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COCA-COLA ENTERPRISES INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE QUARTER ENDED OCTOBER 1, 2004
FILED PURSUANT TO SECTION 13
OF THE
SECURITIES EXCHANGE ACT OF 1934
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended October 1, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-09300
COCA-COLA ENTERPRISES INC.
(Exact name of registrant as specified in its charter)
Delaware 58-0503352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 Windy Ridge Parkway, Suite 700
Atlanta, Georgia 30339
(Address of principal executive offices) (Zip Code)
770-989-3000
(Registrant's telephone number, including area code)
______________
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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
469,226,222 Shares of $1 Par Value Common Stock as of October 29, 2004
================================================================================
COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED OCTOBER 1, 2004
INDEX
Page
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Income Statements for the Third Quarter
and Nine Months ended October 1, 2004 and September 26, 2003.... 1
Condensed Consolidated Balance Sheets as of October 1, 2004
and December 31, 2003........................................... 2
Condensed Consolidated Statements of Cash Flows for the Nine
Months ended October 1, 2004 and September 26, 2003............. 3
Notes to Condensed Consolidated Financial Statements............. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 40
Item 4. Controls and Procedures.......................................... 40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...... 42
Item 6. Exhibits......................................................... 43
Signatures................................................................ 44
Part I. Financial Information
Item 1. Financial Statements
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited; in millions except per share data)
Third Quarter Nine Months
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net operating revenues............... $ 4,670 $ 4,734 $ 13,754 $ 13,018
Cost of sales, transactions with
The Coca-Cola Company $1,248,
$1,195, $3,770, and $3,333,
respectively........................ 2,761 2,778 8,105 7,616
-------- -------- -------- --------
Gross profit......................... 1,909 1,956 5,649 5,402
Selling, delivery, and administrative
expenses............................ 1,460 1,432 4,445 4,172
-------- -------- -------- --------
Operating income..................... 449 524 1,204 1,230
Interest expense, net................ 152 150 465 446
Other nonoperating (income) expense,
net................................. (2) 2 (3) (4)
-------- -------- -------- --------
Income before income taxes........... 299 372 742 788
Income tax expense................... 92 113 228 241
-------- -------- -------- --------
Net income........................... 207 259 514 547
Preferred stock dividends............ - - - 2
-------- -------- -------- --------
Net income applicable to common
shareowners......................... $ 207 $ 259 $ 514 $ 545
======== ======== ======== ========
Basic net income per share
applicable to common shareowners.... $ 0.44 $ 0.57 $ 1.11 $ 1.20
======== ======== ======== ========
Diluted net income per share
applicable to common shareowners.... $ 0.44 $ 0.56 $ 1.09 $ 1.19
======== ======== ======== ========
Dividends per share applicable to
common shareowners.................. $ 0.04 $ 0.04 $ 0.12 $ 0.12
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements.
- 1 -
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions except share data)
October 1, December 31,
ASSETS 2004 2003
-------------- --------------
Current
Cash and cash investments, at cost approximating
market......................................... $ 131 $ 80
Trade accounts receivable, less allowances of
$48 and $52, respectively...................... 1,771 1,735
Amounts receivable from The Coca-Cola Company,
net............................................ - 37
Inventories..................................... 878 725
Current deferred income tax assets.............. 91 42
Prepaid expenses and other current assets....... 367 381
---------- ----------
Total current assets......................... 3,238 3,000
Property, plant, and equipment, net of accumulated
depreciation of $7,407 and $6,729................ 6,622 6,794
Goodwill.......................................... 578 578
License intangible assets......................... 14,184 14,171
Long-term customer contracts and other noncurrent
assets, net...................................... 1,134 1,157
---------- ----------
$ 25,756 $ 25,700
========== ==========
LIABILITIES AND SHAREOWNERS' EQUITY
Current
Accounts payable and accrued expenses........... $ 2,559 $ 2,760
Amounts payable to The Coca-Cola Company, net... 58 -
Deferred cash payments from The Coca-Cola
Company........................................ 41 87
Current portion of debt......................... 616 1,094
---------- ----------
Total current liabilities.................... 3,274 3,941
Debt, less current portion of debt................ 10,494 10,552
Retirement and insurance programs and other
long-term obligations............................ 1,377 1,522
Deferred cash payments from The Coca-Cola Company. 342 355
Long-term deferred income tax liabilities......... 5,180 4,965
Long-term payable to The Coca-Cola Company........ 12 -
Shareowners' equity
Common stock, $1 par value - authorized -
1,000,000,000 shares; issued - 475,740,190 and
462,084,668 shares, respectively............... 476 462
Additional paid-in capital...................... 2,831 2,611
Reinvested earnings............................. 1,699 1,241
Accumulated other comprehensive income.......... 160 133
Common stock in treasury, at cost - 6,606,574
and 6,330,513 shares, respectively............. (89) (82)
---------- ----------
Total shareowners' equity.................... 5,077 4,365
---------- ----------
$ 25,756 $ 25,700
========== ==========
See Notes to Condensed Consolidated Financial Statements.
- 2 -
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)
Nine Months
-----------------------------
2004 2003
-------------- --------------
Cash Flows From Operating Activities
Net income....................................... $ 514 $ 547
Adjustments to reconcile net income to net cash
derived from operating activities:
Depreciation................................... 784 756
Net change in long-term customer contracts..... 12 49
Deferred income tax expense.................... 155 167
Deferred cash payments from The Coca-Cola
Company....................................... (45) (61)
Pension cash contributions in excess of costs.. (132) (117)
Net changes in current assets and current
liabilities................................... (119) (276)
Other.......................................... (82) (38)
---------- ----------
Net cash derived from operating activities....... 1,087 1,027
Cash Flows From Investing Activities
Investments in capital assets.................... (618) (702)
Proceeds from fixed asset disposals, $58 from
The Coca-Cola Company in 2003................... 11 83
Cash investments in bottling businesses, net of
cash acquired................................... - (13)
---------- ----------
Net cash used in investing activities............ (607) (632)
Cash Flows From Financing Activities
Net increase in commercial paper................. 515 152
Issuances of debt................................ 197 365
Payments on debt................................. (1,262) (815)
Cash dividend payments on common and preferred
stock........................................... (56) (38)
Cash received from stock option exercises........ 177 17
Cash received from settlement of interest rate
swap............................................ - 28
---------- ----------
Net cash used in financing activities............ (429) (291)
---------- ----------
Net increase in cash and cash investments.......... 51 104
Cash and cash investments at beginning of period... 80 68
---------- ----------
Cash and cash investments at end of period......... $ 131 $ 172
========== ==========
See Notes to Condensed Consolidated Financial Statements.
- 3 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments consisting of normal recurring
accruals considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements and
footnotes included in the Coca-Cola Enterprises Inc. ("CCE," "we," "our," "us,"
or the "Company") Annual Report on Form 10-K for the year ended December 31,
2003. The third quarter and nine months of 2004 and 2003 ended on October 1,
2004 and September 26, 2003, respectively. The third quarter of 2004 and 2003
included 65 days. The nine months of 2004 and 2003 included 197 and 193 days,
respectively.
Note B - Reclassifications
Classifications in the condensed consolidated statement of cash flows for the
prior year have been conformed to classifications used in the current year for
payments and amortization expense associated with contracts for pouring or
vending rights in specific athletic venues, specific school districts, or other
locations.
Note C - Seasonality of Business
Operating results for the third quarter and nine months ended October 1, 2004
are not indicative of results that may be expected for the year ending December
31, 2004 because of business seasonality. Business seasonality results from a
combination of higher unit sales of our products in the second and third
quarters versus the first and fourth quarters of the year and the methods of
accounting for fixed costs such as depreciation, amortization, and interest
expense which are not significantly impacted by business seasonality.
- 4 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note D - Inventories
We value our inventories at the lower of cost or market. Cost is determined
using the first-in, first-out ("FIFO") method.
Inventories at October 1, 2004 and December 31, 2003 consisted of the following
(in millions):
October 1, December 31,
2004 2003
----------------- -----------------
Finished goods............................. $ 542 $ 475
Raw materials and supplies................. 336 250
--------- ---------
$ 878 $ 725
========= =========
Note E - Earnings Per Share
The following table presents information concerning basic and diluted
earnings per share for the third quarter and nine months ended October 1, 2004
and September 26, 2003 (in millions except per share data; per share data is
calculated prior to rounding to millions):
Third Quarter Nine Months
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income........................... $ 207 $ 259 $ 514 $ 547
Preferred stock dividends............ - - - 2
--------- --------- --------- ---------
Net income applicable to common
shareowners......................... $ 207 $ 259 $ 514 $ 545
========= ========= ========= =========
Basic average common shares
outstanding......................... 469 454 464 453
Effect of dilutive securities:
Stock compensation awards(A)....... 5 6 8 7
--------- --------- --------- ---------
Diluted average common shares
outstanding......................... 474 460 472 460
========= ========= ========= =========
Basic net income per share
applicable to common shareowners.... $ 0.44 $ 0.57 $ 1.11 $ 1.20
========= ========= ========= =========
Diluted net income per share
applicable to common shareowners.... $ 0.44 $ 0.56 $ 1.09 $ 1.19
========= ========= ========= =========
(A) Prior to the conversion into common stock during the third quarter of 2003,
the preferred stock outstanding was not included in our computation of
diluted earnings per share because the effect of its inclusion would have
been antidilutive. Options to purchase 56.7 million and 65.3 million common
shares were outstanding at October 1, 2004 and September 26, 2003,
respectively. Of these amounts, options to purchase 30.4 million and 39.9
million shares for the quarters ended October 1, 2004 and September 26,
2003, respectively, and options to purchase 16.9 million and 30.0 million
common shares for the nine months ended October 1, 2004 and September 26,
2003, respectively, are not included in the computation of diluted earnings
per share because the effect of including the options in the computation
would be antidilutive. The dilutive impact of the remaining options
outstanding in each period is included in the stock compensation awards
line above.
- 5 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note F - Comprehensive Income
The following table (in millions) presents a calculation of comprehensive
income, comprised of net income and other adjustments, for the third quarter and
nine months ended October 1, 2004 and September 26, 2003. Other adjustments
include currency items such as foreign currency translation adjustments and
hedges of net investments in international subsidiaries, gains and losses on
certain investments in equity securities, changes in the fair value of certain
derivative financial instruments qualifying as cash flow hedges, and minimum
pension liability adjustments, where applicable. We adjust for the income tax
effect on all items comprising comprehensive income, excluding the impact of
currency translations as earnings from international subsidiaries are determined
to be indefinitely reinvested.
Third Quarter Nine Months
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income........................... $ 207 $ 259 $ 514 $ 547
Currency translations................ 41 (36) 21 236
Hedges of net investments, net of tax (2) 7 5 (46)
Unrealized gains (losses) on
securities, net of tax.............. (1) (2) 1 (6)
Realized (gains) on securities
included in in net income, net of
tax................................. - - - (2)
Unrealized gains (losses) on cash
flow hedges, net of tax............. 1 - (3) 5
Reclassifications of (gains) losses
on cash flow hedges into net income,
net of tax.......................... 1 (1) 3 (9)
--------- --------- --------- ---------
Net change to derive comprehensive
income for the period............... 40 (32) 27 178
--------- --------- --------- ---------
Comprehensive income................. $ 247 $ 227 $ 541 $ 725
========= ========= ========= =========
- 6 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note G - Related Party Transactions
The following table presents transactions with The Coca-Cola Company ("TCCC"),
and their impact on the income statement categories, for the third quarter and
nine months ended October 1, 2004 and September 26, 2003 (in millions):
Third Quarter Nine Months
-------------------- --------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Amounts affecting net operating
revenues:
Fountain syrup and packaged product
sales............................. $ 120 $ 137 $ 368 $ 368
Dispensing equipment repair
services.......................... 14 13 41 40
Other transactions................. 4 3 9 11
--------- --------- --------- ---------
$ 138 $ 153 $ 418 $ 419
========= ========= ========= =========
Amounts affecting cost of sales:
Purchases of syrup, concentrate,
and mineral water................. $ (1,117) $ (1,207) $ (3,572) $ (3,397)
Purchases of sweeteners............ (82) (82) (240) (238)
Purchases of finished products..... (178) (155) (497) (414)
Marketing support funding earned... 116 229 494 647
Cold drink equipment placement
funding earned.................... 13 20 45 61
Cost recovery from sale of hot fill
production facility............... - - - 8
--------- --------- --------- ---------
$ (1,248) $ (1,195) $ (3,770) $ (3,333)
========= ========= ========= =========
Amounts affecting selling, delivery,
and administrative expenses:
Marketing program payments........ $ - $ 1 $ (20) $ 2
Operating expense cost
reimbursements:
To TCCC......................... - (4) - (12)
From TCCC....................... 7 8 19 26
--------- --------- --------- ---------
$ 7 $ 5 $ (1) $ 16
========= ========= ========= =========
As part of our strategic planning project with TCCC, we agreed that an
increase in the level of spending in the areas of brand building and innovation
was necessary to promote our objective of building value. In support of this
strategy, we paid TCCC approximately $20 million for participation in marketing
activities for the period of January 1, 2004, through April 30, 2004. This
amount is included in marketing program payments in the table above. Effective
May 1, 2004, this spending was eliminated.
- 7 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note G - Related Party Transactions (continued)
Effective May 1, 2004, we agreed with TCCC that a significant portion of our
funding from TCCC will be netted against the price we pay TCCC for concentrate
in our United States territories. Effective June 1, 2004, similar changes were
made in our Canadian territories. As a result, our cost of sales increased by
approximately $41 million during the second quarter of 2004 as inventory on hand
was sold without funding and replaced with lower cost inventory.
Additionally, we agreed to terminate the Strategic Growth Initiative ("SGI")
program and eliminate the Special Marketing Funds ("SMF") funding program. These
actions were effective May 1, 2004 in the United States and June 1, 2004 in
Canada. TCCC paid us for all funding earned under the SMF funding program. Under
the SGI program, we received $41.3 million from TCCC during the first quarter of
2004 and $6.8 million as a final payment during the second quarter of 2004.
Also effective May 1, 2004, TCCC agreed to establish a Global Marketing Fund,
under which TCCC will pay us $61.5 million annually through December 31, 2014,
as support for marketing activities. The term of the agreement will
automatically be extended for successive ten-year periods thereafter unless
either party gives written notice of termination of this agreement. The
marketing activities to be funded under this agreement will be agreed upon each
year as part of the annual joint planning process and will be incorporated into
the annual marketing plans of both companies. TCCC may terminate this agreement
for the balance of any year in which we fail to timely complete the marketing
plans or are unable to execute the elements of those plans, when such failure is
within our reasonable control. We will receive a pro rata amount of $41.5
million during 2004, of which a total of $26 million was received during the
first nine months ended October 1, 2004. This amount is included in marketing
support funding earned in the table above.
During the first quarter of 2004, TCCC revised our base SMF funding rate to
include reimbursements between the companies for expenses related to the
assumption of customer marketing group responsibilities from TCCC and the
transfer of local media activities from us to TCCC in prior years. These amounts
are included in marketing support funding earned for 2004 in the table above
through April 2004 when, as noted above the SMF funding program was terminated.
The amounts shown in the table above as operating expense cost reimbursements to
us from TCCC for the third quarter and first nine months of 2004 relate to the
staffing costs transferred to us under another agreement with TCCC.
- 8 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note G - Related Party Transactions (continued)
We participate in Cooperative Trade Marketing ("CTM") arrangements in the United
States administered by TCCC. Beginning in 2002, we became responsible for all
costs of the programs in our territories, other than costs relative to a limited
number of specified customers. We transfer amounts to TCCC under the program for
payment to customers. Pursuant to these arrangements, amounts paid or payable to
TCCC for the nine months ended October 1, 2004 and September 26, 2003 totaled
approximately $175 million and $189 million, respectively, and are recognized as
a reduction of net operating revenues.
Deferred cash payments from TCCC include amounts deferred under Jumpstart and
other miscellaneous programs. During the third quarter of 2004, we amended our
Jumpstart agreements with TCCC for the United States and Canada to reduce the
cold drink equipment purchase and placement requirements by 70,000 units per
year for 2004 and 2005 and to extend our North American purchase and placement
requirements through 2010. Previously, we were required to purchase and place
targeted amounts of cold drink equipment through 2008. By placing approximately
103,000 units in 2004, as required by the amended agreements, we will earn
approximately $50 million of funding in 2004 versus $72 million earned in 2003.
Support funding earned under the Jumpstart programs with TCCC is shown as cold
drink equipment placement funding earned in the table above. In return for
TCCC's postponement of our purchase and placement obligations, we have agreed to
pay TCCC $1.5 million in 2004, $3.0 million annually in 2005 through 2008, and
$1.5 million in 2009.
In March 2004, we recalled the recently launched Dasani water brand in Great
Britain because of bromate levels exceeding British regulatory standards. We
recognized a $32 million reimbursement for recall costs from TCCC in the first
quarter of 2004 as an offset to related costs. This amount was received from
TCCC in October 2004.
- 9 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note H - Income Taxes
Our effective tax rate was 31% for the first nine months of 2004 and 2003. The
table below provides a reconciliation of the income tax provision at the
statutory federal rate to our actual income tax provision for the nine months
ended October 1, 2004 and September 26, 2003 (in millions):
Nine Months
-----------------------------
2004 2003
-------------- --------------
U.S. federal statutory expense..................... $ 260 $ 276
State expense, net of federal expense.............. 13 12
Impact of lower taxes on European and Canadian
operations........................................ (54) (54)
Valuation allowance provision...................... 5 5
Nondeductible items................................ 10 13
Settlement of tax items............................ (3) (11)
Other.............................................. (3) -
-------- --------
$ 228 $ 241
======== ========
On October 22, 2004, "The American Jobs Creation Act of 2004" (the "Act") was
enacted into law. This major U.S. tax legislation contains numerous provisions
of potential significance to the Company. The Act allows a special deduction
with respect to "qualified production activities income" generated by U.S. based
manufacturing activities that will amount to 3% of the taxable income
attributable to such activities in 2005 increasing to 9% after 2009. The Act
also contains a provision permitting the repatriation of international earnings
at a special reduced U.S. tax rate if such repatriations meet certain criteria
and are repatriated during specified periods. Substantive changes to tax law are
contained in many other provisions of the Act. Much of this new legislation is
highly complex, and the U.S. Treasury Department and the Internal Revenue
Service are expected to issue further guidance on the application of these
changes within the next few months. We are evaluating the Act and will closely
review all new guidance as it becomes available. At this time, it is unclear
whether the Act will have a material impact on our consolidated financial
statements.
- 10 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note I - Debt
Total debt balances summarized below are adjusted for the effects of our
interest rate and currency swap agreements (in millions):
October 1, 2004 December 31, 2003
------------------- -------------------
Balance Rates(A) Balance Rates(A)
--------- --------- --------- ---------
U.S. commercial paper.................. $ 1,107 1.7 % $ 655 1.1 %
Euro commercial paper.................. 191 2.1 208 2.1
Canadian dollar commercial paper....... 239 2.3 148 2.8
U.S. dollar notes due 2004-2037 (B).... 3,783 4.1 4,510 3.5
Euro and pound sterling notes due
2004-2021............................. 1,564 5.9 1,560 5.9
Canadian dollar notes due 2004-2009 (C) 119 5.9 432 5.4
U.S. dollar debentures due 2012-2098... 3,783 7.4 3,783 7.4
U.S. dollar zero coupon notes due 2020. 174 8.4 164 8.4
Various foreign currency debt.......... 102 - 129 -
Additional debt........................ 48 - 57 -
--------- ---------
11,110 11,646
Less: current portion of debt.......... 616 1,094
--------- ---------
Debt, less current portion of debt..... $ 10,494 $ 10,552
========= =========
(A) Weighted average annual interest rate on balances outstanding.
(B) U.S. dollar note of $500 million matured on April 26, 2004 and a U.S.
dollar note of $200 million matured on August 1, 2004. There are no
additional scheduled maturities until first quarter of 2005.
(C) Canadian Medium Term Note of 350 million CAD (266 million USD) matured on
March 17, 2004 and Canadian Medium Term Note of 60 million CAD (44 million
USD) matured on May 13, 2004. There are no additional scheduled maturities
until first quarter of 2009.
- 11 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note I - Debt (continued)
The credit facilities and outstanding notes and debentures contain various
provisions that, among other things, require us to maintain a defined leverage
ratio and limit the incurrence of certain liens or encumbrances in excess of
defined amounts. These requirements currently are not, and it is not anticipated
they will become, restrictive to our liquidity or capital resources.
The following table provides additional information about our debt facilities
(in millions):
October 1, December 31,
2004 2003
----------------- -----------------
Certain borrowings due in the next 12
months, including commercial paper,
classified as long-term due to our intent
and our ability through our credit
facilities to refinance on a long-term
basis..................................... $ 1,238 $ 1,266
========== ==========
Amounts available for borrowing:
Amounts available under committed
domestic and international credit
facilities............................. $ 2,839 $ 3,302
Amounts available under public debt
facilities: (A)
Shelf registration statement with
the Securities and Exchange
Commission......................... 3,221 3,221
Euro medium-term note program....... 2,135 2,135
Canadian medium-term note program... 1,584 1,542
---------- ----------
Total amounts available under public
debt facilities........................ 6,940 6,898
---------- ----------
Total amounts available.................... $ 9,779 $ 10,200
========== ==========
(A) Amounts available under these public debt facilities are subject to market
conditions.
On August 13, 2004 we established a $2.5 billion revolving credit facility with
a syndicate of 23 banks. The facility combined four previously separate credit
facilities into a single facility that matures in 2009. The facility serves as a
backstop to our various commercial paper programs and for general corporate
borrowing purposes. The only financial covenant included with this facility is
that our net debt to total capital ratio shall not exceed 75%. There were no
outstanding borrowings under the facility as of October 1, 2004.
- 12 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note J - Stock-Based Compensation Plans
We granted approximately 6.6 million service-vesting stock options to certain
executive and management level employees during the first nine months of 2004.
These options vest over a period of 3 years and expire 10 years from the date of
grant. All of the options were granted at an exercise price equal to the fair
market value of the stock on the grant date. An aggregate of 12.5 million shares
of common stock were issued during the first nine months of 2004 from the
exercise of stock options.
We also granted approximately 1.0 million shares of restricted stock and 120,500
restricted stock units to certain employees during the first nine months of
2004. These awards vest upon continued employment for a period of at least 5
years and the attainment of certain performance targets.
We apply Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees," and related interpretations in accounting for our
stock-based compensation plans. Statements of Financial Accounting Standards No.
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," if fully adopted,
would change the method for cost recognition on our stock-based compensation
plans.
- 13 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note J - Stock-Based Compensation Plans (continued)
The following table illustrates the effect of stock-based employee compensation
costs on reported net income applicable to common shareowners and also
illustrates the effect on reported net income applicable to common shareowners
and earnings per share as if compensation cost for our grants under stock-based
compensation plans had been determined under SFAS 123, for the third quarter and
nine months ended October 1, 2004 and September 26, 2003 (in millions, except
per share data):
Third Quarter Nine Months
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income applicable to common shareowners, as
reported..................................... $ 207 $ 259 $ 514 $ 545
Add: Total stock-based employee compensation
expense, net of tax, included in net income
applicable to common shareowners............. 5 2 12 6
Deduct: Stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax............ (20) (18) (53) (52)
--------- -------- --------- --------
Pro forma net income applicable to common
shareowners.................................. $ 192 $ 243 $ 473 $ 499
========= ======== ========= ========
Net income per share applicable to common
shareowners:
Basic - as reported.......................... $ 0.44 $ 0.57 $ 1.11 $ 1.20
========= ======== ========= ========
Basic - pro forma............................ $ 0.41 $ 0.53 $ 1.02 $ 1.10
========= ======== ========= ========
Diluted - as reported........................ $ 0.44 $ 0.56 $ 1.09 $ 1.19
========= ======== ========= ========
Diluted - pro forma.......................... $ 0.41 $ 0.53 $ 1.00 $ 1.09
========= ======== ========= ========
- 14 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note K - Pensions and Other Postretirement Benefits
Pension expense for the current year is determined using the prior year
valuation of liabilities and the projected values of pension assets. Net
periodic benefit costs of pension plans consisted of the following for the third
quarter and nine months ended October 1, 2004 and September 26, 2003 (in
millions):
Third Quarter Nine Months
------------------------------------- -----------------------------------
2004 2003 2004 2003
----------------- ------------------- ---------------- ------------------
Service cost................................. $ 27 $ 20 $ 81 $ 61
Interest cost................................ 33 27 99 85
Expected return on plan assets............... (34) (28) (102) (87)
Recognized actuarial loss.................... 12 3 37 8
---------- ---------- --------- ----------
Net periodic benefit cost.................... $ 38 $ 22 $ 115 $ 67
========== ========== ========= ==========
Net periodic benefit costs of other postretirement plans consisted of the
following for the third quarter and nine months ended October 1, 2004 and
September 26, 2003 (in millions):
Third Quarter Nine Months
------------------------------------- -----------------------------------
2004 2003 2004 2003
----------------- ------------------- ---------------- ------------------
Service cost................................. $ 3 $ 3 $ 8 $ 8
Interest cost................................ 6 7 16 18
Recognized actuarial loss.................... 1 - 3 -
Amortization of prior service cost........... (4) (3) (10) (7)
---------- ---------- --------- ----------
Net periodic benefit cost.................... $ 6 $ 7 $ 17 $ 19
========== ========== ========= ==========
Contributions to our pension and other postretirement benefit plans
were $262 million and $199 million for the nine months ended October 1, 2004 and
September 26, 2003, respectively. Projected annual contributions for 2004 are,
and actual contributions for 2003 were, as follows (in millions):
Projected Actual
2004 2003
------------ ------------
U. S. - Pension........................ $ 228 $ 168
European - Pension..................... 33 29
North America - Postretirement......... 22 20
---------- ----------
$ 283 $ 217
========== ==========
- 15 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note K - Pensions and Other Postretirement Benefits (continued)
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduced a prescription drug benefit under Medicare, as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least "actuarially equivalent" to Medicare. In September 2004, we
concluded, based on currently available guidance, that certain of our retiree
medical health plans provide prescription drug coverage that is at least
"actuarially equivalent" to the Medicare Part D coverage to be provided under
the Act. Therefore, we will qualify for the federal subsidy described in the
Act. In accordance with the provisions of Financial Accounting Standards Board
("FASB") Staff Position 106-2 ("FSP 106-2"), "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," we considered the effect of the Act and elected to
apply FSP 106-2 retroactively to January 1, 2004. The reduction in our
accumulated post-retirement benefit obligation as of December 31, 2003, related
to this subsidy, is estimated to be $12.3 million. We recognized a reduction in
net periodic post retirement benefit cost of $1.1 million for the first nine
months ended October 1, 2004.
Note L - Hedging Financial Instruments
We use certain risk management instruments to manage our interest rate and
foreign exchange exposures. These instruments are accounted for as fair value
and cash flow hedges, as appropriate, under Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," as amended.
At October 1, 2004, a net of tax gain of approximately $0.5 million related to
cash flow hedges of forecasted international raw materials purchases was
included in accumulated other comprehensive income. We expect these adjustments
to be reclassified into income over the next 12 months.
We also enter into certain Euro-denominated borrowings to hedge net investments
in international subsidiaries.
- 16 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note M - Commitments and Contingencies
We guarantee debt and other obligations of certain third parties. In North
America, we guarantee repayment of indebtedness owed by a PET (plastic) bottle
manufacturing cooperative. We also guarantee repayment of indebtedness owed by a
vending partnership in which we have a limited partnership interest.
The following table presents the maximum amounts of our guarantees and the
amounts outstanding under these guarantees as of October 1, 2004 and December
31, 2003 (in millions):
Guaranteed Outstanding
---------------------------------------- ----------------------------------------
October 1, December 31, October 1, December 31,
Category Expiration 2004 2003 2004 2003
- -------------------- ------------ ------------------- ------------------- ------------------- -------------------
Manufacturing Various $ 236 $ 236 $ 193 $ 176
cooperative...... through 2015
Vending partnership. Nov 2006 25 25 18 19
Other............... Renewable 1 1 1 1
------- ------- ------- -------
$ 262 $ 262 $ 212 $ 196
======= ======= ======= =======
We do not hold any assets that serve as collateral against these guarantees and
no contractual recourse provisions exist that would enable us to recover amounts
we guarantee in the event of an occurrence of a triggering event under these
guarantees. These guarantees arose as a result of our ongoing business
relationships, which have existed for a number of years. No amounts are recorded
for our obligations under these guarantees as we consider the risk of default to
be remote.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," revised December 2003. FIN 46
requires variable interest entities to be consolidated by the primary
beneficiary of the entity in certain instances. Our adoption of FIN 46 in the
first quarter of 2004 did not have a material impact on our consolidated
financial statements.
In addition to the above, we have letters of credit issued as collateral for
claims incurred under self-insurance programs for workers' compensation and
large deductible casualty insurance programs aggregating $355.8 million and
letters of credit on certain operating activities aggregating $4.7 million.
- 17 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note M - Commitments and Contingencies (continued)
Our business practices, as well as those of TCCC and certain other bottlers are
being reviewed in various jurisdictions by the European Commission for alleged
abuses of an alleged dominant position under Article 82 of the European Union
("EU") Treaty. We do not believe we have a dominant position in the relevant
markets, or that our current or past commercial practices violate EU law. On
October 19, 2004, the European Commission received a proposed undertaking from
our European bottler, relating to various commercial practices under
investigation. The undertaking is identical to other undertakings delivered by
TCCC and certain of its other European bottlers. The commitments set forth in
the undertaking will be published for third-party comments and circulated among
all of the member states of the EU. The European Commission will consider any
responses from those sources, as well as its own analysis, before the
undertaking becomes final and binding.
We are also the subject of investigations by Belgian and French competition law
authorities for our compliance under competition laws. We intend to continue to
vigorously defend against an unfavorable outcome, although it is not possible
for us to determine the ultimate outcome of these matters at this time.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in a
combined amount of $15.2 million to five plaintiffs, each a distributor of
competing beverage products. These distributors sued alleging that CCE and TCCC
engaged in anticompetitive marketing practices. The trial court's verdict was
upheld by the Texas Court of Appeals in July 2003. We and TCCC petitioned the
Texas Supreme Court to hear our appeal, and in September 2004 the Texas Supreme
Court granted our petition and will hear the appeal. The Texas Supreme Court has
scheduled argument in the case for November 2004. Should the judgment not be
overturned, this fact would not have an adverse effect on our consolidated
financial statements. The claims of the three remaining plaintiffs in this case
remain to be tried and one additional competitor has filed a similar claim
against us. We intend to vigorously defend against these claims and have not
provided for any potential awards for these additional claims.
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. In one case, the parties
have accepted a mediator's proposed settlement for which we have provided in our
financial statements. The terms of the release in this case remain the subject
of negotiation, and any settlement is subject to final approval by the trial
court having jurisdiction over the lawsuit. Our subsidiary is vigorously
defending against other similar claims, but it is not possible to predict the
outcomes at this time.
- 18 -
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note M - Commitments and Contingencies (continued)
Under the Jumpstart programs with TCCC, we received payments from TCCC for a
portion of the cost of developing the infrastructure necessary to support
accelerated placements of cold drink equipment. During the third quarter of
2004, we amended our Jumpstart agreements with TCCC for the United States and
Canada to reduce the cold drink equipment purchase and placement requirements by
70,000 units per year for 2004 and 2005 and to extend our North American
purchase and placement requirements through 2010. Previously, we were required
to purchase and place targeted amounts of cold drink equipment through 2008. In
return for TCCC's postponement of our purchase and placement obligations, we
have agreed to pay TCCC $1.5 million in 2004, $3.0 million annually in 2005
through 2008, and $1.5 million in 2009. Under the recently amended Jumpstart
agreements, we recognize the deferred cash payments from TCCC primarily as cold
drink equipment is placed, which is through 2010, and the remainder over the
period we have the potential requirement to relocate the equipment, which is
through 2022.
Should we not satisfy the provisions of the programs, the agreement provides for
the parties to meet to work out mutually agreeable solutions. We continue to
believe we would in all cases resolve any matters with TCCC that might arise
under these programs, and we believe the probability of a refund of amounts
previously paid under these programs is remote.
Our tax filings are routinely subjected to audit by tax authorities in most
jurisdictions where we conduct business. These audits may result in assessments
of additional taxes that are subsequently resolved with the authorities or
potentially through the courts. Currently, there are assessments, certain of
which are material, or audits involving certain of our subsidiaries, including
our subsidiary in Canada, that may not be resolved in the foreseeable future. We
believe we have substantial defenses to the questions being raised and intend to
pursue all legal remedies available if we are unable to reach a resolution with
the authorities. We believe we have adequately provided for any ultimate amounts
that would result from these proceedings, however, it is too early to predict a
final outcome in these matters. Final assessments could be materially different
than the amounts provided in the financial statements.
We are a defendant in various other matters of litigation generally arising out
of the normal course of business. Although it is difficult to predict the
ultimate outcome of these cases or the other cases discussed above, management
believes, based on discussions with counsel, that any ultimate liability would
not materially affect our consolidated financial statements.
- 19 -
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BUSINESS SUMMARY AND OBJECTIVES
Coca-Cola Enterprises Inc. ("CCE," "we," "our," "us," or "the Company") is the
world's largest marketer, producer, and distributor of products of The Coca-Cola
Company ("TCCC"). We also distribute other beverage brands in select
territories. We operate in 46 states in the United States, the District of
Columbia, all 10 provinces of Canada, and in portions of Europe, including
Belgium, continental France, Great Britain, Luxembourg, Monaco, and the
Netherlands.
Forward-Looking Statements
Certain expectations and projections regarding the future performance of CCE
referenced in this report are forward-looking statements. Officers may also make
verbal statements to analysts, investors, the media, and others that are
"forward-looking." Forward-looking statements include, but are not limited to:
o Projections of revenues, income, earnings per share, capital expenditures,
dividends, capital structure or other financial measures;
o Descriptions of anticipated plans or objectives of our management for
operations, products or services;
o Proposed amendments to existing funding arrangements with TCCC;
o Forecasts of performance; and
o Assumptions regarding any of the foregoing.
Forward-looking statements involve matters which are not historical facts.
Because these statements involve anticipated events or conditions,
forward-looking statements often include words such as "anticipate," "believe,"
"estimate," "expect," "intend," "outlook," "plan," "project," "target," "can,"
"could," "may," "should," "will," "would" or similar expressions. They represent
our expectations about the future and are not guarantees. Forward-looking
statements are only as of the date they are made and they might not be updated
to reflect changes as they occur after the forward-looking statements are made.
- 20 -
Outlook
During the third quarter of 2004, we released 2004 operating results projections
that project full-year 2004 earnings per diluted common share in the range of
$1.21 to $1.25. Included within this outlook is $0.05 per share related to
higher cost of sales from the transition to a new North American concentrate
price structure with TCCC, incurred in the second quarter of 2004. This revised
outlook reflects the continuing impact of softer than expected volume trends in
North America and Europe. The Company expects full-year 2004 North American
volume to decline approximately 1 percent, and European volume to decline
approximately 4 percent.
In July 2004, we amended our Jumpstart agreements with TCCC for the United
States and Canada to reduce the cold drink equipment purchase and placement
requirements by 70,000 units per year for 2004 and 2005 and to extend our North
American purchase and placement requirements through 2010. By placing
approximately 103,000 units in 2004, as required by the amended agreements, we
will earn approximately $50 million of funding in 2004 versus $72 million earned
in 2003. In return for extending our obligations under the Jumpstart program, we
have agreed to pay TCCC a total of $15 million over the period beginning with
the amendments and ending in 2009.
Project Pinnacle, our multi-year effort to redesign business processes and
implement the SAP software platform, continues to progress. The implementation
of SAP financial systems and processes in North America occurred in July 2004.
Including the costs of our internal resources assigned to the project, we
estimate that we will spend approximately $65 million in capital costs and
$30 million in non-capital costs during 2004. We expect our 2005 capital and
non-capital costs, related to Project Pinnacle, to be consistent with our 2004
costs as we continue to implement additional SAP modules.
Management's Discussion and Analysis should be read in conjunction with our
accompanying unaudited condensed consolidated financial statements and the
accompanying footnotes along with the cautionary statements at the end of this
section.
- 21 -
OPERATING RESULTS
Overview
The following table presents consolidated income statement data as a percentage
of net operating revenues for the periods presented:
Third Quarter Nine Months
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Net operating revenues............................. 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales...................................... 59.1 58.7 58.9 58.5
-------------- -------------- -------------- --------------
Gross profit....................................... 40.9 41.3 41.1 41.5
Selling, delivery, and administrative expenses..... 31.3 30.2 32.3 32.0
-------------- -------------- -------------- --------------
Operating income................................... 9.6 11.1 8.8 9.5
Interest expense, net.............................. 3.3 3.2 3.4 3.4
Other nonoperating income (expense), net........... 0.1 0.0 0.0 0.0
-------------- -------------- -------------- --------------
Income before income taxes......................... 6.4 7.9 5.4 6.1
Income tax expense................................. 2.0 2.4 1.7 1.9
-------------- -------------- -------------- --------------
Net income applicable to common shareowners........ 4.4 % 5.5 % 3.7 % 4.2 %
============== ============== ============== ==============
Our operating performance in the third quarter of 2004 reflects lower volumes in
North America and Europe due to a combination of soft retail environment, cool
wet weather across our territories, and a continuing decline in regular soft
drinks. Our European comparisons were affected by record volumes achieved during
the extraordinary summer heat of a year ago and unusually cool rainy weather in
the third quarter of 2004. Lower volumes were partially offset by solid pricing
growth in Europe and North America.
Third quarter of 2004 currency-neutral bottle and can net price per case
increased 3.0 percent in North America and 1.0 percent in Europe as compared to
the third quarter of 2003. Physical case bottle and can volume decreased 4.0
percent in North America and 12.0 percent in Europe from the third quarter of
2003.
For the third quarter of 2004, net income applicable to common shareowners
decreased to $207 million, or $0.44 per diluted common share, compared to net
income applicable to common shareowners of $259 million, or $0.56 per diluted
common share, for the third quarter of 2003. Operating income decreased
approximately 14.5 percent from the third quarter of 2003 results of $524
million to $449 million for the third quarter of 2004.
- 22 -
In March 2004, we recalled the recently launched Dasani water brand in Great
Britain because the level of bromate in Dasani was in excess of Great Britain's
regulatory standards. We expensed approximately $37.1 million of costs
associated with this recall in the first nine months of 2004, of which $0.5
million was expensed in the third quarter of 2004. We recognized a reimbursement
from TCCC of $32 million as an offset to the total costs in March 2004; this
amount was received from TCCC in October 2004.
On April 27, 2004, our Board of Directors approved a project to be implemented
in the Netherlands to transition from the production and sale of refillable PET
bottles to the production and sale of non-refillable PET bottles. The transition
is planned to commence in 2005 and be completed in early 2006. The transition
resulted in accelerated depreciation charges for certain machinery and
equipment, plastic crates, and refillable plastic bottles; costs for removing
current production lines; termination and severance costs; training costs;
external warehousing costs; and operational inefficiencies. The total of these
expenses over the period commencing May 1, 2004 and ending in the second quarter
of 2006 is estimated to be approximately $27 million. We expensed $3.8 million
and $6.1 million of these costs in the third quarter and first nine months of
2004, respectively. We expect the increased packaging flexibility to increase
sales in the Netherlands by offering added variety and convenience to consumers.
Net Operating Revenues
Our third quarter 2004 net operating revenues decreased 1 1/2 percent to $4.7
billion, on a consolidated basis, from the third quarter of 2003. Third quarter
net operating revenues decreased 1 1/2 percent in North America and 1 1/2
percent in Europe from 2003 to 2004. Net operating revenues increased 5 1/2
percent on a consolidated basis from $13.0 billion for the first nine months of
2003 to $13.8 billion for the first nine months of 2004. The following table
outlines the significant components of the changes in net operating revenues.
All percentage changes are rounded to the nearest 1/2 percent.
Third-Quarter 2004 Change First Nine-Months 2004 Change
----------------------------------- -----------------------------------
Total North Europe Total North Europe
America America
---------- ----------- ---------- ---------- ----------- ----------
Change in net operating revenues:
Net price per case growth............... 2.0 % 3.0 % 1.0 % 2.5 % 3.0 % 2.0 %
Impact of volume changes on net
operating revenues................... (6.0) (4.0) (12.0) (0.5) 0.5 (4.5)
Impact of currency exchange rate changes 3.0 0.5 9.5 3.5 1.0 11.0
Other................................... (0.5) (1.0) 0.0 0.0 (0.5) 1.0
------- ------ -------- ------- ------- -------
Total percentage increase (decrease) in (1.5)% (1.5)% (1.5)% 5.5 % 4.0 % 9.5 %
net operating revenues.................. ======= ====== ======== ======= ======= =======
- 23 -
The percentage of consolidated net operating revenues derived from our North
American and European groups was 71 percent and 29 percent, respectively, for
both the third quarter and the first nine months of 2004. In the third quarter
and first nine months of 2004, Great Britain contributed approximately 49
percent and 47 percent of European revenues, respectively.
"Bottle and Can Net Pricing per Case" and "Currency-Neutral Bottle and Can Net
Pricing per Case" are provided to assist in the evaluation of bottle and can
pricing trends in the marketplace and to distinguish the impact of foreign
currency exchange rate changes to our operations. Bottle and can net price per
case is based on the invoice price charged to customers reduced by promotional
allowances. Our bottle and can sales accounted for 91 percent of our net revenue
for the first nine months of 2004.
The following table presents the reconciliation of these measures to the change
in net operating revenues per case for the third quarter and the first nine
months of 2004 as compared to the third quarter and the first nine months of
2003. All per case percentage changes are rounded to the nearest 1/2 percent and
are based on wholesale physical case volume.
Third-Quarter 2004 Change First Nine-Months 2004 Change
----------------------------------- -----------------------------------
Total North Europe Total North Europe
America America
---------- ----------- ---------- ---------- ----------- ----------
Change in net revenues per case......... 5.0% 3.0% 12.0% 6.0% 3.5% 14.0%
Impact of Belgium excise and VAT
tax change......................... (0.5) 0.0 (1.0) 0.0 0.0 (0.5)
Impact of excluding post-mix sales
and agency sales................... 0.5 0.5 (0.5) 0.0 0.5 (0.5)
------- ------- ------- ------- ------- -------
Change in bottle and can net pricing 5.0 3.5 10.5 6.0 4.0 13.0
per case.............................
Impact of currency exchange rate (3.0) (0.5) (9.5) (3.5) (1.0) (11.0)
changes........................... ------- ------- ------- ------- ------- -------
Currency neutral change in bottle and
can net pricing per case........... 2.0% 3.0% 1.0% 2.5% 3.0% 2.0%
======= ======= ======= ======= ======= =======
Net pricing per case is impacted by the price charged per package, the volume
generated in each package, and the channels in which those packages are sold.
The change in currency neutral change in bottle and can net pricing per case is
primarily due to price increases. Increases in volume in higher margin packages
or in higher margin channels may increase net pricing per case without an actual
increase in wholesale pricing. The increases in pricing in the third quarter of
2004 reflect our continued commitment to our revenue management initiative.
We participate in various programs with customers to promote the sale of our
products. Among our programs with customers are arrangements under which
allowances may be earned by the customer for attaining agreed upon sales levels
and/or for participating in specific marketing programs. We also participate in
contractual arrangements providing us pouring or vending rights in athletic
venues, school districts, or similar venues. Coupon programs and under-the-cap
promotions are also developed in various territories for the purpose of
increasing sales by all customers. The costs of these programs, included as
deductions in net operating revenues, totaled approximately $458 million and
$445 million for the quarters ended October 1, 2004 and September 26, 2003,
respectively, and approximately $1.5 billion and $1.3 billion for the nine month
periods ended October 1, 2004 and September 26, 2003, respectively.
- 24 -
Cost of Sales
Cost of sales for the third quarter of 2004 decreased approximately 1/2 percent
from the third quarter of 2003 to $2.8 billion. Included as a reduction in our
third quarter of 2004 cost of sales is a $7.6 million recycling rebate received
from the State of California. "Change in Bottle and Can Cost of Sales per Case"
and "Currency-Neutral Change in Bottle and Can Cost of Sales per Case" are
provided to assist in evaluating cost trends for bottle and can products and to
distinguish the impact of foreign currency exchange rate changes on our
operations. These measures exclude the impact of fountain ingredient costs, as
well as marketing credits and Jumpstart funding to isolate the change in bottle
and can ingredient and packaging costs.
The following table presents the reconciliation between these measures and the
change in cost of sales per case for the third quarter and the first nine months
of 2004 as compared to the third quarter and first nine months of 2003. All per
case percentage changes are rounded to the nearest 1/2 percent and are based on
wholesale physical case volume.
Third-Quarter 2004 Change First Nine-Months 2004 Change
----------------------------------- -----------------------------------
Total North Europe Total North Europe
America America
---------- ----------- ---------- ---------- ----------- ----------
Change in cost of sales per case......... 6.0 % 3.0 % 14.5 % 7.0 % 4.0 % 15.0 %
Impact of Belgium excise and VAT
tax change........................ (0.5) 0.0 (1.5) (0.5) 0.0 (1.0)
Impact of new concentrate transition 0.0 0.0 0.0 (0.5) (1.0) 0.0
Impact of excluding bottle and can
marketing credits and Jumpstart
funding........................... (0.5) 0.0 (1.5) 0.0 0.0 (0.5)
Impact of excluding post-mix sales
and agency sales.................. 0.5 0.5 0.0 0.0 0.0 (0.5)
------- ------- ------- ------- ------- -------
Change in bottle and can cost of sales
per case.............................. 5.5 3.5 11.5 6.0 3.0 13.0
Impact of currency exchange rate
changes........................... (3.5) (0.5) (9.5) (4.5) (0.5) (11.5)
------- ------- ------- ------- ------- -------
Currency neutral change in bottle and
can cost of sales per case............ 2.0 % 3.0 % 2.0 % 1.5 % 2.5 % 1.5 %
======= ======= ======= ======= ======= =======
- 25 -
Volume
Comparable volume results, as adjusted for four more selling days in the first
quarter of 2004 and the acquisition of Chaudfontaine in the second quarter of
2003, are reconciled to volume changes for the third quarter and the first nine
months of 2004 in the following table:
Third-Quarter 2004 Change First Nine-Months 2004 Change
----------------------------------- -----------------------------------
Total North Europe Total North Europe
America America
---------- ----------- ---------- ---------- ----------- ----------
Change in volume......................... (6.0)% (4.0)% (12.0)% (0.5)% 0.5% (4.5)%
Impact of acquisitions.............. 0.0 0.0 0.0 0.0 0.0 (0.5)
Impact of selling day shift......... 0.0 0.0 0.0 (2.0) (1.5) (1.5)
------- ------- ------- ------- ------- -------
Change in comparable bottle and can
volume................................ (6.0)% (4.0)% (12.0)% (2.5)% (1.0)% (6.5)%
======= ======= ======= ======= ======= =======
Comparable volume results are presented below for the third quarter and the
first nine months of 2004 by major brand category. All percentage changes are
rounded to the nearest 1/2 percent.
Third-Quarter 2004 First Nine-Months 2004
------------------------------------- -----------------------------------
Change % of Total Change % of Total
------------------ ------------------ ----------------- -----------------
North America:
My Coke portfolio.................. (3.0) % 59.5 % (1.0) % 61.0 %
Soft drink flavors................. (8.5) 24.5 (4.5) 25.0
Juices, isotonics, and other....... (4.0) 9.5 1.5 8.0
Water.............................. 2.0 6.5 9.0 6.0
---------- ----------
Total.............................. (4.0) % 100.0 % (1.0) % 100.0 %
========== ==========
Europe:
My Coke portfolio.................. (7.5) % 67.0 % (3.5) % 67.5 %
Soft drink flavors................. (14.0) 22.0 (7.0) 21.5
Juices, isotonics, and other....... (7.0) 9.0 (1.0) 8.5
Water.............................. (65.0) 2.0 (53.0) 2.5
---------- ----------
Total.............................. (12.0) % 100.0 % (6.5) % 100.0 %
========== ==========
Consolidated:
My Coke portfolio.................. (4.5) % 61.5 % (1.5) % 62.5 %
Soft drink flavors................. (10.0) 24.0 (5.0) 24.0
Juices, isotonics, and other....... (5.0) 9.5 1.0 8.5
Water.............................. (12.0) 5.0 (4.0) 5.0
---------- ----------
Total.............................. (6.0) % 100.0 % (2.5) % 100.0 %
========== ==========
On a physical case basis, North American operations comprised 76 percent of our
volume for the third quarter of 2004 and 74 percent of our volume for the third
quarter of 2003.
The performance of our My Coke Portfolio brands (which includes all regular and
diet Coca-Cola trademark products) in the third quarter of 2004 reflects
stronger demand for our low-calorie products. Our diet My Coke Portfolio
increased 2 1/2 percent in North America and decreased 7 percent in Europe. Our
diet My Coke Portfolio declined in Europe as weather continued to influence our
overall European performance. The introduction of our mid-calorie cola,
Coca-Cola C2, in June of 2004 also contributed 1 percent of My Coke Portfolio's
sales during the third quarter of 2004.
- 26 -
On a consolidated basis, the decrease during the third quarter of 2004 in
flavors volumes is attributable to a decrease in Sprite in North America, as
well as a decrease in Fanta and Lilt in Europe.
In North America, the decrease in juice drinks, isotonics, and other volume is
mostly attributable to lower sales of Minute Maid products, offset partially by
higher sales of Powerade.
The increase in water volume in North America is attributable to Dasani. The
decrease in water volume in Europe is mostly due to our discontinuing the
distribution of Nestle water brands in Great Britain in anticipation of the
launch of Dasani in that market, and our subsequent withdrawal of Dasani in
Great Britain.
Selling, Delivery, and Administrative Expenses
Selling, delivery, and administrative ("SD&A") expenses increased 2 percent from
$1.4 billion for the third quarter of 2003 to $1.5 billion for the third quarter
of 2004 on a consolidated basis. SD&A expenses increased 6 1/2 percent from $4.2
billion for the first nine months of 2003 to $4.4 billion for the first nine
months of 2004. The following table presents the impact of currency exchange
rate changes on the change in selling, delivery, and administrative expenses
from the prior year:
Third-Quarter 2004 Change First Nine-Months 2004 Change
----------------------------------- -----------------------------------
Total North Europe Total North Europe
America America
---------- ----------- ---------- ---------- ----------- ----------
Reported change in selling, delivery, 2.0 % 3.5 % (4.5)% 6.5 % 6.5 % 7.5 %
and administrative expenses...........
Impact of currency exchange rate
changes.......................... (2.0) (0.5) (8.0) (3.0) (1.0) (11.0)
------- ------- ------- ------- ------- -------
Currency-neutral change in selling,
delivery, and administrative expenses... 0.0 % 3.0 % (12.5)% 3.5 % 5.5 % (3.5)%
======= ======= ======= ======= ======= =======
Interest Expense
Net interest expense for the first nine months of 2004 increased 4 percent from
the same period of 2003 due to an increase in our weighted average cost of debt
and six more interest days in the first nine months of 2004 as compared to the
first nine months of 2003. The weighted average cost of debt for the third
quarter and first nine months of 2004 was 5.3 percent, compared to 5.0 percent
for the third quarter and first nine months of 2003.
Income Taxes
Our effective tax rate was 31 percent for the first nine months of 2004 and
2003, respectively. Our effective tax rate for the remainder of 2004 will depend
upon operating results and may change if the results for the year are different
from current expectations.
- 27 -
Transactions with The Coca-Cola Company
The following table presents transactions with TCCC and the income statement
impact of those transactions for the periods presented (in millions):
Third Quarter Nine Months
--------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
Amounts from TCCC to CCE:
Marketing support funding earned............ $ 116 $ 229 $ 494 $ 647
Fountain syrup and packaged product sales... 120 137 368 368
Cold drink equipment placement funding
earned.................................... 13 20 45 61
Dispensing equipment repair services........ 14 13 41 40
Operating expense cost reimbursements....... 7 8 19 26
Cost recovery from sale of hot-fill
production facility (proceeds of $58
million).................................. - - - 8
Marketing program payments.................. - 1 - 2
Other transactions.......................... 4 3 9 11
---------- ----------- ---------- ----------
$ 274 $ 411 $ 976 $ 1,163
========== =========== ========== ==========
Amounts from CCE to TCCC:
Purchases from TCCC:
Syrup, concentrate, and mineral water..... 1,117 $ 1,207 $ 3,572 $ 3,397
Sweeteners................................ 82 82 240 238
Finished products......................... 178 155 497 414
---------- ----------- ---------- ----------
1,377 1,444 4,309 4,049
Marketing program payments.................. - - 20 -
Operating expense cost reimbursements....... - 4 - 12
---------- ----------- ---------- ----------
$ 1,377 $ 1,448 $ 4,329 $ 4,061
========== =========== ========== ==========
As part of our strategic planning project with TCCC, we agreed that an
increase in the level of spending in the areas of brand building and innovation
was necessary to promote our objective of building value. In support of this
strategy, we paid TCCC approximately $20 million for participation in marketing
activities for the period of January 1, 2004, through April 30, 2004. This
amount is included in marketing program payments in the table above. Effective
May 1, 2004, this spending was eliminated.
- 28 -
Effective May 1, 2004, we agreed with TCCC that a significant portion of our
funding from TCCC will be netted against the price we pay TCCC for concentrate
in our United States territories. Effective June 1, 2004, similar changes were
made in our Canadian territories. As a result, our cost of sales increased by
approximately $41 million during the second quarter of 2004 as inventory on hand
was sold without funding and replaced with lower cost inventory.
Additionally, we agreed to terminate the Strategic Growth Initiative ("SGI")
program and eliminate the Special Marketing Funds ("SMF") funding program. These
actions were effective May 1, 2004 in the United States and June 1, 2004 in
Canada. TCCC paid us for all funding earned under the SMF funding program. Under
the SGI program, we received $41.3 million from TCCC during the first quarter of
2004 and $6.8 million as a final payment during the second quarter of 2004.
Also effective May 1, 2004, TCCC agreed to establish a Global Marketing Fund,
under which TCCC will pay us $61.5 million annually through December 31, 2014,
as support for marketing activities. The term of the agreement will
automatically be extended for successive ten-year periods thereafter unless
either party gives written notice of termination of this agreement. The
marketing activities to be funded under this agreement will be agreed upon each
year as part of the annual joint planning process and will be incorporated into
the annual marketing plans of both companies. TCCC may terminate this agreement
for the balance of any year in which we fail to timely complete the marketing
plans or are unable to execute the elements of those plans, when such failure is
within our reasonable control. We will receive a pro rata amount of $41.5
million during 2004, of which $26 million was received during the first nine
months ended October 1, 2004. This amount is included in marketing support
funding earned in the table above.
During the first quarter of 2004, TCCC revised our base SMF funding rate to
include reimbursements between the companies for expenses related to the
assumption of customer marketing group responsibilities from TCCC and the
transfer of local media activities from us to TCCC in prior years. These amounts
are included in marketing support funding earned for 2004 in the table above
through April 2004 when, as noted above the SMF funding program was terminated.
The amounts shown in the table above as operating expense cost reimbursements to
us from TCCC for the third quarter and first nine months of 2004 relate to the
staffing costs transferred to us under another agreement with TCCC.
We participate in Cooperative Trade Marketing ("CTM") arrangements in the United
States administered by TCCC. Beginning in 2002, we became responsible for all
costs of the programs in our territories, other than costs relative to a limited
number of specified customers. We transfer amounts to TCCC under the program for
payment to customers. Pursuant to these arrangements, amounts paid or payable to
TCCC for the nine months ended October 1, 2004 and September 26, 2003 totaled
approximately $175 million and $189 million, respectively, and are recognized as
a reduction of net operating revenues.
Deferred cash payments from TCCC include amounts deferred under Jumpstart and
other miscellaneous programs. During the third quarter of 2004, we amended our
Jumpstart agreements with TCCC for the United States and Canada to reduce the
cold drink equipment purchase and placement requirements by 70,000 units per
year for 2004 and 2005 and to extend our North American purchase and placement
requirements into 2010. Previously, we were required to purchase and place
targeted amounts of cold drink equipment through 2008. By placing approximately
103,000 units in 2004, as required by the amended agreements, we will earn
- 29 -
approximately $50 million of funding in 2004 versus $72 million earned in 2003.
Support funding earned under the Jumpstart programs with TCCC is shown as cold
drink equipment placement funding earned in the table above. In return for
TCCC's postponement of our purchase and placement obligations, we have agreed to
pay TCCC $1.5 million in 2004, $3.0 million annually in 2005 through 2008, and
$1.5 million in 2009.
In March 2004, we recalled the recently launched Dasani water brand in Great
Britain because of bromate levels exceeding British regulatory standards. We
recognized a $32 million reimbursement for recall costs from TCCC in the first
quarter of 2004 as an offset to related costs. This amount was received from
TCCC in October 2004.
Pensions and Other Postretirement Benefits
Pension expense for the current year is determined using the prior year
valuation of liabilities and the projected values of pension assets. The
following tables outline significant assumptions used in the determination of
pension obligations and expense:
Weighted-average assumptions used to determine benefit obligations at December
31:
Pension Benefits Other Benefits
---------------------- --------------------
2003 2002 2003 2002
------------ -------- --------- ---------
Discount rate........................... 6.0% 6.8% 6.1% 7.0%
Rate of compensation increase........... 4.6 4.6 - -
Weighted-average assumptions used to determine net cost for the nine months
ended October 1, 2004 and September 26, 2003:
Pension Benefits Other Benefits
---------------------- --------------------
2004 2003 2004 2003
------------ -------- --------- ---------
Discount rate........................... 6.0% 6.8% 6.1% 7.0%
Expected return on plan assets.......... 8.3 8.3 - -
Rate of compensation increase........... 4.6 4.6 - -
- 30 -
Net periodic benefit costs consisted of the following for the nine months ended
(in millions):
Pension Plans Other Postretirement Plans
------------------------------------ ------------------------------------
October 1, September 26, October 1, September 26,
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
Service cost............................. $ 81 $ 61 $ 8 $ 8
Interest cost............................ 99 85 16 18
Expected return on plan assets........... (102) (87) - -
Recognized actuarial loss................ 37 8 3 -
Amortization of prior service cost....... - - (10) (7)
---------- ---------- ---------- ----------
Net periodic benefit cost................ $ 115 $ 67 $ 17 $ 19
========== ========== ========== ==========
Pension assets of the North American and Great Britain plans represent
approximately 96 percent of pension plan assets. Below is a summary of targeted
pension plan asset allocation, actual allocation of those assets at the end of
the third quarters of 2004 and 2003 along with expected long-term rate of return
by asset category:
Weighted-
% of Plan Assets Average
Weighted ------------------------------------ Expected
Average Target October 1, September 26, Long-Term
Asset Category Allocation 2004 2003 Rate of Return
- ---------------------------------------- ------------------- ----------------- ------------------ ------------------
Equity Securities...................... 65 % 62 % 61 % 8.7 %
Fixed Income Securities................ 20 29 30 5.7
Real Estate............................ 5 3 3 9.6
Private Equity and Other............... 10 6 6 10.4
---------- --------- ---------
Total.................................. 100 % 100 % 100 % 8.3 %
========== ========= =========
The third quarter of 2004 and 2003 overweight to Fixed Income Securities is
largely due to contributions to U.S. pension plans made near the end of each
respective third quarter. Due to the timing of these contributions, they were
primarily invested in cash equivalents, which is part of the Fixed Income
Securities asset category. Subsequently, these contributions are repositioned to
bring the actual U.S. asset class allocations in-line with their respective
targets. We currently project Real Estate should be in-line with its target by
the end of 2005, while Private Equity is on track to be in-line with its target
sometime within the next few years. On an interim basis, funds that will
ultimately be redirected to Real Estate and Private Equity are being invested in
Equity Securities.
Our Fixed Income Securities portfolio is invested primarily in commingled funds
and managed in terms of overall return expectations rather than matching
duration against plan liabilities, therefore debt maturities are not significant
to the plan performance.
- 31 -
Contributions to pension and other postretirement benefit plans of the Company
were $262 million and $199 million for the nine months ended October 1, 2004 and
September 26, 2003, respectively. Projected annual contributions for 2004 are,
and actual contributions for 2003 were, as follows (in millions):
Projected Actual
2004 2003
------------- --------------
U. S. - Pension........................ $ 228 $ 168
European - Pension..................... 33 29
North America - Postretirement......... 22 20
---------- ----------
$ 283 $ 217
========== ==========
Our policy is to fund the U.S. pension plans at a level to maintain, within
established guidelines, the IRS defined 90 percent Current Liability Funded
status. The Pension Funding Equity Act of 2004, signed by President Bush on
April 10, 2004, established new benchmark interest rates for the determination
of this status. In September 2004, we contributed $225 million to fund U.S.
defined benefit pension plans. This contribution is comparable with our
previously disclosed anticipated funding level and exceeded the amount required
to maintain the targeted 90 percent Current Liability Funded Status by $80
million.
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduced a prescription drug benefit under Medicare, as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least "actuarially equivalent" to Medicare. In September 2004, we
concluded, based on currently available guidance, that certain of our retiree
medical health plans provide prescription drug coverage that is at least
"actuarially equivalent" to the Medicare Part D coverage to be provided under
the Act. Therefore, we will qualify for the federal subsidy described in the
Act. In accordance with the provisions of Financial Accounting Standards Board
("FASB") Staff Position 106-2 ("FSP 106-2"), "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," we considered the effect of the Act and elected to
apply FSP 106-2 retroactively to January 1, 2004. The reduction in our
accumulated post-retirement benefit obligation as of December 31, 2003, related
to this subsidy, is estimated to be $12.3 million. We recognized a reduction in
net periodic post retirement benefit cost of $1.1 million for the first nine
months ended October 1, 2004.
- 32 -
CASH FLOW AND LIQUIDITY REVIEW
Capital Resources
Our sources of capital include, but are not limited to, cash flows from
operations, the issuance of public or private placement debt, bank borrowings,
and the issuance of equity securities. We believe that available short-term and
long-term capital resources are sufficient to fund our capital expenditure and
working capital requirements, scheduled debt payments, interest and income tax
obligations, dividends to our shareowners, acquisitions, and share repurchases.
The following table provides additional information about our debt facilities
(in millions):
October 1, December 31,
2004 2003
------------------ -------------------
Amounts available for borrowing:
Amounts available under committed domestic and international credit
facilities................................................................ $ 2,839 $ 3,302
Amounts available under public debt facilities:
Registration statements with the Securities and Exchange Commission. 3,221 3,221
Euro medium-term note program......................................... 2,135 2,135
Canadian medium-term note program..................................... 1,584 1,542
-------- --------
Total amounts available under public debt facilities...................... 6,940 6,898
-------- --------
Total amounts available..................................................... $ 9,779 $ 10,200
======== ========
In addition, we satisfy seasonal working capital needs and other financing
requirements with short-term borrowings under our commercial paper programs,
bank borrowings, and various lines of credit in the countries in which we
operate. At October 1, 2004, we had approximately $1.5 billion in commercial
paper borrowings outstanding, including $288 million of current maturities. We
also had approximately $2.8 billion available for borrowing under committed
domestic and international credit facilities. We intend to refinance our
borrowings under our commercial paper programs and our short-term credit
facilities with longer-term fixed and floating rate financings, excluding the
$288 million discussed above. At the end of the third quarter, our debt
portfolio contained 73 percent fixed rate debt and 27 percent floating rate
debt.
Summary of Cash Activities
Cash and cash investments increased $51 million during the first nine months of
2004 from net cash transactions. Our primary sources of cash for the first nine
months of 2004 were operations, providing $1.1 billion, and proceeds from the
issuance of debt aggregating $712 million. Our primary uses of cash were debt
repayments totaling $1.3 billion and capital expenditures totaling $618 million.
Operating Activities: Operating activities resulted in $1.1 billion of net cash
provided during the first nine months of 2004 compared to $1.0 billion provided
by operating activities for the same period in 2003. Cash provided by operating
activities was higher primarily due to lower net changes in current assets and
current liabilities.
- 33 -
Investing Activities: Net cash used in investing activities resulted primarily
from our capital investments of $618 million for the first nine months of 2004.
We expect full-year 2004 capital expenditures to total approximately $1.0
billion.
Financing Activities: The following table presents issuances of long-term debt
and payments on long-term debt as noted in our condensed consolidated statements
of cash flows for the nine months ended (in millions):
Maturity/
Expiration October 1, September 26,
Date Rate 2004 2003
-------------- -------------- -------------- --------------
Issuances of long-term debt
French revolving credit facilities............ Uncommitted (A) $ 128 $ 63
British revolving credit facilities........... Dec 2004 (A) 55 -
British pound notes........................... May 2006 4.13% - 276
Other issuances............................... 14 26
---------- ----------
Total......................................... $ 197 $ 365
========== ==========
Payments on long-term debt
French revolving credit facilities............ Uncommitted (A) $ 105 $ 122
British revolving credit facilities........... Dec 2004 (A) 55 -
$350 million Canadian dollar note............. Mar 2004 5.65% 266 -
$500 million U.S. dollar note................. Apr 2004 (A) 500 -
$60 million Canadian dollar note.............. May 2004 (A) 44 -
French franc notes............................ Jan 2003 5.00% - 27
Eurobonds..................................... Feb 2003 5.00% - 160
$100 million Canadian dollar note............. Mar 2003 5.31% - 65
British pound notes........................... May 2003 6.50% - 276
$200 million U.S. dollar note................. Aug 2004 6.63% 200 -
$175 million Canadian dollar note............. July 2004 6.70% - 129
Other payments................................ 92 36
---------- ----------
Total......................................... $ 1,262 $ 815
========== ==========
Net increase in commercial paper $ 515 $ 152
========== ==========
(A) These credit facilities and notes carry variable interest rates.
We continue to refinance portions of our short-term borrowings as they mature
with short-term and long-term fixed and floating rate debt. Exchange rate
changes during the first nine months of 2004 resulted in an increase in
long-term debt of $19 million.
- 34 -
FINANCIAL CONDITION
The seasonality of our business results from higher sales in the second and
third quarters versus the first and fourth quarters of the year.
The current portion of deferred cash payments from TCCC decreased from December
31, 2003 because of the amendment to our Jumpstart agreement with TCCC. This
amendment reduces the cold drink equipment purchase and placement requirements
for 2004 and 2005 and extends placement requirements through 2010. We will earn
approximately $50 million of non-cash funding in 2004 as we place cold drink
equipment. This is approximately $35 million less than we would have earned
under the previous Jumpstart agreements.
Inventory increased approximately 21% from December 31, 2003 to October 1, 2004.
This increase is primarily due to the seasonality of our business, as well as a
change in the distribution route for concentrate of certain brands we source
from TCCC and currency exchange rate changes.
- 35 -
KNOWN TRENDS AND UNCERTAINTIES
Contingencies
Our business practices as well as those of TCCC and certain other bottlers are
being reviewed in various jurisdictions by the European Commission for alleged
abuses of an alleged dominant position under Article 82 of the European Union
("EU") Treaty. We do not believe we have a dominant position in the relevant
markets, or that our current or past commercial practices violate EU law. On
October 19, 2004, the European Commission received a proposed undertaking from
our European bottler, relating to various commercial practices under
investigation. The undertaking is identical to other undertakings delivered by
TCCC and certain of its other European bottlers. The commitments set forth in
the undertaking will be published for third-party comments and circulated among
all of the member states of the EU. The European Commission will consider any
responses from those sources, as well as its own analysis, before the
undertaking becomes final and binding.
We are also the subject of investigations by Belgian and French competition law
authorities for our compliance under competition laws. We intend to continue to
vigorously defend against an unfavorable outcome, although it is not possible
for us to determine the ultimate outcome of these matters at this time.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in a
combined amount of $15.2 million to five plaintiffs, each a distributor of
competing beverage products. These distributors sued alleging that CCE and TCCC
engaged in anticompetitive marketing practices. The trial court's verdict was
upheld by the Texas Court of Appeals in July 2003. We and TCCC petitioned the
Texas Supreme Court to hear our appeal, and in September 2004 the Texas Supreme
Court granted our petition and will hear the appeal. The Texas Supreme Court has
scheduled argument in the case for November 2004. Should the judgment not be
overturned, this fact would not have an adverse effect on our consolidated
financial statements. The claims of the three remaining plaintiffs in this case
remain to be tried and one additional competitor has filed a similar claim
against us. We intend to vigorously defend against these claims and have not
provided for any potential awards for these additional claims.
- 36 -
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. In one case, the parties
have accepted a mediator's proposed settlement for which we have provided in our
financial statements. The terms of the release in this case remain the subject
of negotiation, and any settlement is subject to final approval by the trial
court having jurisdiction over the lawsuit. Our subsidiary is vigorously
defending against other similar claims, but it is not possible to predict the
outcomes at this time.
Under the Jumpstart programs with TCCC, we received payments from TCCC for
a portion of the cost of developing the infrastructure necessary to support
accelerated placements of cold drink equipment. During the third quarter of
2004, we amended our Jumpstart agreements with TCCC for the United States and
Canada to reduce the cold drink equipment purchase and placement requirements by
70,000 units per year for 2004 and 2005 and to extend our North American
purchase and placement requirements through 2010. Previously, we were required
to purchase and place targeted amounts of cold drink equipment through 2008. In
return for TCCC's postponement of our purchase and placement obligations, we
have agreed to pay TCCC $1.5 million in 2004, $3.0 million annually in 2005
through 2008, and $1.5 million in 2009. Under the recently amended Jumpstart
agreements, we recognize the deferred cash payments from TCCC primarily as cold
drink equipment is placed, which is through 2010, and the remainder over the
period we have the potential requirement to relocate the equipment, which is
through 2022.
Should we not satisfy the provisions of the programs, the agreement provides for
the parties to meet to work out mutually agreeable solutions. We continue to
believe we would in all cases resolve any matters with TCCC that might arise
under these programs, and we believe the probability of a refund of amounts
previously paid under these programs is remote.
Our tax filings are routinely subjected to audit by tax authorities in most
jurisdictions where we conduct business. These audits may result in assessments
of additional taxes that are subsequently resolved with the authorities or
potentially through the courts. Currently, there are assessments, certain of
which are material, or audits involving certain of our subsidiaries, including
our subsidiary in Canada, that may not be resolved in the foreseeable future. We
believe we have substantial defenses to the questions being raised and intend to
pursue all legal remedies available if we are unable to reach a resolution with
the authorities. We believe we have adequately provided for any ultimate amounts
that would result from these proceedings, however, it is too early to predict a
final outcome in these matters. Final assessments could be materially different
than the amounts provided in the financial statements.
We are a defendant in various other matters of litigation generally arising out
of the normal course of business. Although it is difficult to predict the
ultimate outcome of these cases or the other cases discussed above, management
believes, based on discussions with counsel, that any ultimate liability would
not materially affect our consolidated financial statements.
- 37 -
Accounting Developments
We currently apply Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our stock-based compensation plans. In March 2004, the FASB
issued the Exposure Draft, "Share-Based Payment - an amendment of FASB
Statements No. 123 and 95" (Proposed Statement of Financial Accounting
Standards). The Exposure Draft would replace existing requirements under
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" and APB 25. Under the Exposure Draft, all
shared-based payment awards to employees would be required to be recognized in
the income statement based upon their fair values. The FASB expects to issue the
final statement on or around December 15, 2004 and it would be effective for us
at the beginning of the third quarter of 2005.
CAUTIONARY STATEMENTS
There are several factors - many beyond our control - that could cause results
to differ significantly from our expectations. Our expectations are based on
then currently available competitive, financial, and economic data along with
our operating plans and are subject to future events and uncertainties. We
caution readers that in addition to the important factors described elsewhere in
this report, the following factors, among others, could cause our business,
results of operations and/or financial condition in 2004 and thereafter to
differ significantly from those expressed in any forward-looking statements.
There are also other factors not described in this report that could cause
results to differ from our expectations.
Marketplace: The Company's response to continued and increased customer and
competitor consolidations and marketplace competition may result in lower than
expected net pricing of our products. In addition, competitive pressures may
cause channel and product mix to shift from more profitable cold drink channels
and packages and adversely affect our overall pricing. Efforts to improve
pricing in the future consumption channels of our business may result in lower
than expected volume. There is a consumer trend toward beverage products that
are lower in calories and carbohydrates than many of the Company's products. In
addition, weather conditions, particularly in Europe, may have a significant
impact on our sales volume. Net pricing, volume, and costs of sales are the
primary determinants of net earnings.
- 38 -
Cost Participation Payments from TCCC: Material changes in levels of payments
historically provided under various programs with TCCC, or our inability to meet
the performance requirements for the anticipated levels of such support
payments, could adversely affect future earnings.
The amount of infrastructure funding from TCCC recognized as an offset to cost
of sales in a given year is dependent upon the actual number of cold drink units
placed in service. Actual results may differ materially from projections should
placement levels be significantly different than program requirements. Should we
not satisfy the provisions of the infrastructure funding programs and we are
unable to agree with TCCC on an alternative solution, TCCC would be entitled to
seek partial refund of amounts previously paid.
Raw Materials: Our forecasts assume no unplanned increases in the costs of raw
materials, ingredients, packaging materials, or supplies. If such increases
occur, and we are unable to achieve an increase in pricing to customers by
comparable amounts, earnings could be adversely affected.
Infrastructure Investment: Projected capacity levels of our infrastructure
investments may differ from actual if our volume growth is not as anticipated.
Significant changes from our expected timing of returns on cold drink equipment
and employee, fleet, and plant infrastructure investments could adversely impact
our net income.
Financing Considerations: Changes from our expectations for interest and
currency exchange rates can have a material impact on our forecasts. We may not
be able to completely mitigate the effect of significant interest rate or
currency exchange rate changes. Changes in our debt rating can have a material
adverse effect on interest costs and our financing sources.
Legal Contingencies: Changes from expectations for the resolution of outstanding
legal claims and assessments, including the investigation by the European
Commission, could have a material impact on our forecasts and financial
condition.
Legislative Risk: Our business model is dependent on the availability of our
products in multiple channels and locations to better satisfy our customers'
needs. Laws that restrict our ability to distribute products in schools and
other venues could materially impact our cash flows and negatively impact our
revenue and profit.
Tax Contingencies: Assessments of additional taxes resulting from audits
conducted by tax authorities, such as those involving our Canada subsidiary,
could have a material impact on our earnings and financial condition.
- 39 -
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have no material changes to the disclosure on this matter made in
"Management's Financial Review - Interest Rate and Currency Risk Management" on
Pages 76 and 77 of our Annual Report to Shareowners for the year ended December
31, 2003.
Item 4. Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer, with the participation
of management, evaluated the effectiveness of our "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely making known to them material information required to be disclosed in our
reports filed or submitted under the Exchange Act. During the third quarter of
2004, the Company successfully implemented the financial modules of SAP in North
America. As a result, certain processes were standardized across North America.
Other than the implementation of the financial modules of SAP in North America,
there has been no change in our internal control over financial reporting during
the quarter ended October 1, 2004 that has materially affected, or is reasonably
likely to affect, our internal control over financial reporting.
- 40 -
Part II. Other Information
Item 1. Legal Proceedings
On October 19, 2004, the European Commission received a proposed undertaking
from our European bottler, relating to various commercial practices under
investigation. This investigation, which had commenced in 2000, involved
allegations of abuse by us of an alleged dominant position under Article 82 of
the EC Treaty. Our undertaking is identical to other undertakings delivered by
TCCC and certain of its other European bottlers. The commitments set forth in
the undertaking will be published for third-party comments and circulated among
all of the member states of the EU. The European Commission will consider any
responses from those sources, as well as its own analysis, before the
undertaking becomes final and binding.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in a
combined amount of $15.2 million to five plaintiffs, each a distributor of
competing beverage products. These distributors sued alleging that CCE and TCCC
engaged in anticompetitive marketing practices. The trial court's verdict was
upheld by the Texas Court of Appeals in July 2003. We and TCCC petitioned the
Texas Supreme Court to hear our appeal, and in September 2004 the Texas Supreme
Court granted our petition and will hear the appeal. The Texas Supreme Court has
scheduled argument in the case for November 2004. Should the judgment not be
overturned, this fact would not have an adverse effect on our consolidated
financial statements. The claims of the three remaining plaintiffs in this case
remain to be tried and one additional competitor has filed a similar claim
against us. We intend to vigorously defend against these claims and have not
provided for any potential awards for these additional claims.
-41-
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to our repurchases of
common stock of the Company, made during the third quarter of 2004:
Total Number of
Shares Purchased Maximum Number
as Part of of Shares that May
Average Publicly Yet Be Purchased
Total Number of Price Paid Announced Plans Under the Plans
Period Shares Purchased (A) per Share or Programs or Programs
- ----------------------- -------------------- ---------- ---------------- ------------------
July 3, 2004 through
July 30, 2004.......... 17,525 $ 27.38 None 33,283,579
July 31, 2004 through
August 27, 2004........ --- --- --- ---
August 28, 2004 through
October 1, 2004........ --- --- --- ---
- ----------------------- -------------------- ---------- ---------------- ------------------
Total 17,525 $ 27.38 None 33,283,579
============================================================================================
(A) The total number of shares purchased includes: shares surrendered to the
Company to pay the exercise price and/or to satisfy tax witholding
obligations in connection with so-called "stock swap exercises" of employee
stock options and/or the vesting of restricted stock issued to employees.
-42-
Item 6. Exhibits
(a) Exhibit (numbered in accordance with Item 601 of Regulation S-K):
Exhibit Incorporated by Reference
Number Description or Filed Herewith
- -------------------- -------------------------------------------------------- -----------------------------------
10 Undertaking from Bottling Holdings (Luxembourg) dated Exhibit 99.1 to our Current Report
October 19, 2004, relating to various commercial on Form 8-K (Date of Report:
practices that had been under investigation by the October 19, 2004).
European Commission.
12 Earnings to Combined Fixed Charges and Preferred Stock Filed herewith.
Dividends.
31.1 Certificate of John R. Alm, filed pursuant to Section Filed herewith.
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Shaun B. Higgins, filed pursuant to Filed herewith.
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of John R. Alm, furnished pursuant to Furnished herewith.
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Shaun B. Higgins, furnished pursuant to Furnished herewith.
Section 906 of the Sarbanes-Oxley Act of 2002.
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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.
COCA-COLA ENTERPRISES INC.
(Registrant)
Date: November 5, 2004 /s/ Shaun B. Higgins
-------------------------------------
Shaun B. Higgins
Executive Vice President and Chief
Financial Officer
Date: November 5, 2004 /s/ William W. Douglas, III
-------------------------------------
William W. Douglas, III
Vice President, Controller and
Principal Accounting Officer
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