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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 19, 2005 (12 weeks)
-------------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 333-80361-01
------------
BOTTLING GROUP, LLC
-------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4042452
- -------------------------------- ------------------
(State or other jurisdiction of (I.R.S.
employer incorporation or organization) Identification No.)
One Pepsi Way, Somers, New York 10589
- ----------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
914-767-6000
------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
Bottling Group, LLC
-------------------
Index
Page No.
--------
Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
12 weeks ended March 19, 2005 and March 20, 2004 2
Condensed Consolidated Statements of Cash Flows -
12 weeks ended March 19, 2005 and March 20, 2004 3
Condensed Consolidated Balance Sheets -
March 19, 2005 and December 25, 2004 4
Notes to Condensed Consolidated Financial Statements 5-11
Report of Independent Registered Public Accounting Firm 12
Item 2. Management's Financial Review 13-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
Part II Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits 21
PART I - FINANCIAL INFORMATION
Item 1.
Bottling Group, LLC
Condensed Consolidated Statements of Operations
in millions, unaudited
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Net revenues........................................................... $2,147 $2,067
Cost of sales.......................................................... 1,116 1,051
----- -----
Gross profit........................................................... 1,031 1,016
Selling, delivery and administrative expenses.......................... 912 880
----- -----
Operating income....................................................... 119 136
Interest expense....................................................... 40 41
Interest income........................................................ 13 8
----- -----
Income before income taxes............................................. 92 103
Income tax expense..................................................... 4 6
----- -----
Net income............................................................. $ 88 $ 97
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
- 2 -
Bottling Group, LLC
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Cash Flows - Operations
Net income..................................................................... $ 88 $ 97
Adjustments to reconcile net income to net cash provided by operations:
Depreciation................................................................. 130 124
Amortization................................................................. 3 3
Deferred income taxes........................................................ - 2
Other non-cash charges and credits, net...................................... 36 32
Changes in operating working capital, excluding effects of acquisitions:
Accounts receivable, net.................................................... (3) (3)
Inventories, net............................................................ (48) (67)
Prepaid expenses and other current assets................................... (28) 14
Accounts payable and other current liabilities.............................. (61) (9)
Income taxes payable........................................................ (8) (16)
----- -----
Net change in operating working capital ..................................... (148) (81)
----- -----
Pension contributions........................................................ (20) (20)
Other, net................................................................... (15) (10)
----- -----
Net Cash Provided by Operations................................................. 74 147
----- -----
Cash Flows - Investments
Capital expenditures........................................................... (93) (102)
Acquisitions of bottlers....................................................... (1) -
Sale of property, plant and equipment.......................................... 1 1
Notes receivable from PBG, net................................................. (73) (50)
----- -----
Net Cash Used for Investments................................................... (166) (151)
----- -----
Cash Flows - Financing
Short-term borrowings - three months or less................................... 30 13
Proceeds of long-term debt..................................................... 23 9
Payments of long-term debt..................................................... (4) (1,004)
----- -----
Net Cash Provided by (Used for) Financing....................................... 49 (982)
----- -----
Effect of Exchange Rate Changes on Cash and Cash Equivalents.................... - (1)
----- -----
Net Decrease in Cash and Cash Equivalents....................................... (43) (987)
Cash and Cash Equivalents - Beginning of Period................................. 177 1,154
----- -----
Cash and Cash Equivalents - End of Period....................................... $ 134 $ 167
===== =====
Supplemental Cash Flow Information
Net third-party interest paid................................................... $ 50 $ 56
===== =====
Income taxes paid............................................................... $ 12 $ 20
===== =====
See accompanying notes to Condensed Consolidated Financial Statements.
- 3 -
Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
(Unaudited)
March December
19, 2005 25, 2004
-------- --------
ASSETS
Current Assets
Cash and cash equivalents..................................................... $ 134 $ 177
Accounts receivable, less allowance of $59 at March 19, 2005 and
$61 at December 25, 2004................................................... 1,054 1,054
Inventories................................................................... 476 427
Prepaid expenses and other current assets..................................... 252 229
------ ------
Total Current Assets....................................................... 1,916 1,887
Property, plant and equipment, net............................................ 3,543 3,581
Other intangible assets, net.................................................. 3,645 3,639
Goodwill...................................................................... 1,422 1,416
Notes receivable from PBG..................................................... 2,021 1,948
Other assets.................................................................. 104 109
------ ------
Total Assets........................................................ $12,651 $12,580
====== ======
LIABILITIES AND OWNERS' EQUITY
Current Liabilities
Accounts payable and other current liabilities................................ $ 1,197 $ 1,279
Short-term borrowings......................................................... 107 77
Current maturities of long-term debt.......................................... 76 52
------ ------
Total Current Liabilities.................................................. 1,380 1,408
Long-term debt................................................................ 3,476 3,495
Other liabilities............................................................. 632 618
Deferred income taxes......................................................... 439 436
Minority interest............................................................. 3 3
------ ------
Total Liabilities.......................................................... 5,930 5,960
------ ------
Owners' Equity
Owners' net investment........................................................ 7,156 7,068
Accumulated other comprehensive loss.......................................... (434) (447)
Deferred compensation......................................................... (1) (1)
------ ------
Total Owners' Equity....................................................... 6,721 6,620
------ ------
Total Liabilities and Owners' Equity................................ $12,651 $12,580
====== ======
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 and Europe, which consists of
operations in Spain, Greece, Russia and Turkey.
In conjunction with PBG's initial public offering and other subsequent
transactions, PBG and PepsiCo, Inc. ("PepsiCo") contributed bottling businesses
and assets used in the bottling businesses to Bottling LLC. As a result of the
contribution of these assets, PBG owns 93.2% of Bottling LLC and PepsiCo owns
the remaining 6.8% as of March 19, 2005.
The accompanying Condensed Consolidated Balance Sheet at March 19, 2005 and
the Condensed Consolidated Statements of Operations and Cash Flows for the 12
weeks ended March 19, 2005 and March 20, 2004 have not been audited, but have
been prepared in conformity with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. These Condensed Consolidated
Financial Statements should be read in conjunction with the audited consolidated
financial statements for the fiscal year ended December 25, 2004 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 fifty-two weeks, ending on the last Saturday in December. Every five or six
years a fifty-third week is added. Fiscal year 2004 consisted of fifty-two
weeks. In 2005, our fiscal year consists of fifty-three weeks (the additional
week is added to the fourth quarter). 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/17 weeks (FY 2005) September, October,
November and December
Note 2 - Seasonality of Business
The results for the first quarter are not necessarily indicative of the
results that may be expected for the full year because of business seasonality.
The seasonality of our operating results arises from higher sales in the second
and third quarters versus the first and fourth quarters of the year, combined
with the impact of fixed costs, such as depreciation and interest, which are not
significantly impacted by business seasonality. From a cash flow perspective,
the majority of our cash flow from operations is generated in the third and
fourth quarters.
- 5-
Note 3 - New Accounting Standards
Share-Based Payment
In December 2004, the FASB issued a revised Statement of Financial
Accounting Standards ("SFAS") No. 123, "Share-Based Payment." Among its
provisions, SFAS 123R will require us to measure the cost of employee services
in exchange for an award of equity instruments based on the grant-date fair
value of the award and to recognize the cost over the requisite service period.
As a result of the release of a recent Securities and Exchange Commission rule,
SFAS 123R becomes effective for us beginning in the first quarter of 2006. We
are currently evaluating the impact of this proposed standard on our
Consolidated Financial Statements.
FASB Staff Position No. FAS 109-1
In December 2004, the FASB issued Staff Position No. FAS 109-1 ("FSP
109-1"), "Application of FASB Statement No. 109, Accounting for Income Taxes, to
the Tax Deduction on Qualified Production Activities Provided by the American
Jobs Creation Act of 2004." FSP No. 109-1 clarifies SFAS No. 109's guidance that
applies to the new tax deduction for qualified domestic production activities.
We have adopted the standard at the beginning of 2005. This standard will not
have a material impact to our Consolidated Financial Statements.
FASB Staff Position No. FAS 109-2
In December 2004, the FASB issued Staff Position No. FAS 109-2 ("FSP
109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004." FSP 109-2
provides that an enterprise is allowed time beyond the financial reporting
period of enactment to evaluate the effect of the new tax law on its plan for
applying SFAS No. 109. We are evaluating whether to repatriate our undistributed
foreign earnings in 2005.
FASB Interpretation No. 47
In April 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations." FIN 47 provides
clarification of certain sections of FASB Statement No. 143, "Accounting for
Asset Retirement Obligations." Specifically, FIN 47 clarifies the term
conditional asset retirement obligation as used in SFAS 143 and also clarifies
when an entity would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. FIN 47 is effective no later than the
end of fiscal years ending after December 15, 2005. We are currently evaluating
the impact of this standard on our Consolidated Financial Statements.
Note 4 - Stock-Based Employee Compensation
We measure stock-based compensation expense using the intrinsic value
method in accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related interpretations.
Accordingly, compensation expense for PBG stock option grants to our employees
is measured as the excess of the quoted market price of PBG's common stock at
the grant date over the amount the employee must pay for the stock. Our policy
is to grant PBG stock options at fair value on the date of grant. As allowed by
SFAS No. 148, "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 the PBG
- 6 -
stock awards granted to our employees under the fair-value based method
prescribed by SFAS No. 123, net income would have been changed to the pro forma
amounts set forth below:
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Net income:
As reported..................................................... $ 88 $ 97
Add: Total stock-based employee compensation expense
included in reported net income........................... - 1
Less: Total stock-based employee compensation expense
determined under fair-value based method for all
awards.................................................... (18) (18)
----- -----
Pro forma....................................................... $ 70 $ 80
===== =====
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-Merton
option-pricing model.
Note 5 - Inventories
March December
19, 2005 25, 2004
-------- --------
Raw materials and supplies...................................... $ 175 $ 159
Finished goods.................................................. 301 268
----- -----
$ 476 $ 427
===== =====
Note 6 - Property, plant and equipment, net
March December
19, 2005 25, 2004
-------- --------
Land............................................................ $ 258 $ 257
Buildings and improvements...................................... 1,270 1,263
Manufacturing and distribution equipment........................ 3,303 3,289
Marketing equipment............................................. 2,255 2,237
Other........................................................... 180 177
----- -----
7,266 7,223
Accumulated depreciation........................................ (3,723) (3,642)
----- -----
$3,543 $3,581
===== =====
- 7 -
Note 7 - Other intangible assets, net and Goodwill
March December
19, 2005 25, 2004
-------- --------
Intangibles subject to amortization:
Gross carrying amount:
Customer relationships and lists ............................. $ 46 $ 46
Franchise/distribution rights................................. 45 44
Other identified intangibles.................................. 30 30
----- -----
121 120
----- -----
Accumulated amortization:
Customer relationships and lists ............................. (6) (6)
Franchise/distribution rights................................. (16) (15)
Other identified intangibles.................................. (18) (16)
----- -----
(40) (37)
----- -----
Intangibles subject to amortization, net............................. 81 83
----- -----
Intangibles not subject to amortization:
Carrying amount:
Franchise rights.............................................. 2,965 2,958
Distribution rights........................................... 289 288
Trademarks.................................................... 209 208
Other identified intangibles.................................. 101 102
----- -----
Intangibles not subject to amortization......................... 3,564 3,556
----- -----
Total other intangible assets, net................................... $3,645 $3,639
===== =====
Goodwill............................................................. $1,422 $1,416
===== =====
Goodwill increased by approximately $6 million in 2005 due to the impact
from foreign currency translation.
For intangible assets subject to amortization, we calculate amortization
expense over the period we expect to receive economic benefit. Total
amortization expense was $3 million for the twelve weeks ended March 19, 2005
and March 20, 2004. 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
---------- ------------------
2005 2006 2007 2008 2009
---- ---- ---- ---- ----
Customer relationships
and lists...................... 17 years $2 $3 $3 $3 $3
Franchise/distribution
rights......................... 7 years $5 $5 $3 $2 $2
Other identified
intangibles.................... 7 years $3 $3 $3 $2 $1
- 8 -
Note 8 - Pension and Postretirement Medical 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 the 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.
Nearly all of our U.S. employees are also eligible to participate in PBG's
401(k) savings plans, which are voluntary defined contribution plans. We make
matching contributions to the 401(k) savings plans on behalf of participants
eligible to receive such contributions. If a participant has one or more but
less than 10 years of eligible service, our match will equal $0.50 for each
dollar the participant elects to defer up to 4% of the participant's pay. If the
participant has 10 or more years of eligible service, our match will equal $1.00
for each dollar the participant elects to defer up to 4% of the participant's
pay.
Components of our U.S. pension expense for the twelve weeks ended March 19,
2005 and March 20, 2004 are as follows:
12 Weeks Ended
---------------
March March
19, 2005 20, 2004
-------- --------
Service cost............................................. $ 11 $ 10
Interest cost............................................ 17 16
Expected return on plan assets........................... (21) (19)
Amortization of prior service cost....................... 2 1
Amortization of net loss................................. 7 6
--- ---
Net pension expense for the defined benefit plans........ 16 14
--- ---
Defined contribution plans expense....................... 4 5
--- ---
Total U.S. pension expense recognized in the Condensed
Consolidated Statements of Operations.................... $ 20 $ 19
=== ===
As of March 19, 2005, we have contributed $20 million to PBG's pension
plans in 2005.
Postretirement Medical Benefits
PBG's postretirement medical 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.
- 9 -
Components of our U.S. postretirement benefits expense for the twelve weeks
ended March 19, 2005 and March 20, 2004 are as follows:
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Service cost.................................................. $ 1 $ 1
Interest cost................................................. 5 4
Amortization of net loss...................................... 1 1
--- ---
U.S. postretirement benefits expense recognized in the
Condensed Consolidated Statements of Operations............... $ 7 $ 6
=== ===
Note 9 - Geographic Data
We operate in one industry, carbonated soft drinks and other ready-to-drink
beverages. We conduct business in all or a portion of the United States, Mexico,
Canada, Spain, Russia, Greece and Turkey.
Net Revenues 12 Weeks Ended
- ------------ --------------
March March
19, 2005 20, 2004
-------- --------
U.S..................................................... $ 1,688 $ 1,626
Mexico.................................................. 153 158
Other countries......................................... 306 283
------ ------
$ 2,147 $ 2,067
====== ======
Long-Lived Assets March December
- ----------------- 19, 2005 25, 2004
-------- --------
U.S..................................................... $ 7,853 $7,814
Mexico.................................................. 1,431 1,435
Other countries......................................... 1,451 1,444
------ ------
$10,735 $10,693
====== ======
Note 10 - Comprehensive Income
12 Weeks Ended
--------------
March March
19, 2005 20, 2004
-------- --------
Net income.............................................. $ 88 $ 97
Currency translation adjustment......................... 15 2
Cash flow hedge adjustment ............................. (2) 3
---- ----
Comprehensive income.................................... $ 101 $ 102
==== ====
Note 11 - Contingencies
We are subject to various claims and contingencies related to lawsuits,
taxes and environmental and other matters arising out of the normal course of
business. We believe that the ultimate liability arising from such claims or
contingencies, if any, in excess of amounts already recognized is not likely to
have a material adverse effect on our results of operations, financial condition
or liquidity.
In 1995, a class action suit was filed against three of our suppliers for
price fixing on the sale of high fructose corn syrup during the years between
1991 and 1995. During this time period we were still part of PepsiCo. During
2004, these suppliers settled their respective charges. The settlement amount
will be allocated to each class action recipient based on the proportion of its
- 10 -
purchases of high fructose corn syrup from these suppliers during the period
1991 through 1995 to the total of such purchases by all class action recipients.
As the allocation of the settlement to each class action recipient has not been
finalized and we do not have reliable information as to the total of such
purchases, we can not accurately estimate with reasonable assurance the amount
of proceeds we will receive from the settlement. Accordingly, we have not
recorded a gain in our Condensed Consolidated Financial Statements. However, our
preliminary estimate of the proceeds we will receive from settlement of this
case is approximately $20 million. We believe the claims process for the
allocation of settlement to each class action recipient will be finalized during
2005.
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 this credit facility to support its commercial paper program in 2005 and
2004.
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.
- 11 -
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 March 19, 2005, and the related
condensed consolidated statements of operations and cash flows for the twelve-
week periods ended March 19, 2005 and March 20, 2004. 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 25, 2004,
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 February 25, 2005, 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 25, 2004,
is fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/ KPMG LLP
New York, New York
April 27, 2005
- 12 -
Item 2.
Management's Financial Review
- -----------------------------
Tabular dollars in millions
OVERVIEW
- --------
Bottling Group, LLC (collectively referred to as "Bottling LLC," "we,"
"our" and "us") is the principal operating subsidiary of The Pepsi Bottling
Group, Inc. ("PBG") and consists of substantially all of the operations and
assets of PBG. Bottling LLC, which is consolidated by PBG, has the exclusive
right to manufacture, sell and distribute Pepsi-Cola beverages, in all or a
portion of the United States, Mexico, Canada and Europe, which consists of
operations in 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 25, 2004, which include additional
information about our accounting policies, practices and the transactions that
underlie our financial results.
FINANCIAL PERFORMANCE SUMMARY
- -----------------------------
- -----------------------------------------------------------------------------
12 Weeks Ended
--------------
March March %
19, 2005 20, 2004 Change
-------- -------- ------
Net revenues.................... $2,147 $2,067 4 %
Gross profit.................... $1,031 $1,016 2 %
Operating income................ $119 $136 (13)%
Net income...................... $88 $ 97 (10)%
- -----------------------------------------------------------------------------
As we expected at the beginning of the year, our performance in the quarter
reflected soft volume results and continued increases in raw material costs.
However, from a net revenue per case perspective, we have continued to generate
strong results.
Excluding the impact of acquisitions, worldwide physical case volume was
flat in the first quarter of 2005 versus the prior year. In the U.S., volume was
down 1% as we lapped last year's strong innovation in the form of Tropicana and
Pepsi Vanilla, coupled with declines in brand Pepsi. In Europe, we generated 3%
volume growth in the quarter due to a strong performance in Turkey and Russia.
In Mexico, volume was flat driven primarily by declines in the metro Mexico City
region, offset by growth in our other regions in Mexico.
Worldwide net revenue per case grew by 3% during the first quarter of 2005
versus the prior year, driven by a 4% increase in the United States. Our pricing
actions in the U.S. have continued to hold in the market place as two thirds of
the growth in net revenue per case was due to rate increases with the remainder
coming from the mix of products we sell.
Cost of sales per case for the quarter increased 6% versus the prior year
driven by increases in raw material costs, coupled with the mix of products we
sell. As expected in the quarter, we have experienced increases in packaging and
sweetener costs. We expect our raw material costs to continue to increase
through the remainder of 2005, with the majority of the cost of sales growth
occurring in the first half of the year. Even with these increased raw material
costs, we were able to grow our gross profit per case by 1% in the quarter
versus the prior year, driven by our strong net revenue performance.
- 13 -
Outlook
In 2005, our fiscal year will include a 53rd week, while fiscal year 2004
consisted of 52 weeks. Our U.S. and Canadian operations report on 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 other countries report on a calendar-year
basis. In order to provide comparable guidance for 2005, we have excluded the
impact of the 53rd week from our outlook. The table and the 2005 outlook
discussion below provide pro forma disclosure by excluding the projected impact
of the 53rd week in 2005:
- --------------------------------------------------------------------------------
Pro forma Forecasted
2005 versus 2004 Impact of Forecasted 2005
growth 53rd week versus 2004 growth
- --------------------------------------------------------------------------------
Worldwide Volume 2% to 3% 1% 3% to 4%
- --------------------------------------------------------------------------------
SD&A Expenses 3% to 4% 1% 4% to 5%
- --------------------------------------------------------------------------------
Pro forma worldwide volume is expected to increase 2% to 3% for the full
year of 2005 versus 2004, excluding the impact of the 53rd week.
We expect to increase our worldwide net revenue per case 3%, which reflects
a 3% increase in the United States. Additionally, as raw material costs continue
to increase, we expect our cost of sales per case to grow about 5% for the full
year of 2005 versus 2004. Pro forma selling, delivery and administrative
expenses (excluding the impact of the 53rd week) is expected to grow
approximately 3% to 4% for the full year of 2005 versus 2004, which reflects
additional costs associated with rising fuel rates and the negative impact of
foreign currency.
Our 2005 outlook does not reflect the effect of the implementation of the
final accounting standard on the expensing of share-based payments, which will
have a material impact on our results. We are in the process of evaluating the
impact of the standard. See Note 3 in Notes to Condensed Consolidated Financial
Statements for more information. Additionally, the American Jobs Creation Act of
2004 was enacted allowing for special tax breaks for the repatriation of
earnings from foreign subsidiaries. We are evaluating whether to repatriate our
undistributed foreign earnings in 2005.
Volume
- -------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
---------------
World- Outside
wide U.S. the U.S.
------ ---- --------
Base volume................. 0 % (1)% 0 %
Acquisitions................ 0 % 1 % 1 %
--- --- ---
Total Volume change..... 0 % 0 % 1 %
=== === ===
- -------------------------------------------------------------------------------
Excluding the impact of acquisitions, our reported worldwide physical case
volume was flat in the first quarter of 2005 versus the prior year, driven by
declines in the U.S. and Canada, partially offset by growth in Europe and a flat
performance in Mexico.
Excluding the impact of acquisitions, volume in the U.S. declined by
approximately 1% reflecting a 1% decrease in our take-home channel, partially
offset by a 1% increase in our cold-
- 14 -
drink channel. During the quarter, the cold-drink channel was positively
impacted by our important twenty-ounce package business. From a brand
perspective, our carbonated soft drink portfolio was down 2% driven primarily by
declines in brand Pepsi and the lapping of the introduction of Pepsi Vanilla.
Our non-carbonated beverage portfolio continued to perform well in the quarter,
with an increase of 3% versus the prior year, reflecting growth from Aquafina
and SoBe and the introduction of Aquafina Flavor Splash, partially offset by the
lapping of the Tropicana launch in 2004.
Excluding the impact of acquisitions, volume performance for our operations
outside the U.S., was flat. Volume trends in Canada were similar to those in the
U.S., with declines in take home, partially offset by a slight increase in cold
drink. In Mexico, physical case volume was essentially flat for the quarter,
with a 4% decline in both carbonated soft drinks and bottled water volume,
partially offset by a 7% increase in our jug water business.
In Europe, volume grew 3%, driven by a 15% increase in Turkey and a 6%
increase in Russia. In Turkey, we continued to improve in the areas of execution
and distribution, which resulted in volume increases in brand Pepsi and local
brands. In Russia, we had solid growth in our non-carbonated beverage portfolio,
driven by Tropicana Juice and Lipton Iced Tea. These increases were partially
offset by declines in Spain, where we faced steep overlaps in the first quarter
of 2004.
Net Revenues
- --------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
--------------
World- Outside
wide U.S. the U.S.
------ ---- --------
Volume impact................... 0 % (1)% 0 %
Net price per case impact
(rate/mix)...................... 3 % 4 % 0 %
Acquisitions.................... 1 % 1 % 1 %
Currency translation............ 0 % 0 % 3 %
--- --- ---
Total Net Revenues change.. 4 % 4 % 4 %
=== === ===
- --------------------------------------------------------------------------------
Net revenues were $2.1 billion for the first quarter of 2005, a 4% increase
over the similar period in the prior year. The increase in net revenues for the
quarter was driven primarily by growth in net price per case. In the first
quarter, approximately 79% of our net revenues was generated in the U.S., 7% of
our net revenues was generated in Mexico and the remaining 14% was generated
outside the U.S. and Mexico.
In the U.S., net revenues increased 4% in the first quarter of 2005 versus
the prior year, reflecting solid growth in net price per case and contributions
from our prior year acquisitions, partially offset by volume declines. The 4%
increase in net price per case in the U.S. for the quarter was due to a
combination of rate increases within bottles and cans, and the mix of products
we sold.
Net revenues outside the U.S. grew approximately 4% in the first quarter of
2005 versus the prior year. The increase in net revenues outside the U.S. was
driven by the favorable impact of foreign currency translation in Canada,
coupled with contributions from our prior year acquisitions in Mexico. In
Mexico, net price per case declined by 4% in the quarter driven primarily by
mix. This change in mix reflects increased sales of our jug water business,
which carries a lower net price per case.
- 15 -
Cost of Sales
- ------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
--------------
World- Outside
wide U.S. the U.S.
------ ---- --------
Volume impact................... 0 % (1)% 0 %
Cost per case impact............ 5 % 6 % 2 %
Acquisitions.................... 1 % 1 % 1 %
Currency translation............ 0 % 0 % 3 %
--- --- ---
Total Cost of Sales change... 6 % 6 % 6 %
=== === ===
- ------------------------------------------------------------------------------
Cost of sales was $1.1 billion in the first quarter of 2005, a 6% increase
over the prior year. The growth in cost of sales was driven primarily by cost
per case increases coupled with contributions from our prior year acquisitions.
In the U.S., cost of sales increased 6% due primarily to increases in cost
per case. The increases in cost per case resulted from rate increases in
packaging and concentrate, coupled with the impact of mix shifts into higher
cost products.
Cost of sales outside the U.S. grew approximately 6% due primarily to the
negative impact of foreign currency translation in Canada, coupled with
increases in cost per case in Europe. Cost per case increases in Europe were
driven by a mix shift into higher priced products and packages, coupled with an
increase in packaging and sweetener costs. In Mexico, cost per case declined by
3%, driven primarily by mix shifts into the jug water business, partially offset
by higher raw material costs.
Selling, Delivery and Administrative Expenses
- -------------------------------------------------------------------------------
12 Weeks Ended
March 19, 2005 vs.
March 20, 2004
--------------
World- Outside
wide U.S. the U.S.
------- ---- --------
Cost impact..................... 2 % 1 % 5 %
Acquisitions.................... 1 % 1 % 1 %
Currency translation............ 1 % 0 % 2 %
--- --- ---
Total SD&A change.......... 4 % 2 % 8 %
=== === ===
- -------------------------------------------------------------------------------
Selling, delivery and administrative expenses were $912 million in the
first quarter of 2005, a 4% percent increase over the prior year. Growth in
selling, delivery and administrative expenses was driven by a 2% increase from
operations, coupled with a two percentage point contribution
- 16 -
from the negative impact of foreign currency translation and acquisitions.
Excluding acquisitions and foreign currency, we limited our selling, delivery
and administrative expenses to 2% growth, reflecting the positive impact from a
number of ongoing productivity initiatives we put in place, partially offset by
higher benefits and fuel costs.
Operating Income
Operating income was $119 million in the first quarter of 2005,
representing a 13% decrease over the prior year, driven by declines in the U.S.
and Mexico. Operating income declines in the U.S. were due to higher raw
material costs and soft volume results during the quarter. In Mexico, declines
in operating income were driven by mix shifts into the jug water business, which
delivers a lower gross profit than the remainder of our portfolio.
Interest Expense
Interest expense decreased slightly in the first quarter of 2005 versus the
prior year. During the quarter we incurred less interest expense due to the
repayment of our $1.0 billion senior note in February 2004, partially offset by
higher effective interest rates on our long-term debt from the use of interest
rate swaps.
Income Tax Expense
We are a limited liability company, taxable as a partnership for U.S. tax
purposes and, as such, generally pay no U.S. federal or state income taxes. We
allocate the federal and state distributable share of income, deductions and
credits to our owners based on percentage ownership. However, certain of our
domestic and foreign affiliates pay income taxes in their respective
jurisdictions. Such amounts are reflected in our Consolidated Statements of
Operations. Our effective tax rate for the first quarter of 2005 was 4.5%
compared with our effective tax rate of 6.0% in the first quarter of 2004. The
decrease in our effective tax rate versus the prior year is due largely to an
increase in anticipated pre-tax income in jurisdictions with lower effective tax
rates.
Liquidity and Financial Condition
- ---------------------------------
Cash Flows
Net cash provided by operations decreased by $73 million to $74 million in
the first quarter of 2005. Decreases in net cash provided by operations were
driven by lower profits in the quarter, coupled with a decrease in working
capital due to higher incentive compensation payouts and the timing of certain
disbursements.
Net cash used for investments increased by $15 million to $166 million due
to increases in notes receivable from PBG, partially offset by lower capital
spending.
Net cash from financing increased by $1,031 million to a source of $49
million in the first quarter of 2005 driven primarily by the lapping of the
repayment of our $1.0 billion note in February 2004 and higher proceeds from
borrowings.
For the full year 2005, we expect capital expenditures to be between $675
million and $725 million.
- 17 -
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.
PBG has a $500 million commercial paper program in the U.S. that is
supported by a credit facility, which is guaranteed by us and expires in April
2009. There are certain financial covenants associated with this credit
facility. PBG has used this credit facility to support its commercial paper
program in 2005 and 2004. PBG had $194 million and $84 million in outstanding
commercial paper at March 19, 2005 and March 20, 2004, respectively.
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.
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 2005, 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.
Contractual Obligations
As of March 19, 2005, there have been no material changes outside the
normal course of business in the contractual obligations disclosed in Item 7 to
our Annual Report on Form 10-K for the fiscal year ended December 25, 2004,
under the caption "Contractual Obligations."
- 18 -
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 long-term and short-term business and financial results;
o restrictions imposed by PepsiCo on our raw material suppliers that could
increase our costs;
o material changes from expectations in the cost of raw materials and
ingredients;
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 impact of customer consolidations on our business;
o an inability to achieve cost savings;
o material changes in capital investment for infrastructure and 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 failure or inability to comply with laws and regulations;
o changes in laws and regulations governing the manufacture and sale of food and
beverages, including restrictions on the sale of carbonated soft drinks in
schools;
o changes in laws and regulations governing the environment, transportation,
employee safety, labor and government contracts;
o changes in accounting standards and taxation requirements (including
unfavorable outcomes from audits performed by various tax authorities);
o changes in our debt ratings;
o material changes in expected interest and currency exchange rates and
unfavorable market performance of our pension plan assets;
o interruptions of operations due to labor disagreements;
o loss of business from a significant customer; and
o limitations on the availability of water or obtaining water rights.
- 19 -
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. There have been no
material changes to our market risks as disclosed in Item 7 to our Annual Report
on Form 10-K for the year ended December 25, 2004.
Item 4.
Controls and Procedures
- -----------------------
Bottling LLC's management carried out an 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 our last fiscal quarter. Based upon this evaluation, the Principal
Executive Officer and the Principal Financial Officer concluded that our
disclosure controls and procedures were effective, as of the end of the period
covered by this Quarterly Report on Form 10-Q, 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, Bottling LLC's management carried out an evaluation, as
required by Rule 13a-15(d) of the Exchange Act, with the participation of our
Principal Executive Officer and our Principal Financial Officer, of changes in
Bottling LLC's internal control over financial reporting. Based on this
evaluation, the Principal Executive Officer and the Principal Financial Officer
concluded that there were no changes in our internal control over financial
reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
- 20 -
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings
At the end of the fourth quarter of 2004 and during the first quarter of
2005, we received Notices of Violation ("NOVs") and Orders For Compliance from
the Environmental Protection Agency, Region 9, relating to operations at three
bottling plants in California and one in Hawaii. The NOVs allege that we
violated our permits and the Clean Water Act as a result of certain events
relating to waste water discharge and storm water run-off. We believe monetary
sanctions may be sought in connection with one or more of these NOVs. We further
believe that neither the sanctions nor the remediation costs associated with
these NOVs will be material to the Company's business or financial condition.
Item 6.
Exhibits
- --------
ITEM 6 (a). EXHIBITS
- --------------------
Exhibit No.
- -----------
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
99.1 Financial statements of PBG, which are incorporated herein by
reference to PBG's Quarterly Report on Form 10-Q for the quarter ended
March 19, 2005, 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.
- 21 -
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: April 25, 2005 /s/ Andrea L. Forster
-------------- ---------------------
Andrea L. Forster
Principal Accounting Officer
Date: April 25, 2005 /s/ Alfred H. Drewes
-------------- --------------------
Alfred H. Drewes
Principal Financial Officer