N.A., Citicorp USA, Inc., Credit Suisse First Boston
and Deutsche Bank Securities Inc., as Syndication Agents
15.1 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
-22-
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)
Date: July 21, 2004 /s/ Andrea L. Forster
------------- ---------------------
Andrea L. Forster
Principal Accounting Officer
Date: July 21, 2004 /s/ Alfred H. Drewes
------------- --------------------
Alfred H. Drewes
Principal Financial Officer