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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 September 4, 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 36 weeks ended September 4, 2004 and September 6, 2003 2
Condensed Consolidated Statements of Cash Flows -
36 weeks ended September 4, 2004 and September 6, 2003 3
Condensed Consolidated Balance Sheets -
September 4, 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 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 36 Weeks Ended
-------------- --------------
September September September September
4, 2004 6, 2003 4, 2004 6, 2003
------- ------- ------- -------
Net revenues........................................................... $2,934 $2,810 $7,676 $7,216
Cost of sales.......................................................... 1,522 1,438 3,951 3,655
----- ----- ----- -----
Gross profit........................................................... 1,412 1,372 3,725 3,561
Selling, delivery and administrative expenses.......................... 1,052 1,012 2,956 2,806
----- ----- ----- -----
Operating income....................................................... 360 360 769 755
Interest expense....................................................... 35 43 113 121
Interest income........................................................ 7 9 22 21
Other non-operating expenses, net...................................... 1 2 3 5
----- ----- ----- -----
Income before income taxes............................................. 331 324 675 650
Income tax expense..................................................... 7 17 30 38
----- ----- ----- -----
Income before cumulative effect of change in accounting
principle.............................................................. 324 307 645 612
Cumulative effect of change in accounting principle, net of
tax.................................................................... - - - 6
----- ----- ----- -----
Net income............................................................. $ 324 $ 307 $ 645 $ 606
===== ===== ===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
-2-
Bottling Group, LLC
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
36 Weeks Ended
--------------
September September
4, 2004 6, 2003
------- -------
Cash Flows - Operations
Net income................................................................ $ 645 $ 606
Adjustments to reconcile net income to net cash provided by operations:
Depreciation............................................................ 394 380
Amortization............................................................ 9 6
Deferred income taxes................................................... (7) 19
Cumulative effect of change in accounting principle..................... - 6
Other non-cash charges and credits, net................................. 102 120
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net.............................................. (332) (324)
Inventories, net...................................................... (91) (52)
Prepaid expenses and other current assets............................. (9) (34)
Accounts payable and other current liabilities........................ 231 98
------ ------
Net change in operating working capital ................................ (201) (312)
------ ------
Pension contributions................................................... (72) (15)
Other, net.............................................................. (35) (34)
------ ------
Net Cash Provided by Operations............................................ 835 776
------ ------
Cash Flows - Investments
Capital expenditures.................................................... (425) (428)
Acquisitions of bottlers................................................ (8) (97)
Sale of property, plant and equipment................................... 8 5
Notes receivable from PBG .............................................. (449) (501)
------ ------
Net Cash Used for Investments.............................................. (874) (1,021)
------ ------
Cash Flows - Financing
Short-term borrowings - three months or less............................ 52 30
Proceeds from issuance of long-term debt................................ 23 247
Payments of long-term debt.............................................. (1,009) (12)
------ ------
Net Cash (Used for)/Provided by Financing.................................. (934) 265
------ ------
Effect of Exchange Rate Changes on Cash and Cash Equivalents............... (2) 1
------ ------
Net (Decrease)/Increase in Cash and Cash Equivalents....................... (975) 21
Cash and Cash Equivalents - Beginning of Period............................ 1,154 202
------ ------
Cash and Cash Equivalents - End of Period.................................. $ 179 $ 223
====== ======
Supplemental Cash Flow Information
Net third-party interest paid.............................................. $ 136 $ 116
====== ======
Income taxes paid.......................................................... $ 56 $ 31
====== ======
See accompanying notes to Condensed Consolidated Financial Statements.
-3-
Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
(Unaudited)
September December
4, 2004 27, 2003
------- --------
Assets
Current Assets
Cash and cash equivalents................................................ $ 179 $ 1,154
Accounts receivable, less allowance of $66 at
September 4, 2004 and $72 at December 27, 2003..................... 1,295 994
Inventories.............................................................. 464 374
Prepaid expenses and other current assets................................ 200 194
Investment in debt defeasance trust...................................... - 168
------ ------
Total Current Assets............................................. 2,138 2,884
Property, plant and equipment, net......................................... 3,424 3,423
Other intangible assets, net............................................... 3,543 3,562
Goodwill................................................................... 1,396 1,386
Notes receivable from PBG.................................................. 1,955 1,506
Other assets............................................................... 112 125
------ ------
Total Assets.................................................... $12,568 $12,886
====== ======
Liabilities and Owners' Equity
Current Liabilities
Accounts payable and other current liabilities........................... $ 1,368 $ 1,163
Short-term borrowings.................................................... 97 67
Current maturities of long-term debt..................................... 52 1,178
------ ------
Total Current Liabilities........................................ 1,517 2,408
Long-term debt............................................................. 3,487 3,497
Other liabilities.......................................................... 581 628
Deferred income taxes...................................................... 448 451
------ ------
Total Liabilities................................................ 6,033 6,984
------ ------
Owners' Equity
Owners' Equity.......................................................... 7,073 6,409
Accumulated other comprehensive loss.................................... (534) (503)
Deferred compensation................................................... (4) (4)
------ ------
Total Owners' Equity............................................. 6,535 5,902
------ ------
Total Liabilities and Owners' Equity............................ $12,568 $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 September 4, 2004.
The accompanying Condensed Consolidated Balance Sheet at September 4, 2004,
the Condensed Consolidated Statements of Operations for the twelve and
thirty-six weeks ended September 4, 2004 and September 6, 2003 and the Condensed
Consolidated Statements of Cash Flows for the thirty-six weeks ended September
4, 2004 and September 6, 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
Note 2 - Seasonality of Business
The results for the third quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not
significantly impacted by business seasonality.
-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 Related 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 36 Weeks Ended
-------------- ---------------
September September September September
4, 2004 6, 2003 4, 2004 6, 2003
------- ------- ------- -------
Net income:
As reported.................................................. $ 324 $ 307 $ 645 $ 606
Add: Total stock-based employee compensation expense
included in reported net income ....................... - - 1 4
Less: Total stock-based employee compensation expense
determined determined under fair-value based method for
all awards............................................. (16) (21) (50) (57)
---- ---- ---- ----
Pro forma.................................................... $ 308 $ 286 $ 596 $ 553
==== ==== ==== ====
Pro forma compensation cost measured for stock options granted to employees
is amortized using a straight-line basis over the vesting period, which is
typically three years.
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 36 Weeks Ended
-------------- --------------
September September September September
4, 2004 6, 2003 4, 2004 6, 2003
------- ------- ------- -------
Risk-free interest rate...................................... 3.9% 2.8% 3.2% 2.9%
Expected life................................................ 6 years 6 years 6 years 6 years
Expected volatility.......................................... 35% 37% 35% 37%
Expected dividend yield...................................... 0.66% 0.21% 0.68% 0.17%
Note 5 - Inventories
September December
4, 2004 27, 2003
------- --------
Raw materials and supplies................................... $ 177 $ 140
Finished goods............................................... 287 234
---- ----
$ 464 $ 374
==== ====
-7-
Note 6 - Property, plant and equipment, net
September December
4, 2004 27, 2003
------- --------
Land................................................................... $ 253 $ 241
Buildings and improvements............................................. 1,221 1,185
Manufacturing and distribution equipment............................... 3,095 3,028
Marketing equipment.................................................... 2,187 2,131
Other.................................................................. 175 176
------ ------
6,931 6,761
Accumulated depreciation............................................... (3,507) (3,338)
------ ------
$ 3,424 $ 3,423
====== ======
Note 7 - Other intangible assets, net and Goodwill
September December
4, 2004 27, 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 ............................. (5) (3)
Franchise rights.............................................. (13) (10)
Other identified intangibles.................................. (15) (12)
------ ------
(33) (25)
------ ------
Intangibles subject to amortization, net............................... 64 67
------ ------
Intangibles not subject to amortization:
Carrying amount:
Franchise rights.............................................. 2,900 2,908
Distribution rights........................................... 282 286
Trademarks.................................................... 204 207
Other identified intangibles.................................. 93 94
------ ------
Intangibles not subject to amortization........................... 3,479 3,495
------ ------
Total other intangible assets, net..................................... $ 3,543 $ 3,562
====== ======
Goodwill............................................................... $ 1,396 $ 1,386
====== ======
Goodwill increased by approximately $10 million in 2004 due to purchase
price allocations of $11 million relating to our recent acquisitions, partially
offset by the impact from foreign currency translation of $1 million.
-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 $9 million and $6 million for the
thirty-six weeks ended September 4, 2004 and September 6, 2003, respectively.
The weighted-average amortization period for each category of intangible assets
and its 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 $1 $3 $3 $3 $3
Franchise rights...................... 5 years $1 $5 $2 $1 $-
Other identified intangibles.......... 6 years $1 $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 of PBG's
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 U.S. pension expense for the twelve and thirty-six weeks
ended September 4, 2004 and September 6, 2003 are as follows:
12 Weeks Ended 36 Weeks Ended
-------------- --------------
September September September September
4, 2004 6, 2003 4, 2004 6, 2003
------- ------- ------- -------
Service cost............................................. $ 10 $ 9 $ 30 $ 26
Interest cost............................................ 16 14 48 43
Expected return on plan assets........................... (19) (16) (57) (47)
Amortization of prior service cost....................... 2 2 5 5
Amortization of net loss................................. 5 3 16 9
--- --- --- ---
Net pension expense for the defined benefit plans........ 14 12 42 36
--- --- --- ---
Defined contribution plans expense....................... 4 4 14 13
--- --- --- ---
Total pension expense recognized in the Condensed
Consolidated Statements of Operations.................... $ 18 $ 16 $ 56 $ 49
=== === === ===
We expect to contribute $100 million to PBG's U.S. pension plans in 2004.
As of September 4, 2004, $70 million of contributions to PBG's U.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 U.S. postretirement benefits expense for the twelve and
thirty-six weeks ended September 4, 2004 and September 6, 2003 are as follows:
12 Weeks Ended 36 Weeks Ended
-------------- --------------
September September September September
4, 2004 6, 2003 4, 2004 6, 2003
------ ------- ------- -------
Service cost.............................................. $ 1 $ 1 $ 3 $ 3
Interest cost............................................. 4 4 13 13
Amortization of net loss.................................. 1 1 3 2
--- --- --- ---
Net postretirement benefits expense recognized in the
Condensed Consolidated Statements of Operations........... $ 6 $ 6 $ 19 $ 18
=== === === ===
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 the beginning of 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
and $0.6 million for the twelve and thirty-six weeks ended September
4, 2004, respectively.
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 36 Weeks Ended
- ------------ -------------- --------------
September September September September
4, 2004 6, 2003 4, 2004 6, 2003
------- ------- ------- -------
U.S..................................................... $ 2,002 $ 1,929 $ 5,537 $ 5,222
Mexico.................................................. 288 298 722 763
Other countries......................................... 644 583 1,417 1,231
------ ------ ------ ------
$ 2,934 $ 2,810 $ 7,676 $ 7,216
====== ====== ====== ======
Long-Lived Assets September December
- ----------------- 4, 2004 27, 2003
------- --------
U.S..................................................... $ 7,673 $ 7,220
Mexico.................................................. 1,410 1,432
Other countries......................................... 1,347 1,350
------ ------
$10,430 $10,002
====== ======
Note 10 - Comprehensive Income
12 Weeks Ended 36 Weeks Ended
-------------- --------------
September September September September
4, 2004 6, 2003 4, 2004 6, 2003
------- ------- ------- -------
Net income.............................................. $ 324 $ 307 $ 645 $ 606
Currency translation adjustment......................... 39 (119) (22) 33
Cash flow hedge adjustment.............................. (4) 3 (9) 16
---- ---- ---- ----
Comprehensive income.................................... $ 359 $ 191 $ 614 $ 655
==== ==== ==== ====
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 a
credit facility, which is guaranteed by us and expires in April 2009. PBG has
used these credit facilities to support its commercial paper program in 2004 and
2003.
-11-
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 September 4, 2004, the related
condensed consolidated statements of operations for the twelve week and
thirty-six week periods ended September 4, 2004 and September 6, 2003,
respectively, and the related condensed consolidated statements of cash flows
for the thirty-six week periods ended September 4, 2004 and September 6, 2003.
These condensed consolidated financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with the standards of 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 U.S. generally accepted accounting principles.
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
shareholders' 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
September 28, 2004
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 36 Weeks Ended
-------------- --------------
Sept. Sept. % Sept. Sept. %
4, 2004 6, 2003 Change 4, 2004 6, 2003 Change
------- ------- ------ ------- ------- ------
Net revenues....................... $2,934 $2,810 4% $7,676 $7,216 6%
Gross profit....................... $1,412 $1,372 3% $3,725 $3,561 5%
Operating income................... $ 360 $ 360 0% $ 769 $ 755 2%
Income before cumulative
effect of change in accounting
principle 1........................ $ 324 $ 307 5% $ 645 $ 612 5%
Net income......................... $ 324 $ 307 5% $ 645 $ 606 6%
1 - Cumulative effect of change in accounting principle for the thirty-six weeks
ended September 6, 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.
-14-
We generated strong top line results during the quarter, growing worldwide
net revenues by 4%, driven by innovation and execution in the marketplace. This
growth has been balanced, reflecting 2% growth in both volume and net revenue
per case. The strong topline growth has been partially offset by higher cost of
sales as a result of mix shifts into more expensive products and packages
coupled with increases in raw material costs. However, even with the increase in
cost of sales, our gross profit is still growing as our worldwide gross profit
per case increased one percent during the quarter versus the prior year.
From a cost perspective, selling, delivery and administrative expenses have
increased four percent in the third quarter versus the prior year. Approximately
one half of this increase is due to higher incentive compensation and benefit
costs. As a result of these higher costs, operating income for the quarter was
flat versus the prior year.
We expect our full year worldwide operating income performance to be in
line with our year-to-date trends, reflecting growth in both volume and net
revenue per case of two to three percent. Our cost of goods sold per case is
expected to grow three to five percent for the full year of 2004.
Volume
12 Weeks Ended 36 Weeks Ended
Sept. 4, 2004 vs. Sept. 4, 2004 vs.
Sept. 6, 2003 Sept. 6, 2003
------------- -------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
------ ---- -------- ------ ---- --------
Base volume................ 2 % 1 % 4 % 3 % 3 % 2 %
Acquisitions............... 0 % 0 % 1 % 0 % 0 % 1 %
----- ----- ---- ----- ----- ----
Total volume change........ 2 % 1 % 5 % 3 % 3 % 3 %
===== ===== ==== ===== ===== ====
Our reported worldwide physical case volume increased two percent in the
third quarter and three percent in the first thirty-six weeks of 2004, when
compared with similar periods of 2003. For the quarter, increases in reported
worldwide volume were driven by growth in the U.S., Europe, Mexico and Canada.
On a year-to-date-basis, worldwide volume growth reflects increases in the U.S.,
Europe and Canada, partially offset by volume declines in Mexico.
In the U.S., our volume increased by one percent in the third quarter and
three percent on a year-to-date basis reflecting growth in both the cold-drink
and take-home channels of our business. While we did experience softness in our
retail bottle and can cold drink segments, we have been experiencing very good
results in our foodservice business. Our foodservice business segment, which
comprises our on-premise and full service vending accounts, has generated solid
results, up four percent for the quarter and six percent on a year-to-date
basis. From a brand perspective, Trademark PEPSI's volume was down three percent
for the quarter, due to the lapping of PEPSI VANILLA in the prior year,
partially offset by solid contributions from our diet portfolio and the addition
of PEPSI EDGE. On a year-to-date basis, however, Trademark PEPSI's volume has
grown slightly versus the prior year. Our non-carbonated soft drink portfolio
increased four percent in the quarter and 13% on a year-to-date basis, led by
the introduction of TROPICANA juice drinks and continued growth from AQUAFINA.
In Europe, volume grew five percent in the third quarter and nine percent
on a year-to-date basis, driven by strong performances in Russia and Turkey,
partially offset by declines in Spain. For the quarter and on a year-to-date
basis, our volume in Russia and Turkey grew in the double digits. In Russia, we
had solid growth in our core brands, coupled with contributions from new product
introductions, including TROPICANA JUICE and LIPTON ICED TEAS. In Turkey, we
continue to improve in the areas of execution and distribution. In Spain, volume
declined four percent in the quarter and two percent on a year-to-date basis,
reflecting weak tourism and cooler weather.
-15-
In Mexico, volume trends improved during the quarter, reflecting improved
marketplace execution, brand and package innovation and our focus on consumer
value. Total volume in Mexico, excluding the impact of acquisitions, increased
three percent in the quarter with increases in each of our water and carbonated
soft drink categories. On a year-to-date basis, volume in Mexico declined two
percent primarily reflecting softness in our jug water business in the first
half of the year.
Net Revenues
12 Weeks Ended 36 Weeks Ended
Sept. 4, 2004 vs. Sept. 4, 2004 vs.
Sept. 6, 2003 Sept. 6, 2003
------------- -------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
------ ---- -------- ------ ---- --------
Volume impact......................... 2 % 1 % 4 % 3 % 3 % 2 %
Net price per case impact (rate/mix).. 2 % 3 % 0 % 3 % 3 % 2 %
Acquisitions.......................... 0 % 0 % 1 % 0 % 0 % 1 %
Currency translation.................. 0 % 0 % 1 % 0 % 0 % 2 %
---- ---- ---- ---- ---- ----
Total Net Revenues change........ 4 % 4 % 6 % 6 % 6 % 7 %
==== ==== ==== ==== ==== ====
Net revenues were $2.9 billion for the third quarter and $7.7 billion for
the first thirty-six weeks in 2004, a four percent and six percent 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 price per case.
In the U.S., net revenues increased four percent in the third quarter and
six percent for the first thirty-six 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 three percent 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, primarily in cans, and mix benefits from
higher-priced products.
Net revenues outside the U.S. grew approximately six percent in the third
quarter and seven percent for the first thirty-six 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, coupled with the
favorable impact of foreign exchange in Europe and Canada. This growth was
partially offset by net revenue declines in Mexico. Net revenues in Mexico
declined four percent in the quarter and five percent on a year-to-date basis
due primarily to the devaluation of the Mexican peso and volume declines in the
first half of the year. In local currency, our net revenue per case in Mexico
declined one percent in the quarter and increased one percent on a year-to-date
basis.
In the third quarter, approximately 68% of our net revenues was generated
in the U.S., 10% of our net revenues was generated in Mexico and the remaining
22% was generated outside the U.S. and Mexico. On a year-to-date basis,
approximately 72% of our net revenues was generated in the U.S., nine percent of
our net revenues was generated in Mexico and the remaining 19% was generated
outside the U.S. and Mexico.
For the full year of 2004, we expect our worldwide net revenue per case to
grow about two to three percent, driven by net revenue per case growth in the
United States of three percent.
-16-
Cost of Sales
12 Weeks Ended 36 Weeks Ended
Sept. 4, 2004 vs. Sept. 4, 2004 vs.
Sept. 6, 2003 Sept. 6, 2003
------------- -------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
----- ---- -------- ----- ---- --------
Volume impact......................... 2 % 1 % 4 % 3 % 3 % 2 %
Costs per case impact................. 3 % 4 % 2 % 4 % 5 % 4 %
Acquisitions.......................... 1 % 0 % 1 % 0 % 0 % 1 %
Currency translation.................. 0 % 0 % 0 % 1 % 0 % 2 %
---- ---- ---- ---- ---- ----
Total Cost of Sales change....... 6 % 5 % 7 % 8 % 8 % 9 %
==== ==== ==== ==== ==== ====
Cost of sales was $1.5 billion in the third quarter and $4.0 billion for
the first thirty-six weeks of 2004, a six percent and eight percent 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.
In the U.S., cost of sales grew five percent in the third quarter and eight
percent for the first thirty-six weeks of 2004, due to volume growth and
increases in costs per case. The increases in costs per case resulted from the
impact of mix shifts into higher cost products, including our non-carbonated
products, coupled with higher raw material costs.
Cost of sales outside the U.S. grew approximately seven percent in the
third quarter of 2004 due to volume growth and increases in costs per case in
Europe. Costs per case increases in Europe were driven by a mix shift into
higher priced products and packages, coupled with increases in certain commodity
costs. Cost of sales outside the U.S. on a year-to-date basis grew nine percent,
reflecting increases in costs per case in Europe and Mexico, coupled with volume
growth and the negative impact from foreign currency translation.
For the full year of 2004, we expect our worldwide cost of sales per case
to grow three to five percent.
-17-
Selling, Delivery and Administrative Expenses
12 Weeks Ended 36 Weeks Ended
Sept. 4, 2004 vs. Sept. 4, 2004 vs.
Sept. 6, 2003 Sept. 6, 2003
------------- -------------
World- Outside World- Outside
wide U.S. the U.S. wide U.S. the U.S.
------ ---- -------- ------ ---- --------
Cost impact........................... 4 % 5 % 1 % 4 % 5 % 4 %
Acquisitions.......................... 0 % 0 % 1 % 0 % 0 % 1 %
Currency translation.................. 0 % 0 % 0 % 1 % 0 % 2 %
---- ---- ---- ---- ---- ----
Total SD&A change................ 4 % 5 % 2 % 5 % 5 % 7 %
==== ==== ==== ===== ==== ====
Selling, delivery and administrative expenses were $1.1 billion in the
third quarter and $3.0 billion for the first thirty-six weeks of 2004, a four
percent and five percent respective increase over similar periods in 2003.
Increases in selling, delivery and administrative costs were driven by higher
costs in the U.S. and Europe. In the U.S., increases reflect higher incentive
compensation and benefit costs coupled with additional costs associated with
volume growth. Outside the U.S., increases were driven primarily by higher
operating costs in Russia and Turkey and the negative impact of foreign currency
throughout Europe and Canada in the first half of the year, partially offset by
declines in Mexico due to the devaluation of the Mexican peso.
Selling, delivery and administrative expenses for the full year are
expected to grow in line with trends of the third quarter.
Operating Income
Operating income was $360 million in the third quarter, which was flat
versus the prior year. Operating income performance during the quarter was
driven by a decline in the U.S. in the mid-single digits, partially offset by
double digit growth in Canada and Europe. Operating income declines in the U.S.
were due to higher selling, delivery and administrative expenses as a result of
increases in our incentive compensation and benefit costs. In Canada and Europe,
growth in operating income was due to strong top line growth, partially offset
by higher cost of sales.
On a year-to-date basis, operating income was $769 million, a two percent
increase over the prior year. Growth in operating income was driven by a three
percent increase in the U.S. and double digit increases in Canada and Europe.
This growth was partially offset by operating income declines in Mexico due
primarily to the decrease in volume in the first half of the year.
Operating income for the full year in 2004 is expected to increase in the
mid-single digits driven by the continued strong topline growth in the U.S.,
Europe and Canada.
Interest Expense
Interest expense decreased by $8 million in the third quarter and for the
first thirty-six 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.
-18-
Our effective tax rate for the thirty-six weeks ended 2004 and 2003 was
4.4% and 5.9%, respectively. The decrease in our effective tax rate versus the
prior year is due largely to the settlement of certain international tax audits,
which allowed the Company to reverse certain previously established liabilities
for tax exposures.
Liquidity and Financial Condition
- ---------------------------------
Cash Flows
Net cash provided by operations grew by $59 million to $835 million in the
first thirty-six weeks of 2004 due to higher profits, lower incentive
compensation payments and working capital improvements in 2004, coupled with the
lapping of payments related to the settlement of our New Jersey wage and hour
litigation in 2003. These upsides were partially offset by the timing of pension
contributions during 2004.
Net cash used for investments decreased by $147 million to $874 million,
principally reflecting lower acquisition spending and less notes receivable from
PBG.
Net cash used for financing increased by $1,199 million to $934 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.
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. Additionally,
during the second quarter, we repaid our $160 million 9.75% senior notes by
liquidating our investments in our debt defeasance trust.
PBG has a $500 million commercial paper program that is supported by a
credit facility, which is guaranteed by us and expires in April 2009. PBG has
used these credit facilities to support its commercial paper program in 2004 and
2003.
Due to the nature of our business, we require insurance coverage for
certain casualty risks. Given the rapidly increasing costs associated with
obtaining third-party insurance coverage for our casualty risks in the U.S., we
moved to a self-insurance program in 2002. In 2004, we are self-insured for
workers' compensation and automobile risks for occurrences up to $10 million,
and product and general liability risks for occurrences up to $5 million. For
losses exceeding these self-insurance thresholds, we purchase casualty insurance
from a third-party provider.
On October 1, 2004, we purchased the Auburn, Maine-based Pepsi bottling
operation of Seltzer and Rydholm, Inc.
Contractual Obligations
As of September 4, 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 impact of competitive activities on our business;
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 our 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 5.
Other Information
- -----------------
The financial statements of PBG, included in PBG's Quarterly Report on Form
10-Q and filed with the SEC on October 13, 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.
- -----------
ITEM 6 (b). REPORTS ON FORM 8-K
- -------------------------------
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: October 13, 2004 /s/ Andrea L. Forster
---------------- ---------------------
Andrea L. Forster
Principal Accounting Officer
Date: October 13, 2004 /s/ Alfred H. Drewes
---------------- --------------------
Alfred H. Drewes
Principal Financial Officer
-23-