Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedJune 17, 2006
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number333-80361-01
BOTTLING GROUP, LLC
(Exact name of registrant as specified in its charter)
Delaware | 13-4042452 | |
(State or other jurisdiction of | (I.R.S. | |
employer incorporation or organization) | Identification No.) | |
One Pepsi Way, Somers, New York | 10589 | |
(Address of principal executive offices) | (Zip Code) |
914-767-6000
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report.)
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESþ NOo
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filero Accelerated Filero Non-Accelerated Filerþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YESo NOþ
Bottling Group, LLC
Index
Index
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PART I — FINANCIAL INFORMATION
Item 1.
Bottling Group, LLC
Condensed Consolidated Statements of Operations
in millions, unaudited
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
17, 2006 | 11, 2005 | 17, 2006 | 11, 2005 | |||||||||||||
Net revenues | $ | 3,138 | $ | 2,862 | $ | 5,505 | $ | 5,009 | ||||||||
Cost of sales | 1,666 | 1,495 | 2,919 | 2,611 | ||||||||||||
Gross profit | 1,472 | 1,367 | 2,586 | 2,398 | ||||||||||||
Selling, delivery and administrative expenses | 1,169 | 1,074 | 2,164 | 1,986 | ||||||||||||
Operating income | 303 | 293 | 422 | 412 | ||||||||||||
Interest expense | 56 | 42 | 101 | 82 | ||||||||||||
Interest income | 39 | 15 | 68 | 28 | ||||||||||||
Other non-operating expenses, net | 9 | 1 | 9 | 1 | ||||||||||||
Income before income taxes | 277 | 265 | 380 | 357 | ||||||||||||
Income tax expense | 8 | 13 | 13 | 17 | ||||||||||||
Net income | $ | 269 | $ | 252 | $ | 367 | $ | 340 | ||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Bottling Group, LLC
Condensed Consolidated Statements of Cash Flows
in millions, unaudited
24 Weeks Ended | ||||||||
June | June | |||||||
17, 2006 | 11, 2005 | |||||||
Cash Flows – Operations | ||||||||
Net income | $ | 367 | $ | 340 | ||||
Adjustments to reconcile net income to net cash provided by operations: | ||||||||
Depreciation | 285 | 274 | ||||||
Amortization | 6 | 7 | ||||||
Deferred income taxes | (12 | ) | 8 | |||||
Stock-based compensation | 32 | — | ||||||
Other non-cash charges and credits, net | 97 | 77 | ||||||
Changes in operating working capital, excluding effects of acquisitions: | ||||||||
Accounts receivable, net | (350 | ) | (320 | ) | ||||
Inventories | (190 | ) | (92 | ) | ||||
Prepaid expenses and other current assets | (6 | ) | (40 | ) | ||||
Accounts payable and other current liabilities | 276 | 191 | ||||||
Income taxes payable | 3 | (24 | ) | |||||
Net change in operating working capital | (267 | ) | (285 | ) | ||||
Pension contributions | (1 | ) | (20 | ) | ||||
Other, net | (26 | ) | (32 | ) | ||||
Net Cash Provided by Operations | 481 | 369 | ||||||
Cash Flows – Investments | ||||||||
Capital expenditures | (355 | ) | (316 | ) | ||||
Proceeds from sale of property, plant and equipment | 4 | 12 | ||||||
Acquisitions of bottlers, net of cash acquired | — | (1 | ) | |||||
Notes receivable from PBG, net | (738 | ) | (242 | ) | ||||
Other investing activities, net | — | 6 | ||||||
Net Cash Used for Investments | (1,089 | ) | (541 | ) | ||||
Cash Flows – Financing | ||||||||
Short-term borrowings – three months or less, net | 136 | 75 | ||||||
Proceeds from long-term debt | 793 | 37 | ||||||
Payments of long-term debt | (63 | ) | (6 | ) | ||||
Net Cash Provided by Financing | 866 | 106 | ||||||
Effect of Exchange Rate Changes on Cash and Cash Equivalents | (5 | ) | 1 | |||||
Net Increase (Decrease) in Cash and Cash Equivalents | 253 | (65 | ) | |||||
Cash and Cash Equivalents – Beginning of Period | 346 | 177 | ||||||
Cash and Cash Equivalents – End of Period | $ | 599 | $ | 112 | ||||
Supplemental Cash Flow Information | ||||||||
Interest paid | $ | 92 | $ | 86 | ||||
Income taxes paid | $ | 21 | $ | 32 | ||||
Changes in accounts payable related to capital expenditures | $ | (22 | ) | $ | (45 | ) | ||
Capital lease additions | $ | 8 | $ | — | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Bottling Group, LLC
Condensed Consolidated Balance Sheets
in millions
(Unaudited) | ||||||||
June | December | |||||||
17, 2006 | 31, 2005 | |||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 599 | $ | 346 | ||||
Accounts receivable, less allowance of $53 at June 17, 2006 and $51 at December 31, 2005 | 1,538 | 1,186 | ||||||
Inventories | 647 | 458 | ||||||
Prepaid expenses and other current assets | 270 | 274 | ||||||
Total Current Assets | 3,054 | 2,264 | ||||||
Property, plant and equipment, net | 3,681 | 3,643 | ||||||
Other intangible assets, net | 3,780 | 3,814 | ||||||
Goodwill | 1,513 | 1,516 | ||||||
Notes receivable from PBG | 3,123 | 2,384 | ||||||
Other assets | 128 | 124 | ||||||
Total Assets | $ | 15,279 | $ | 13,745 | ||||
LIABILITIES AND OWNERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable and other current liabilities | $ | 1,679 | $ | 1,456 | ||||
Short-term borrowings | 215 | 71 | ||||||
Current maturities of long-term debt | 533 | 588 | ||||||
Total Current Liabilities | 2,427 | 2,115 | ||||||
Long-term debt | 3,736 | 2,943 | ||||||
Other liabilities | 737 | 681 | ||||||
Deferred income taxes | 408 | 422 | ||||||
Minority interest | 3 | 3 | ||||||
Total Liabilities | 7,311 | 6,164 | ||||||
Owners’ Equity | ||||||||
Owners’ net investment | 8,375 | 7,990 | ||||||
Accumulated other comprehensive loss | (407 | ) | (395 | ) | ||||
Deferred compensation | — | (14 | ) | |||||
Total Owners’ Equity | 7,968 | 7,581 | ||||||
Total Liabilities and Owners’ Equity | $ | 15,279 | $ | 13,745 | ||||
See accompanying notes to Condensed Consolidated Financial Statements.
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Notes to Condensed Consolidated Financial Statements
Tabular dollars in millions, except per share amounts
Note 1 – Basis of Presentation
Bottling Group, LLC is the principal operating subsidiary of The Pepsi Bottling Group, Inc. (“PBG”) and consists of substantially all of the operations and assets of PBG. Bottling Group, LLC, which is consolidated by PBG, has the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages, in all or a portion of the United States, Mexico, Canada, Spain, Greece, Russia and Turkey.
The preparation of our unaudited Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make judgments, estimates and assumptions that affect the results of operations, financial position and cash flows of Bottling Group, LLC, as well as the related footnote disclosures. Actual results could differ from these estimates. These interim financial statements have been prepared in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include certain information and disclosures required for comprehensive annual financial statements. Therefore the Condensed Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended December 31, 2005 as presented in our Annual Report on Form 10-K. In the opinion of management, this interim information includes all material adjustments, which are of a normal and recurring nature, necessary for a fair presentation. Certain reclassifications were made in our Condensed Consolidated Financial Statements to 2005 amounts to conform to the 2006 presentation.
When used in these Condensed Consolidated Financial Statements, “Bottling LLC,” “we,” “our,” “us” and the “Company” each refers to Bottling Group, LLC.
Our U.S. and Canadian operations report using a fiscal year that consists of fifty-two weeks, ending on the last Saturday in December. Every five or six years a fifty-third week is added. Fiscal year 2006 consists of fifty-two weeks. In 2005, our fiscal year consisted of fifty-three weeks (the additional week was added to the fourth quarter). Our remaining countries report using a calendar-year basis. Accordingly, we recognize our quarterly business results as outlined below:
Quarter | U.S. & Canada | Mexico & Europe | ||
First Quarter | 12 weeks | January and February | ||
Second Quarter | 12 weeks | March, April and May | ||
Third Quarter | 12 weeks | June, July and August | ||
Fourth Quarter | 16 weeks (FY 2006)/17 weeks (FY 2005) | September, October, November and December |
In conjunction with PBG’s initial public offering and other subsequent transactions, PBG and PepsiCo, Inc. (“PepsiCo”) contributed bottling businesses and assets used in the bottling businesses to Bottling LLC. As a result of the contribution of these assets, PBG owns 93.3% of Bottling LLC and PepsiCo owns the remaining 6.7% as of June 17, 2006.
Note 2 – Seasonality of Business
The results for the second quarter are not necessarily indicative of the results that may be expected for the full year because of business seasonality. The seasonality of our operating results arises from higher sales in the second and third quarters versus the first and fourth quarters of the year, combined with the impact of fixed costs, such as depreciation and interest, which are not significantly impacted by business seasonality. From a cash flow perspective, the majority of our cash flow from operations is generated in the third and fourth quarters.
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Note 3 – New Accounting Standards
FASB Interpretation No. 48
In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes. FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
Note 4 – Share-Based Compensation
Accounting for Share-Based Compensation
Effective January 1, 2006, the Company adopted FASB Statement No. 123 (revised), “Share-Based Payment” (“SFAS 123R”). Among its provisions, SFAS 123R requires the Company to recognize compensation expense for equity awards over the vesting period based on their grant-date fair value. Prior to the adoption of SFAS 123R, the Company utilized the intrinsic-value based method of accounting under APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations, and adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic-value based method of accounting, compensation expense for stock options granted to the Company’s employees was measured as the excess of the quoted market price of PBG’s common stock at the grant date over the amount the employee must pay for the stock. The Company’s policy is to grant PBG stock options at fair value on the date of grant and as a result no compensation expense was historically recognized for stock options.
The Company adopted SFAS 123R in the first quarter of 2006 using the modified prospective approach. Under this transition method, the measurement and our method of amortization of costs for share-based payments granted prior to, but not vested as of January 1, 2006, would be based on the same estimate of the grant-date fair value and the same amortization method that was previously used in our SFAS 123 pro forma disclosure. Results for prior periods have not been restated as provided for under the modified prospective approach. For equity awards granted after the date of adoption, we amortize share-based compensation expense on a straight-line basis over the vesting term.
Compensation expense is recognized only for share-based payments expected to vest. We estimate forfeitures, both at the date of grant as well as throughout the vesting period, based on the Company’s historical experience and future expectations. Prior to the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense amounts was recognized based on estimated forfeitures.
Total share-based compensation expense is recognized in selling, delivery and administrative expenses in the Condensed Consolidated Statement of Operations. Share-based compensation expense, both on a pre-tax and after-tax basis, was $16 million and $32 million for the 12 weeks and 24 weeks ended June 17, 2006, respectively.
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The following table shows the effect on net income for the 12 weeks and 24 weeks ended June 11, 2005 had compensation expense been recognized based upon the estimated fair value on the grant date of awards, in accordance with SFAS 123, as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure”:
12 Weeks Ended | 24 Weeks Ended | |||||||
June | June | |||||||
11, 2005 | 11, 2005 | |||||||
Net income: | ||||||||
As reported | $ | 252 | $ | 340 | ||||
Add: Total share-based employee compensation included in reported net income, net of taxes | — | — | ||||||
Less: Total share-based employee compensation determined under fair-value based method for all awards, net of taxes | (15 | ) | (32 | ) | ||||
Pro forma | $ | 237 | $ | 308 | ||||
Share-Based Long-term Incentive Compensation Plans
Prior to 2006, under PBG’s share-based long-term incentive compensation plans (“incentive plans”) PBG granted non-qualified stock options to certain employees, including middle and senior management. Additionally, PBG granted restricted stock and restricted stock units to certain senior executives.
Beginning in 2006, PBG has granted a mix of stock options and restricted stock units to middle and senior management employees under PBG’s incentive plans.
Shares of PBG stock available for future issuance to Bottling LLC’s employees under existing plans were 11.2 million at June 17, 2006.
The fair value of PBG stock options was estimated at the date of grant using the Black-Scholes-Merton option-valuation model. The table below outlines the weighted average assumptions for options granted during the 12 weeks and 24 weeks ended June 17, 2006 and June 11, 2005:
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
17, 2006 | 11, 2005 | 17, 2006 | 11, 2005 | |||||||||||||
Risk-free interest rate | 4.8 | % | 4.4 | % | 4.6 | % | 4.1 | % | ||||||||
Expected term (in years) | 5.7 | 5.8 | 5.7 | 5.8 | ||||||||||||
Expected volatility | 27 | % | 28 | % | 27 | % | 28 | % | ||||||||
Expected dividend yield | 1.5 | % | 1.1 | % | 1.5 | % | 1.1 | % | ||||||||
Estimated fair value per option granted | $ | 9.10 | $ | 8.79 | $ | 8.65 | $ | 8.69 |
The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on a combination of historical volatility of PBG’s stock and the implied volatility of PBG’s traded options. The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with an equivalent remaining term.
We receive a tax deduction for certain stock option exercises when the options are exercised, generally for the excess of the stock price when the options are sold over the exercise price of the options. Prior to the adoption of SFAS 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating cash inflows in the Condensed Consolidated Statements of Cash Flows. SFAS 123R requires the benefits of tax deductions in excess of the grant-date fair
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value for those options to be classified as financing cash inflows rather than operating cash inflows, on a prospective basis. For the 24 weeks ended June 17, 2006, we recognized $449 thousand in tax benefits from the exercise of equity awards, of which $322 thousand was recorded as excess tax benefits in the Condensed Consolidated Statements of Cash Flows, resulting in a decrease of cash from operations and an increase in cash from financing of $322 thousand.
As of June 17, 2006, there was approximately $113 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the incentive plans. That cost is expected to be recognized over a weighted-average period of 2.2 years.
Stock Options
PBG stock options expire after 10 years and prior to the 2006 grant year were generally exercisable 25 percent after each of the first two years, and the remainder after three years. Beginning in 2006, new stock option grants will vest ratably over three years.
The following table summarizes PBG option activity for Bottling LLC employees during the 24 weeks ended June 17, 2006:
Shares in millions
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | |||||||||||||||
Exercise | Contractual | Aggregate | ||||||||||||||
Price per | Term | Intrinsic | ||||||||||||||
Options | Shares | Share | (years) | Value | ||||||||||||
Outstanding at January 1, 2006 | 38.1 | $ | 22.54 | |||||||||||||
Granted | 3.0 | $ | 29.38 | |||||||||||||
Exercised | (3.8 | ) | $ | 17.20 | ||||||||||||
Forfeited or expired | (0.4 | ) | $ | 26.95 | ||||||||||||
Outstanding at June 17, 2006 | 36.9 | $ | 23.71 | 6.6 | $ | 273 | ||||||||||
Exercisable at June 17, 2006 | 24.0 | $ | 21.14 | 5.6 | $ | 239 |
The aggregate intrinsic value in the table above is before income taxes, based on PBG’s closing stock price of $31.12 as of the last business day of the period ended June 17, 2006.
During the 12 and 24 weeks ended June 17, 2006, the total intrinsic value of PBG stock options exercised was $37 million and $54 million, respectively.
Restricted Stock and Restricted Stock Units
PBG restricted stock and restricted stock units granted to employees have vesting periods that range from two to five years. In addition, restricted stock unit awards to certain senior executives contain vesting provisions that are contingent upon the achievement of pre-established performance targets. All restricted stock and restricted stock unit awards are settled in shares of PBG common stock.
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The following table summarizes PBG restricted stock and restricted stock unit activity for Bottling LLC employees during the 24 weeks ended June 17, 2006:
Shares in millions
Restricted Stocks and | Weighted Average | |||||||
Restricted Stock Units | Shares | Grant-Date Fair Value | ||||||
Nonvested at January 1, 2006 | 0.9 | $ | 26.31 | |||||
Granted | 1.1 | $ | 29.32 | |||||
Vested | — | $ | 24.25 | |||||
Forfeited | (0.3 | ) | $ | 23.65 | ||||
Nonvested at June 17, 2006 | 1.7 | $ | 28.89 |
There were no shares vested or granted during the 12 weeks ended June 17, 2006. The total fair value of PBG shares vested during the 24 weeks ended June 17, 2006 was $1 million.
Note 5 – Accounts Receivable
June | December | |||||||
17, 2006 | 31, 2005 | |||||||
Trade accounts receivable | $ | 1,365 | $ | 1,018 | ||||
Allowance for doubtful accounts | (53 | ) | (51 | ) | ||||
Accounts receivable from PepsiCo | 177 | 143 | ||||||
Other receivables | 49 | 76 | ||||||
$ | 1,538 | $ | 1,186 | |||||
Note 6 – Inventories
June | December | |||||||
17, 2006 | 31, 2005 | |||||||
Raw materials and supplies | $ | 247 | $ | 173 | ||||
Finished goods | 400 | 285 | ||||||
$ | 647 | $ | 458 | |||||
Note 7 – Property, Plant and Equipment, net
June | December | |||||||
17, 2006 | 31, 2005 | |||||||
Land | $ | 282 | $ | 277 | ||||
Buildings and improvements | 1,344 | 1,299 | ||||||
Manufacturing and distribution equipment | 3,532 | 3,425 | ||||||
Marketing equipment | 2,394 | 2,334 | ||||||
Other | 183 | 171 | ||||||
7,735 | 7,506 | |||||||
Accumulated depreciation | (4,054 | ) | (3,863 | ) | ||||
$ | 3,681 | $ | 3,643 | |||||
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Note 8 – Other Intangible Assets, net and Goodwill
June | December | |||||||
17, 2006 | 31, 2005 | |||||||
Intangibles subject to amortization: | ||||||||
Gross carrying amount: | ||||||||
Customer relationships and lists | $ | 50 | $ | 53 | ||||
Franchise/distribution rights | 44 | 46 | ||||||
Other identified intangibles | 36 | 39 | ||||||
130 | 138 | |||||||
Accumulated amortization: | ||||||||
Customer relationships and lists | (9 | ) | (9 | ) | ||||
Franchise/distribution rights | (25 | ) | (22 | ) | ||||
Other identified intangibles | (17 | ) | (18 | ) | ||||
(51 | ) | (49 | ) | |||||
Intangibles subject to amortization, net | 79 | 89 | ||||||
Intangibles not subject to amortization: | ||||||||
Carrying amount: | ||||||||
Franchise rights | 3,099 | 3,093 | ||||||
Distribution rights | 283 | 302 | ||||||
Trademarks | 205 | 218 | ||||||
Other identified intangibles | 114 | 112 | ||||||
Intangibles not subject to amortization | 3,701 | 3,725 | ||||||
Total other intangible assets, net | $ | 3,780 | $ | 3,814 | ||||
For intangible assets subject to amortization, we calculate amortization expense over the period we expect to receive economic benefit. For the 12 weeks ended June 17, 2006 and June 11, 2005 total amortization expense was $3 million and $4 million, respectively. For the 24 weeks ended June 17, 2006 and June 11, 2005 total amortization expense was $6 million and $7 million, respectively. The weighted-average amortization period for each category of intangible assets and its estimated aggregate amortization expense expected to be recognized over the next five years are as follows:
Weighted- | ||||||||||||||||||||||
Average | Estimated Aggregate Amortization Expense to be Incurred | |||||||||||||||||||||
Amortization | Balance of | Fiscal Year Ending | ||||||||||||||||||||
Period | 2006 | 2007 | 2008 | 2009 | 2010 | |||||||||||||||||
Customer relationships and lists | 18 years | $ | 2 | $ | 3 | $ | 3 | $ | 3 | $ | 3 | |||||||||||
Franchise/distribution rights | 7 years | $ | 3 | $ | 3 | $ | 2 | $ | 2 | $ | 2 | |||||||||||
Other identified intangibles | 8 years | $ | 3 | $ | 4 | $ | 3 | $ | 2 | $ | 1 |
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The changes in the carrying value of goodwill by reportable segment for the 24 weeks ended June 17, 2006 are as follows:
U.S. & | ||||||||||||||||
Canada | Europe | Mexico | Total | |||||||||||||
Balance at December 31, 2005 | $ | 1,240 | $ | 16 | $ | 260 | $ | 1,516 | ||||||||
Impact of foreign currency translation | 13 | — | (16 | ) | (3 | ) | ||||||||||
Balance at June 17, 2006 | $ | 1,253 | $ | 16 | $ | 244 | $ | 1,513 | ||||||||
Note 9–Accounts Payable and Other Current Liabilities
June | December | |||||||
17, 2006 | 31, 2005 | |||||||
Accounts payable | $ | 592 | $ | 501 | ||||
Trade incentives | 164 | 185 | ||||||
Accrued compensation and benefits | 195 | 211 | ||||||
Other accrued taxes | 109 | 123 | ||||||
Accounts payable to PepsiCo | 284 | 176 | ||||||
Other current liabilities | 335 | 260 | ||||||
$ | 1,679 | $ | 1,456 | |||||
Note 10 – Long-Term Debt
On March 30, 2006, we issued $800 million of 5.50% senior notes due 2016 (the “Notes”). We distributed $356 million of the net proceeds to PBG to repay their outstanding commercial paper balance. The balance of the proceeds is currently invested in short-term investments and will be used to repay our 2.45% senior notes outstanding due in October of 2006.
The Notes are general unsecured obligations and rank on an equal basis with all of our other existing and future unsecured indebtedness and are senior to all future subordinated indebtedness. The Notes contain covenants that are similar to those contained under existing senior notes. We are in compliance with all debt covenants.
Note 11 – Pension and Postretirement Medical Benefit Plans
Pension Benefits
Our U.S. employees participate in PBG’s noncontributory defined benefit pension plans, which cover substantially all full-time salaried employees, as well as most hourly employees. Benefits generally are based on years of service and compensation, or stated amounts for each year of service. All of PBG’s qualified plans are funded and contributions are made in amounts not less than the minimum statutory funding requirements and not more than the maximum amount that can be deducted for U.S. income tax purposes. Our net pension expense for the defined benefit plans for our operations outside the U.S. was not significant and is not included in the tables presented below.
Nearly all of our U.S. employees are also eligible to participate in PBG’s 401(k) savings plans, which are voluntary defined contribution plans. We make matching contributions to the 401(k) savings plans on behalf of participants eligible to receive such contributions. If a participant has one or more but less than 10 years of eligible service, our match will equal $0.50 for each dollar the participant elects to defer up to 4 percent of the participant’s pay. If the participant has 10 or more years of eligible service, our match will equal $1.00 for each dollar the participant elects to defer up to 4 percent of the participant’s pay.
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Components of our U.S. pension expense for the 12 weeks and 24 weeks ended June 17, 2006 and June 11, 2005 are as follows:
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
17, 2006 | 11, 2005 | 17, 2006 | 11, 2005 | |||||||||||||
Service cost | $ | 12 | $ | 10 | $ | 24 | $ | 21 | ||||||||
Interest cost | 19 | 18 | 38 | 35 | ||||||||||||
Expected return on plan assets | (22 | ) | (21 | ) | (44 | ) | (42 | ) | ||||||||
Amortization of prior service cost | 2 | 1 | 4 | 3 | ||||||||||||
Amortization of net loss | 9 | 7 | 18 | 14 | ||||||||||||
Net pension expense for the defined benefit plans | 20 | 15 | 40 | 31 | ||||||||||||
Defined contribution plans expense | 5 | 4 | 10 | 8 | ||||||||||||
Total U.S. pension expense recognized in the Condensed Consolidated Statements of Operations | $ | 25 | $ | 19 | $ | 50 | $ | 39 | ||||||||
There were no contributions made to PBG’s U.S. pension plans for the 24 weeks ended June 17, 2006.
Postretirement Medical Benefits
PBG’s postretirement medical plans provide medical and life insurance benefits principally to U.S. retirees and their dependents. Employees are eligible for benefits if they meet age and service requirements and qualify for retirement benefits. The plans are not funded and since 1993 have included retiree cost sharing.
Components of our U.S. postretirement benefits expense for the 12 and 24 weeks ended June 17, 2006 and June 11, 2005 are as follows:
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
17, 2006 | 11, 2005 | 17, 2006 | 11, 2005 | |||||||||||||
Service cost | $ | 1 | $ | 1 | $ | 2 | $ | 2 | ||||||||
Interest cost | 4 | 5 | 9 | 10 | ||||||||||||
Amortization of net loss | 2 | 2 | 3 | 3 | ||||||||||||
U.S. postretirement benefits expense recognized in the Condensed Consolidated Statements of Operations | $ | 7 | $ | 8 | $ | 14 | $ | 15 | ||||||||
Note 12 – Segment Information
We operate in one industry, carbonated soft drinks and other ready-to-drink beverages and all of our segments derive revenue from these products. We conduct business in all or a portion of the United States, Mexico, Canada, Spain, Russia, Greece and Turkey. Beginning with the fiscal quarter ended March 25, 2006, Bottling LLC changed its financial reporting methodology to three reportable segments – U.S. & Canada, Europe (which includes Spain, Russia, Greece and Turkey) and Mexico. The operating segments of the U.S. and Canada are aggregated into a single reportable segment due to their economic similarity as well as similarity across products, manufacturing and distribution methods, types of customers and regulatory environments.
Operationally, Bottling LLC is organized along geographic lines with specific regional management teams having responsibility for the financial results in each reportable segment. We evaluate the performance of these segments based on operating income or loss. Operating income or loss is exclusive of interest expense, interest income, foreign exchange gains and losses and income taxes.
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
Net Revenues | 17, 2006 | 11, 2005 | 17, 2006 | 11, 2005 | ||||||||||||
U.S. & Canada | $ | 2,422 | $ | 2,207 | $ | 4,458 | $ | 4,056 | ||||||||
Europe | 386 | 356 | 534 | 501 | ||||||||||||
Mexico | 330 | 299 | 513 | 452 | ||||||||||||
Worldwide net revenues | $ | 3,138 | $ | 2,862 | $ | 5,505 | $ | 5,009 | ||||||||
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12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
Operating Income (Loss) | 17, 2006 | 11, 2005 | 17, 2006 | 11, 2005 | ||||||||||||
U.S. & Canada | $ | 263 | $ | 265 | $ | 402 | $ | 406 | ||||||||
Europe | 12 | 8 | (10 | ) | (8 | ) | ||||||||||
Mexico | 28 | 20 | 30 | 14 | ||||||||||||
Worldwide operating income | 303 | 293 | 422 | 412 | ||||||||||||
Interest expense | 56 | 42 | 101 | 82 | ||||||||||||
Interest income | 39 | 15 | 68 | 28 | ||||||||||||
Other non-operating expenses, net | 9 | 1 | 9 | 1 | ||||||||||||
Income before income taxes | $ | 277 | $ | 265 | $ | 380 | $ | 357 | ||||||||
For the 12 and 24 weeks ended June 17, 2006, operating income includes the impact of adopting SFAS 123R. The comparable periods in 2005 have not been restated as described in Note 4.
Total Assets
June | December | |||||||
17, 2006 | 31, 2005 | |||||||
U.S. & Canada | $ | 12,598 | $ | 11,090 | ||||
Europe | 1,017 | 894 | ||||||
Mexico | 1,664 | 1,761 | ||||||
Worldwide total assets | $ | 15,279 | $ | 13,745 | ||||
Note 13 – Comprehensive Income
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||
June | June | June | June | |||||||||||||
17, 2006 | 11, 2005 | 17, 2006 | 11, 2005 | |||||||||||||
Net income | $ | 269 | $ | 252 | $ | 367 | $ | 340 | ||||||||
Currency translation adjustment | (49 | ) | (18 | ) | (23 | ) | (3 | ) | ||||||||
Cash flow hedge adjustment (a) | (2 | ) | (1 | ) | 11 | (3 | ) | |||||||||
Comprehensive income | $ | 218 | $ | 233 | $ | 355 | $ | 334 | ||||||||
(a) | Net of taxes of $0 million for the 12 and 24 weeks ended June 17, 2006 and June 11, 2005, respectively. |
Note 14 – Contingencies
We are subject to various claims and contingencies related to lawsuits, taxes and environmental and other matters arising out of the normal course of business. We believe that the ultimate liability arising from such claims or contingencies, if any, in excess of amounts already recognized is not likely to have a material adverse effect on our results of operations, financial condition or liquidity.
Note 15 – Guarantees
PBG has a commercial paper program that is supported by two credit facilities, which are guaranteed by us. PBG’s $450 million credit facility, which was executed in March 2006, expires in
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March 2011. PBG’s existing credit facility was increased from $500 million to $550 million and expires in April 2009. PBG has used these credit facilities to support its commercial paper program in 2006 and 2005.
On March 8, 1999, PBG issued $1 billion of 7% senior notes due 2029, which are guaranteed by us. We also guarantee, that to the extent there is available cash, we will distribute pro rata to all owners sufficient cash such that aggregate cash distributed to PBG will enable PBG to pay its taxes and make interest payments on the $1 billion 7% senior notes due 2029.
Note 16 – Subsequent Event
Effective July 16, 2006, seventeen Pepsi bottlers, including PBG, formed a regional manufacturing joint venture called Pepsi Northwest Beverages LLC (“PNB”). PNB will manufacture and source products to parts of Washington, Oregon and Idaho, as well as one market in Northern California and all of Alaska. Its volume represents approximately three percent of total Pepsi bottle and can volume in the U.S.
Working as a single organization, the members of PNB will be able to present our customers with an aligned product portfolio, including innovation across individual bottler territories. PBG owns 56 percent of the PNB joint venture. In accordance with FASB Interpretation No. 46 (revised), “Consolidation of Variable Interest Entities”, the results of PNB will be consolidated into Bottling LLC’s financial results. We do not anticipate this transaction to have a material impact on our Consolidated Financial Statements.
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Item 2.
Management’s Financial Review
Tabular dollars in millions
OVERVIEW
Bottling Group, LLC (referred to as “Bottling LLC,” “we,” “our,” “us” and “Company”) is the principal operating subsidiary of The Pepsi Bottling Group (“PBG”) and consists of substantially all of the operations and the assets of PBG. We have the exclusive right to manufacture, sell and distribute Pepsi-Cola beverages in all or a portion of the United States, Mexico, Canada, and Europe, which consists of operations in Spain, Greece, Russia and Turkey.
Bottling LLC operates in one industry, carbonated soft drinks and other ready-to-drink beverages and all of our segments derive revenue from these products. Historically the Company has operated and reported under one reportable segment and, where material to our overall results, provided both performance results and expected trends for volume, net revenues, cost of sales, selling, delivery and administrative expenses and operating income for each of our geographic territories (U.S., Canada, Europe and Mexico) and components thereof.
Beginning with the fiscal quarter ended March 25, 2006, Bottling LLC changed its financial reporting methodology to three reportable segments – U.S. & Canada, Europe and Mexico. Operationally, the Company is organized along geographic lines with specific regional management teams having responsibility for the financial results in each reportable segment. See Note 12 of our Condensed Consolidated Financial Statements for further discussion on our segments.
Management’s Financial Review should be read in conjunction with the accompanying unaudited financial statements and our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, which include additional information about our accounting policies, practices and the transactions that underlie our financial results.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with U.S. GAAP often requires us to make judgments, estimates and assumptions regarding uncertainties that affect the results of operations, financial position and cash flows of the Company, as well as the related footnote disclosures. Management bases its estimates on knowledge of our operations, markets in which we operate, historical trends, and other assumptions. Actual results could differ from these estimates under different assumptions or conditions.
As discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005, management considers the Company’s policies on Allowance for Doubtful Accounts, Recoverability of Goodwill and Intangible Assets with Indefinite Lives, Pension and Postretirement Medical Benefit Plans, and Income Taxes to be the most important to the portrayal of Bottling LLC’s financial condition and results of operations because they require the use of estimates, assumptions and the application of judgment.
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board (“FASB”) Statement No. 123 (revised), “Share-Based Payment” (“SFAS 123R”). With the adoption of SFAS 123R, Bottling LLC has added “Share-Based Compensation” as a critical accounting policy.
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Share-Based Compensation
Among its provisions, SFAS 123R requires the Company to recognize compensation expense for PBG equity awards over the vesting period based on their grant-date fair value. The compensation expense is recognized only for share-based payments expected to vest and we estimate forfeitures, both at the date of grant as well as throughout the vesting period, based on the Company’s historical experience and future expectations.
The Company uses the Black-Scholes-Merton option-valuation model to value PBG stock options, which requires the input of PBG stock price and subjective assumptions. These assumptions include the length of time employees will retain their vested PBG stock options before exercising them (“expected term”), the estimated volatility of PBG’s stock price, risk-free interest rate, and PBG’s expected dividend yield. The expected term of PBG options is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. The expected term determines the period for which the risk-free interest rate and volatility must be applied. The risk-free interest rate is based on the expected U.S. Treasury rate over the expected term. Expected stock price volatility is based on a combination of historical volatility of PBG’s stock price and the implied volatility of PBG’s traded options. Dividend yield is management’s long-term estimate of PBG’s annual dividends to be paid as a percentage of share price.
For 2006, the impact of adopting SFAS 123R is expected to reduce our operating income by $70 million. Future changes in the subjective assumptions used in the Black-Scholes-Merton option-valuation model or estimates associated with forfeitures could materially affect the share-based compensation expense and consequently, the related amounts recognized in the Condensed Consolidated Statement of Operations. See Note 4 of our Condensed Consolidated Financial Statements for further discussion on our share-based compensation.
FINANCIAL PERFORMANCE SUMMARY
12 Weeks Ended | 24 Weeks Ended | |||||||||||||||||||||||
June | June | % | June | June | % | |||||||||||||||||||
17, 2006 | 11, 2005 | Change | 17, 2006 | 11, 2005 | Change | |||||||||||||||||||
Net revenues | $ | 3,138 | $ | 2,862 | 10 | % | $ | 5,505 | $ | 5,009 | 10 | % | ||||||||||||
Gross profit | 1,472 | 1,367 | 8 | % | 2,586 | 2,398 | 8 | % | ||||||||||||||||
Operating income | 303 | 293 | 3 | % | 422 | 412 | 2 | % | ||||||||||||||||
Net income | 269 | 252 | 7 | % | 367 | 340 | 8 | % |
For the second quarter of 2006, net income increased seven percent when compared with the similar period in the prior year. Growth in net income was driven by higher volume and pricing improvements, partially offset by higher raw material costs and increased operating expenses. These results also include a pre-tax charge of $16 million due to the adoption of SFAS 123R and a pre-tax foreign exchange loss of $9 million related to the approximate 20-percent devaluation of the Turkish lira in May 2006. This devaluation resulted in a transactional loss, which is recorded below the operating income line in other non-operating expenses, and is due to the revaluation of our U.S. dollar-denominated liabilities in Turkey.
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Our worldwide operating income results for the second quarter were strong and reflect solid volume trends, coupled with increases in net price per case, which helped drive 10-percent revenue growth and contribute to an eight-percent increase in worldwide gross profit. Worldwide operating income increased three percent during the quarter, which includes a five-percentage point negative impact from the Company’s adoption of SFAS 123R. The impact of foreign currency exchange translation, driven by the strength of the Canadian dollar, contributed about one point of growth to operating income and each of the line items above operating income in the Condensed Consolidated Statement of Operations for the 12 weeks ended June 17, 2006.
Worldwide physical case volume increased five percent in the second quarter of 2006 versus the prior year reflecting strong growth in our U.S. & Canada and Europe segments and solid performance in our Mexico segment. In the U.S. & Canada segment, total volume growth was six percent primarily due to double-digit growth in our non-carbonated portfolio.
Worldwide net revenue per case grew by more than four percent during the second quarter of 2006 versus the prior year, driven by solid improvements across all of our segments. In the U.S., net revenue per case increased three percent due to favorable rate improvements.
Worldwide cost of sales per case for the quarter increased six percent versus the prior year, driven primarily by increases in raw material costs and mix shifts, in both package and country. Mix changes in package were driven by shifts to higher priced products as a result of volume growth in our non-carbonated portfolio. Changes in our country mix resulted from the higher volume growth in our U.S. business compared with our other territories.
Worldwide gross profit per case increased three percent in the quarter versus the prior year, driven by strong net revenue performance and the favorable impact of foreign currency translation, partially offset by increases in our cost of sales per case.
Worldwide selling, delivery and administrative (“SD&A”) expenses increased nine percent in the quarter versus the prior year, including more than one-percentage point of growth due to the adoption of SFAS 123R. In addition to the impact of SFAS 123R, increases in the Company’s SD&A expenses were driven primarily by strong volume growth and wage and benefit increases, coupled with rising fuel and pension costs and investments in high growth European markets.
Full-Year 2006 Outlook
In 2006, our fiscal year consists of 52 weeks, while fiscal year 2005 consisted of 53 weeks. Our U.S. and Canadian operations report on a fiscal year that consists of 52 weeks, ending on the last Saturday in December. Every five or six years a 53rd week is added. Our other countries report on a calendar-year basis. In order to provide comparable guidance for 2006, we have identified the impact that the 53rd week in 2005 has on our growth rates in the footnotes to the table below. Constant territory calculations assume a 52-week year and all significant acquisitions made in the prior year were made at the beginning of that year. These calculations exclude all significant acquisitions made in the current year.
Additionally, as discussed in Note 4 in the Notes to the Condensed Consolidated Financial Statements, the Company adopted SFAS 123R in the first quarter of 2006. SFAS 123R requires that all stock-based payments be expensed based on the fair value of the awards. In accordance with existing accounting guidelines, the Company did not recognize compensation expense for stock options during fiscal year 2005.
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Based on our strong results in the first half of the year, we have raised our full-year 2006 volume and profit growth expectations, which are presented in the table below:
Forecasted 2006 vs. | ||||
2005 growth | ||||
Worldwide Volume(1) | ~ 3 | % | ||
U.S. Volume(1) | ~ 2 | % | ||
Worldwide net revenue per case | 3% to 4% | |||
Worldwide cost of sales per case | ~ 5 | % | ||
Operating Income(2) | (1)% to 1% |
(1) | The additional week of volume as a result of the 53rd week in 2005 reduced our worldwide and U.S. volume growth in 2006 by approximately one percentage point. On a constant territory basis, worldwide volume and U.S. volume are expected to grow about four percent and about three percent, respectively. | |
(2) | The impact of adopting SFAS 123R in 2006 is expected to result in a seven-percentage point reduction in our operating income. |
Second Quarter 2006 Results
Volume Change
12 Weeks Ended | 24 Weeks Ended | ||||||||||||||||||||||||||||||||
June 17, 2006 vs. | June 17, 2006 vs. | ||||||||||||||||||||||||||||||||
June 11, 2005 | June 11, 2005 | ||||||||||||||||||||||||||||||||
World- wide | U.S. & Canada | Europe | Mexico | World- wide | U.S. & Canada | Europe | Mexico | ||||||||||||||||||||||||||
Base volume | 4 | % | 5 | % | 6 | % | 2 | % | 5 | % | 5 | % | 5 | % | 3 | % | |||||||||||||||||
Acquisitions | 1 | % | 1 | % | 0 | % | 0 | % | 1 | % | 1 | % | 0 | % | 0 | % | |||||||||||||||||
Total Volume change | 5 | % | 6 | % | 6 | % | 2 | % | 6 | % | 6 | % | 5 | % | 3 | % | |||||||||||||||||
Our reported worldwide physical case volume increased five percent in the second quarter and six percent in the first 24 weeks of 2006, when compared with similar periods of 2005. The increase in volume for both the quarter and on a year-to-date basis was driven by strong growth in our U.S. & Canada and Europe segments and solid performance in our Mexico segment.
In our U.S. & Canada segment, volume increases, in both the quarter and on a year-to-date basis, were primarily driven by strong non-carbonated beverage sales.
Excluding the impact of acquisitions, volume in the U.S. increased five percent in the second quarter and on a year-to-date basis versus 2005. This growth reflected a six-percent increase in our take-home channel for both the quarter and year-to-date period. In addition, volume increases in the cold drink channel of three percent and four percent for the quarter and year-to-date period, respectively, were driven by strong results in the convenience and gas channel and in the foodservice channel.
From a brand perspective, strong growth in the U.S. for the quarter and year-to-date period versus the prior year was driven by double-digit growth in our non-carbonated portfolio, including trademarkAquafina, our energy drinks andTropicana andLipton Iced Tea. The introduction of new flavors as well as distribution gains on our take-home packages helped increase ourLipton brand volume by more than 50 percent. Despite continued softness in the CSD market overall, our carbonated soft drink (“CSD”) portfolio in the U.S. was about flat for the quarter and year-to-date period versus 2005. Our flavored CSD portfolio continued to generate solid volume improvement, up three percent in the quarter and four percent for the year-to-date period. TrademarkMountain Dew was a significant contributor to this growth.
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In Canada, overall volume increased one and two percent for the quarter and year-to-date period, respectively, versus the prior year and was driven primarily by strong growth in the cold drink channel and partially offset by slight declines in the take-home channel. From a brand perspective, growth in the quarter and year-to-date period versus 2005 was driven largely by double-digit growth in trademarkAquafina, coupled with growth in other non-carbonated brands.
In our Europe segment, overall volume grew six percent for the quarter and five percent for the year-to-date period versus the prior year, driven primarily by strong results in Russia and Turkey. Solid growth in our non-carbonated portfolio, trademarkPepsi and local brands helped drive overall volume growth in these countries.
In our Mexico segment, volume increased two and three percent for the quarter and year-to-date period, respectively, versus the prior year, driven primarily by the introduction of non-carbonated products in 2005 and growth in our bottled water business, which increased eight percent in the quarter and 12 percent on a year-to-date basis. Our jug water business showed some softness during the quarter with a decline in volume of approximately one percent. On a year-to-date basis, our jug water business increased one percent. Our CSD portfolio remained about flat for both the quarter and year-to-date period versus the prior year.
Net Revenues Change
12 Weeks Ended | 24 Weeks Ended | ||||||||||||||||||||||||||||||||
June 17, 2006 vs. | June 17, 2006 vs. | ||||||||||||||||||||||||||||||||
June 11, 2005 | June 11, 2005 | ||||||||||||||||||||||||||||||||
World | U.S. & | World | U.S. & | ||||||||||||||||||||||||||||||
-wide | Canada | Europe | Mexico | -wide | Canada | Europe | Mexico | ||||||||||||||||||||||||||
Volume impact | 4 | % | 5 | % | 6 | % | 2 | % | 5 | % | 5 | % | 5 | % | 3 | % | |||||||||||||||||
Net price per case impact (rate/mix) | 4 | % | 3 | % | 4 | % | 7 | % | 3 | % | 3 | % | 4 | % | 7 | % | |||||||||||||||||
Acquisitions | 1 | % | 1 | % | 0 | % | 0 | % | 1 | % | 1 | % | 0 | % | 0 | % | |||||||||||||||||
Currency translation | 1 | % | 1 | % | (2 | )% | 1 | % | 1 | % | 1 | % | (2 | )% | 3 | % | |||||||||||||||||
Total Net Revenues change | 10 | % | 10 | % | 8 | % | 10 | % | 10 | % | 10 | % | 7 | % | 13 | % | |||||||||||||||||
Worldwide net revenues were $3.1 billion for the second quarter and $5.5 billion on a year-to-date basis, increasing 10 percent over similar periods in 2005. The increases in worldwide net revenues for the quarter and on a year-to-date basis were driven primarily by strong volume growth and increases in net price per case. In the second quarter, our U.S. & Canada segment generated approximately 77 percent of our worldwide revenues. Our Europe segment generated 12 percent of our revenues and Mexico generated the remaining 11 percent. On a year-to-date basis, approximately 81 percent of our revenues were generated in our U.S. & Canada segment, 10 percent was generated by Europe and the remaining nine percent was generated by Mexico.
In the U.S. & Canada segment, net revenues increased 10 percent in the second quarter and year-to-date 2006, when compared with similar periods in 2005. The increases for the quarter and year-to-date period were driven primarily by volume growth and increases in net price per case, mostly due to rate improvements. In the U.S., rate improved three percent for the second quarter and year-to-date.
In Europe, net revenue increased eight percent for the second quarter and seven percent for the first 24 weeks of 2006 versus the prior year, reflecting strong volume growth and increases in net price per case, partially offset by the negative impact of foreign currency translation.
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Net revenues in Mexico grew 10 percent in the second quarter and 13 percent for the first 24 weeks of 2006 versus the prior year, driven primarily by net price per case increases, coupled with volume growth and the favorable impact of foreign currency translation. Increases in net price per case were driven mostly by rate increases, implemented in the latter part of 2005, coupled with a favorable mix shift to higher priced products.
Cost of Sales Change
12 Weeks Ended | 24 Weeks Ended | ||||||||
June 17, 2006 vs. | June 17, 2006 vs. | ||||||||
June 11, 2005 | June 11, 2005 | ||||||||
Worldwide | Worldwide | ||||||||
Volume impact | 4 | % | 5 | % | |||||
Cost per case impact | 5 | % | 5 | % | |||||
Acquisitions | 1 | % | 1 | % | |||||
Currency translation | 1 | % | 1 | % | |||||
Total Cost of Sales change | 11 | % | 12 | % | |||||
Worldwide cost of sales was $1.7 billion in the second quarter of 2006 and $2.9 billion for the first 24 weeks of 2006, increasing 11 percent and 12 percent, respectively, over similar periods in 2005. The growth in cost of sales for the quarter and on a year-to-date basis was driven primarily by cost per case increases and volume growth. Worldwide cost per case increases were driven primarily by increases in raw material costs and mix shifts, both package and country. Mix changes in package were driven by shifts to higher priced products as a result of volume growth in our non-carbonated portfolio. Changes in our country mix resulted from the higher volume growth in our U.S. business compared with our other territories.
In the U.S. & Canada segment, cost of sales increased 12 percent and 13 percent for the second quarter and on a year-to-date basis, when compared to the prior year, driven primarily by increases in cost per case and volume growth, coupled with the negative impact of foreign currency translation and acquisitions. The increases in cost per case resulted from rate increases in packaging and ingredients, coupled with the impact of mix shifts to higher cost products.
In our Europe segment, cost of sales grew in the high single digits in the second quarter and on a year-to-date basis, when compared to the prior year, reflecting strong volume growth, coupled with cost per case increases, partially offset by the favorable impact of foreign currency translation.
In Mexico, cost of sales increased in line with our worldwide cost of sales in the second quarter and on a year-to-date basis, when compared to the prior year, driven predominantly by cost per case increases, coupled with volume growth and the negative impact of foreign currency translation. The increases in cost per case were primarily due to mix shifts to higher cost products as a result of increased volume in our CSD and non-carbonated portfolios as compared to softer volume in our jug water business.
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Selling, Delivery and Administrative Expenses Change
12 Weeks Ended | 24 Weeks Ended | ||||||||
June 17, 2006 vs. | June 17, 2006 vs. | ||||||||
June 11, 2005 | June 11, 2005 | ||||||||
Worldwide | Worldwide | ||||||||
Cost impact | 6 | % | 6 | % | |||||
Adoption of SFAS 123R | 1 | % | 1 | % | |||||
Acquisitions | 1 | % | 1 | % | |||||
Currency translation | 1 | % | 1 | % | |||||
Total SD&A change | 9 | % | 9 | % | |||||
Worldwide SD&A expenses were $1.2 billion in the second quarter and $2.2 billion for the first 24 weeks of 2006, a nine percent increase over similar periods in 2005. Across all segments, increases in SD&A expenses were driven primarily by strong volume growth which impacted the variable components of our SD&A expenses, higher wage and benefit costs and the impact of SFAS 123R. These increases were coupled with higher pension costs in the U.S., higher worldwide fuel costs and planned investment spending in high growth European markets.
Operating Income
Worldwide operating income was $303 million in the second quarter, a three percent increase over 2005. On a year-to-date basis worldwide operating income was $422 million, a two percent increase over 2005. Growth in operating income for the quarter and year-to-date period was driven by higher volume and pricing improvements, partially offset by higher raw material costs, the impact of adopting of SFAS 123R and increased operating expenses. The impact of adopting SFAS 123R reduced our operating income by five percentage points in the second quarter and eight percentage points for the 24 weeks ended 2006.
Interest Expense
Interest expense increased $14 million in the second quarter and $19 million on a year-to-date basis, versus the prior year, largely due to higher effective interest rates from interest rate swaps, which convert our fixed-rate debt to variable-rate debt.
Interest Income
Interest income increased $24 million in the second quarter and $40 million on a year-to-date basis, versus the prior year, driven primarily by higher effective interest rates coupled with additional loans made to PBG.
Other Non-operating Expenses, net
Other non-operating expenses increased $8 million in both the second quarter and on a year-to-date basis, versus the prior year, primarily due to the foreign exchange loss of $9 million related to the approximate 20-percent devaluation of the Turkish lira in May 2006. This devaluation caused a transactional loss due to the revaluation of our U.S. dollar denominated liabilities in Turkey.
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Income Tax Expense
Bottling LLC is a limited liability company, classified as a partnership for U.S. tax purposes and, as such, generally pays no U.S. federal or state income taxes. The federal and state distributive shares of income, deductions and credits of Bottling LLC are allocated to Bottling LLC’s owners based on their percentage ownership in Bottling LLC. However, certain domestic and foreign affiliates pay income taxes in their respective jurisdictions. Such amounts are reflected in our Consolidated Statements of Operations. Our effective tax rate for the 24 weeks ended June 17, 2006 and June 11, 2005 was 3.4% and 4.8%, respectively. The decrease in our effective tax rate versus the prior year is due primarily to the reversal of previously established valuation allowances on tax assets driven by improved profitability trends in certain European jurisdictions. In June 2006, after the close of the quarter, changes to the income tax laws in Canada, Turkey and certain states within the U.S. were enacted. We are currently evaluating the impact of these tax law changes on our Consolidated Financial Statements.
Liquidity and Financial Condition
Cash Flows
Through the second quarter of 2006, Bottling LLC generated $481 million of net cash provided by operations, which was $112 million higher than the cash generated in the comparable period in 2005. The increase was driven by our strong revenue growth, coupled with higher interest income received from PBG and the timing of pension contributions, partially offset by higher growth in inventories as a result of timing of purchases of certain raw materials.
Through the second quarter of 2006, cash used for investments was $1,089 million, which is $548 million higher than the cash used for investments in the comparable period in 2005. The increase in cash used for investments reflects an increase in notes receivable from PBG and higher capital spending, primarily as a result of timing of our fleet and marketing equipment spending.
Through the second quarter of 2006, we generated $866 million from financing activities, which is $760 million higher than the cash generated in the comparable period in 2005. This increase in cash from financing activities is driven by the net proceeds from U.S. bond issuance of $793 million and higher short-term borrowings, partially offset by repayment of our debt and lapping of the 2005 debt issuances.
Liquidity and Capital Resources
On March 30, 2006, we issued $800 million of 5.50% senior notes due 2016 (the “Notes”). The net proceeds received, after deducting the underwriting discount and offering expenses, were approximately $793 million. We distributed $356 million of the net proceeds to PBG to repay their outstanding commercial paper balance. The balance of the proceeds is currently invested in short-term investments and will be used to repay our 2.45% senior notes outstanding due in October of 2006.
The Notes are general unsecured obligations and rank on an equal basis with all of our other existing and future unsecured indebtedness and are senior to all of our future subordinated indebtedness. The Notes contain covenants that are similar to those contained under existing senior notes. We are in compliance with all debt covenants.
We believe that our future cash flows from operations and borrowing capacity will be sufficient to fund capital expenditures, acquisition and working capital requirements for PBG and us for the foreseeable future.
In March 2006, PBG entered into a $450 million committed revolving credit facility (“2006 Agreement”) which expires in March 2011 and increased their existing facility, which expires in April 2009, from $500 million to $550 million. PBG’s $1 billion of committed credit facilities are
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guaranteed by us and support PBG’s $1 billion commercial paper program. Subject to certain conditions stated in the 2006 Agreement, PBG may borrow, prepay and reborrow amounts under the 2006 Agreement at any time during the term of the 2006 Agreement. Funds borrowed may be used for general corporate purposes, including supporting the commercial paper program. The 2006 Agreement also provides that standby letters of credit may be issued on behalf of PBG up to $250 million.
The 2006 Agreement contains customary representations, warranties and events of default in addition to certain financial covenants. PBG is in compliance with all debt covenants.
At June 17, 2006 PBG had no outstanding commercial paper. PBG had $355 million outstanding in commercial paper at December 31, 2005.
Contractual Obligations
As of June 17, 2006, there have been no material changes outside the normal course of business in the contractual obligations disclosed in Item 7 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, under the caption “Contractual Obligations.”
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Cautionary Statements
Except for the historical information and discussions contained herein, statements contained in this Form 10-Q may constitute forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on currently available competitive, financial and economic data and our operating plans. These statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different. Among the events and uncertainties that could adversely affect future periods are:
• | changes in our relationship with PepsiCo that could have a material adverse effect on our long-term and short-term business and financial results; | |
• | material changes in expected levels of bottler incentive payments from PepsiCo; | |
• | restrictions imposed by PepsiCo on our raw material suppliers that could increase our costs; | |
• | material changes from expectations in the cost or availability of raw materials, ingredients or packaging materials; | |
• | limitations on the availability of water or obtaining water rights; | |
• | an inability to achieve cost savings; | |
• | material changes in capital investment for infrastructure and an inability to achieve the expected timing for returns on cold-drink equipment and related infrastructure expenditures; | |
• | decreased demand for our product resulting from changes in consumers’ preferences; | |
• | an inability to achieve volume growth through product and packaging initiatives; | |
• | impact of competitive activities on our business; | |
• | impact of customer consolidations on our business; | |
• | changes in product category consumption; | |
• | unfavorable weather conditions in our markets; | |
• | an inability to meet projections for performance in newly acquired territories; | |
• | loss of business from a significant customer; | |
• | failure or inability to comply with laws and regulations; | |
• | changes in laws, regulations and industry guidelines governing the manufacture and sale of food and beverages, including restrictions on the sale of carbonated soft drinks in schools; | |
• | litigation, other claims and negative publicity relating to the alleged unhealthy properties of soft drinks; | |
• | changes in laws and regulations governing the environment, transportation, employee safety, labor and government contracts; | |
• | changes in accounting standards and taxation requirements (including unfavorable outcomes from audits performed by various tax authorities); | |
• | unforeseen economic and political changes; | |
• | possible recalls of our products; | |
• | interruptions of operations due to labor disagreements; | |
• | changes in our debt ratings; | |
• | material changes in expected interest and currency exchange rates and unfavorable market performance of PBG’s pension plan assets; and | |
• | an inability to achieve strategic business plan targets that could result in an intangible asset impairment charge. |
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The overall risks to our international businesses include changes in foreign governmental policies and other political or economic developments. These developments may lead to new product pricing, tax or other policies and monetary fluctuations, which may adversely impact our business. In addition, our results of operations and the value of our foreign assets are affected by fluctuations in foreign currency exchange rates. Foreign currency gains and losses reflect transaction gains and losses as well as translation gains and losses arising from the re-measurement into U.S. dollars of the net monetary assets of businesses in highly inflationary countries. There have been no material changes to our market risks as disclosed in Item 7 to our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 4.
Controls and Procedures
Bottling LLC’s management carried out an evaluation, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), with the participation of our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of our disclosure controls and procedures, as of the end of our last fiscal quarter. Based upon this evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q, such that the information relating to Bottling LLC and its consolidated subsidiaries required to be disclosed in our Exchange Act reports filed with the SEC (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to Bottling LLC’s management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In addition, Bottling LLC’s management carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of our Principal Executive Officer and our Principal Financial Officer, of changes in Bottling LLC’s internal control over financial reporting. Based on this evaluation, the Principal Executive Officer and the Principal Financial Officer concluded that there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
On May 10, 2006, we met with representatives of the Michigan Department of Environmental Quality (the “DEQ”) regarding certain previous waste water permit violations at our bottling plant in Howell, Michigan. At that meeting, we learned that the DEQ would seek monetary sanctions that we believe will exceed $100,000. We believe that in no event will such sanctions or other associated costs be material to our results of operations or financial condition.
Item 6.
Exhibits
Exhibit No. | ||
31.1 | Certification by the Principal Executive Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 | |
31.2 | Certification by the Principal Financial Officer pursuant to Section 302 of the Sarbanes–Oxley Act of 2002 | |
32.1 | Certification by the Principal Executive Officer pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 | |
32.2 | Certification by the Principal Financial Officer pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 | |
99.1 | Financial statements of PBG for the quarter ended June 17, 2006, as required by the SEC as a result of our guarantee of up to $1,000,000,000 aggregate principal amount of PBG’s 7% Senior Notes due in 2029. |
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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.
BOTTLING GROUP, LLC | ||||
(Registrant) |
Date:July 24, 2006 | /s/ Andrea L. Forster | |||
Andrea L. Forster | ||||
Principal Accounting Officer | ||||
Date:July 24, 2006 | /s/ Alfred H. Drewes | |||
Alfred H. Drewes | ||||
Principal Financial Officer |
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Exhibit 31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eric J. Foss, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Bottling Group, LLC; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date:July 24, 2006 | /s/ Eric J. Foss | |||
Eric J. Foss | ||||
Principal Executive Officer |
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Exhibit 31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Alfred H. Drewes, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Bottling Group, LLC; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | ||
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date:July 24, 2006 | /s/ Alfred H. Drewes | |||
Alfred H. Drewes | ||||
Principal Financial Officer |
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Exhibit 32.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Bottling Group, LLC (the “Company”) certifies to his knowledge that:
(1) | The Quarterly Report on Form 10-Q of the Company for the quarter ended June 17, 2006 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Act”); and | ||
(2) | The information contained in the Form 10-Q fairly presents, in all material respects, the financial conditions and results of operations of the Company as of the dates and for the periods referred to in the Form 10-Q. |
/s/ Eric J. Foss | ||||
Eric J. Foss | ||||
Principal Executive Officer | ||||
July 24, 2006 |
The foregoing certification (the “Certification”) is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
A signed original of the Certification has been provided to the Company and will be retained by the Company in accordance with Rule 12b-11(d) of the Act and furnished to the Securities and Exchange Commission or its staff upon request.
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Exhibit 32.2
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), the undersigned officer of Bottling Group, LLC (the “Company”) certifies to his knowledge that:
(1) | The Quarterly Report on Form 10-Q of the Company for the quarter ended June 17, 2006 (the “Form 10-Q”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Act”); and | ||
(2) | The information contained in the Form 10-Q fairly presents, in all material respects, the financial conditions and results of operations of the Company as of the dates and for the periods referred to in the Form 10-Q. |
/s/ Alfred H. Drewes | ||||
Alfred H. Drewes | ||||
Principal Financial Officer | ||||
July 24, 2006 |
The foregoing certification (the “Certification”) is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).
A signed original of the Certification has been provided to the Company and will be retained by the Company in accordance with Rule 12b-11(d) of the Act and furnished to the Securities and Exchange Commission or its staff upon request.