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COCA-COLA ENTERPRISES, INC. 10-Q 2006

 

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 September 29, 2006

 

or

 

o                                             TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-09300

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

58-0503352

(State of incorporation)

 

(I.R.S. Employee Identification No.)

 

2500 Windy Ridge Parkway, Suite 700
Atlanta, Georgia 30339

(Address of principal executive offices, including 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 o

Indicate by check mark 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. (Check one)
Large accelerated filer 
x   Accelerated Filer o   Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock.

477,848,900 Shares of $1 Par Value Common Stock as of September 29, 2006

 

 




 

COCA-COLA ENTERPRISES INC.

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED SEPTEMBER 29, 2006

INDEX

 

 

Page

 

 

 

Part I — Financial Information

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 29, 2006 and September 30, 2005

 

2

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 29, 2006 and December 31, 2005

 

3

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 29, 2006 and September 30, 2005

 

4

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

31

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

32

 

 

 

 

 

 

 

 

 

Part II — Other Information

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

32

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

32

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

34

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

34

 

 

 

 

 

 

 

Signatures

 

35

 

 

1




PART 1.  FINANCIAL INFORMATION

Item 1. Financial Statements

COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited; in millions, except per share data)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 29,
2006

 

September 30,
2005

 

September 29,
2006

 

September 30,
2005

 

Net operating revenues

 

$

5,206

 

$

4,897

 

$

14,982

 

$

14,217

 

Cost of sales

 

3,171

 

2,914

 

9,038

 

8,432

 

Gross profit

 

2,035

 

1,983

 

5,944

 

5,785

 

Selling, delivery, and administrative expenses

 

1,586

 

1,558

 

4,778

 

4,552

 

Operating income

 

449

 

425

 

1,166

 

1,233

 

Interest expense, net

 

159

 

156

 

472

 

470

 

Other nonoperating income (expense), net

 

4

 

(2

)

6

 

(15

)

Income before income taxes

 

294

 

267

 

700

 

748

 

Income tax expense

 

81

 

75

 

132

 

177

 

Net income

 

$

213

 

$

192

 

$

568

 

$

571

 

Basic net income per share

 

$

0.45

 

$

0.41

 

$

1.20

 

$

1.21

 

Diluted net income per share

 

$

0.44

 

$

0.40

 

$

1.18

 

$

1.20

 

Dividends declared per share

 

$

0.06

 

$

0.04

 

$

0.12

 

$

0.12

 

Basic weighted average common shares outstanding

 

476

 

472

 

474

 

471

 

Diluted weighted average common shares outstanding

 

482

 

476

 

480

 

475

 

Income (expense) amounts from transactions with
The Coca-Cola Company Note 6:

 

 

 

 

 

 

 

 

 

Net operating revenues

 

$

163

 

$

155

 

$

463

 

$

428

 

Cost of sales

 

(1,373

)

(1,297

)

(4,036

)

(3,763

)

Selling, delivery, and administrative expenses

 

6

 

4

 

13

 

15

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

2




 

COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited; in millions, except share data)

 

 

September 29,

 

December 31,

 

 

 

2006

 

2005

 

ASSETS

 

 

 

 

 

Current:

 

 

 

 

 

Cash and cash equivalents

 

$

120

 

$

107

 

Trade accounts receivable, less allowances of $51 and $40, respectively

 

2,025

 

1,802

 

Inventories

 

962

 

786

 

Current deferred income tax assets

 

267

 

313

 

Prepaid expenses and other current assets

 

393

 

387

 

Total current assets

 

3,767

 

3,395

 

Property, plant, and equipment, net

 

6,560

 

6,560

 

Goodwill

 

601

 

578

 

Franchise license intangible assets, net

 

14,231

 

13,832

 

Customer distribution rights and other noncurrent assets, net

 

1,013

 

992

 

Total assets

 

$

26,172

 

$

25,357

 

 

 

 

 

 

 

LIABILITIES AND SHAREOWNERS’ EQUITY

 

 

 

 

 

Current:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,451

 

$

2,639

 

Amounts payable to The Coca-Cola Company, net

 

173

 

180

 

Deferred cash receipts from The Coca-Cola Company

 

73

 

83

 

Current portion of debt

 

846

 

944

 

Total current liabilities

 

3,543

 

3,846

 

Debt, less current portion

 

9,406

 

9,165

 

Retirement and insurance programs and other long-term obligations

 

1,350

 

1,309

 

Deferred cash receipts from The Coca-Cola Company, less current

 

168

 

246

 

Long-term deferred income tax liabilities

 

5,263

 

5,106

 

Amounts payable to The Coca-Cola Company

 

33

 

42

 

 

 

 

 

 

 

Shareowners’ Equity:

 

 

 

 

 

Common stock, $1 par value Authorized 1,000,000,000 shares; Issued 485,742,823 and 481,827,242 shares, respectively

 

486

 

482

 

Additional paid-in capital

 

3,030

 

2,943

 

Reinvested earnings

 

2,680

 

2,170

 

Accumulated other comprehensive income

 

326

 

162

 

Common stock in treasury, at cost 7,893,923 and 8,031,660 shares, respectively

 

(113

)

(114

)

Total shareowners’ equity

 

6,409

 

5,643

 

Total liabilities and shareowners’ equity

 

$

26,172

 

$

25,357

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

3




 

COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in millions)

 

 

Nine Months Ended

 

 

 

September 29,
2006

 

September 30,
2005

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

568

 

$

571

 

Adjustments to reconcile net income to net cash derived from operating activities:

 

 

 

 

 

Depreciation and amortization

 

754

 

777

 

Net change in customer distribution rights

 

23

 

16

 

Share-based compensation expense

 

47

 

19

 

Excess tax benefits from share-based payment arrangements

 

(2

)

 

Deferred funding income from The Coca-Cola Company

 

(88

)

(33

)

Deferred income tax expense

 

73

 

79

 

Pension expense less than retirement plan contributions

 

(40

)

(102

)

Net changes in assets and liabilities, net of acquisition amounts

 

(484

)

(156

)

Other changes, net

 

74

 

13

 

Net cash derived from operating activities

 

925

 

1,184

 

Cash Flows From Investing Activities:

 

 

 

 

 

Capital asset investments

 

(621

)

(605

)

Capital asset disposals

 

21

 

48

 

Acquisition of bottling operations, net of cash acquired

 

(102

)

 

Other investing activities

 

(10

)

 

Net cash used in investing activities

 

(712

)

(557

)

Cash Flows From Financing Activities:

 

 

 

 

 

Increase in commercial paper, net

 

657

 

51

 

Issuances of debt

 

741

 

299

 

Payments on debt

 

(1,568

)

(780

)

Dividend payments on common stock

 

(86

)

(57

)

Exercise of employee share options

 

49

 

34

 

Excess tax benefits from share-based payment arrangements

 

2

 

 

Net cash used in financing activities

 

(205

)

(453

)

Net effect of exchange rate changes on cash and cash equivalents

 

5

 

(19

)

Net Change In Cash and Cash Equivalents

 

13

 

155

 

Cash and Cash Equivalents At Beginning of Period

 

107

 

155

 

Cash and Cash Equivalents At End of Period

 

$

120

 

$

310

 

 

 

 

 

 

 

Supplemental Noncash Investing Activities:

 

 

 

 

 

Capital lease additions

 

$

30

 

$

35

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

4




COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 - ACCOUNTING AND REPORTING POLICIES

Our Business
Coca-Cola Enterprises Inc. (“we,” “our,” or “us”) is the world’s largest marketer, producer, and distributor of bottle and can nonalcoholic beverages. We market, produce, and distribute our bottle and can products to customers and consumers through license territories in 46 states in the United States, the District of Columbia, the United States Virgin Islands, and the 10 provinces of Canada (collectively referred to as “North America”). We are also the sole licensed bottler for products of The Coca-Cola Company (“TCCC”) in Belgium, continental France, Great Britain, Luxembourg, Monaco, and the Netherlands (collectively referred to as “Europe”).

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 reporting 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 fair presentation have been included. This Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Annual Report on Form 10-K for the year ended December 31, 2005 (“Form 10-K”). For reporting convenience, our quarters close on the Friday closest to the end of the quarterly calendar period.

Reclassifications
We have reclassified certain amounts in our prior year Condensed Consolidated Financial Statements to conform to our current presentation.

Seasonality
Our operating results for the three and nine months ended September 29, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006, due to business seasonality.  Business seasonality is the result of traditionally higher unit sales of our products in the second and third quarters versus the first and fourth quarters of the year, combined with the methods of accounting for fixed costs such as depreciation, amortization, and interest expense, which are not significantly impacted by business seasonality.

NOTE 2 - NEW ACCOUNTING STANDARDS

Recently Issued Standards
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132R” (“SFAS 158”). SFAS 158 requires companies to (1) fully recognize, as an asset or liability, the overfunded or underfunded status of defined pension and other postretirement benefit plans; (2) recognize changes in the funded status through other comprehensive income in the year in which the changes occur; (3) measure the funded status of defined pension and other postretirement benefit plans as of the date of the company’s fiscal year-end; and (4) provide enhanced disclosures. The provisions of SFAS 158 are effective for our year-ended December 31, 2006, except for the requirement to measure the funded status of retirement benefit plans as of our fiscal year-end, which is effective for the year-ended December 31, 2008. We are in the process of evaluating the impact that SFAS 158 will have on our Consolidated Financial Statements. For additional information about our defined pension and other postretirement benefit plans, refer to Note 9 in this Form 10-Q and Note 9 of the Notes to Consolidated Financial Statements in our Form 10-K.

5




 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective January 1, 2008. We are in the process of evaluating the impact that SFAS 157 will have on our Consolidated Financial Statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure. FIN 48 is effective January 1, 2007. We are in the process of evaluating the impact that FIN 48 will have on our Consolidated Financial Statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”), which amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after January 1, 2007. We do not expect the adoption of SFAS 155 to have a material impact on our Consolidated Financial Statements.

Recently Adopted Standards
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces Accounting Principles Board (“APB”) Opinion No. 20, “Accounting Changes,” (“APB 20”) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The statement requires a voluntary change in accounting principle to be applied retrospectively to all prior period financial statements so that those financial statements are presented as if the current accounting principle had always been applied. APB 20 previously required most voluntary changes in accounting principle to be recognized by including in net income of the period of change the cumulative effect of changing to the new accounting principle. In addition, SFAS 154 carries forward without change the guidance contained in APB 20 for reporting a correction of an error in previously issued financial statements and a change in accounting estimate. SFAS 154 was effective January 1, 2006 and did not have a material impact on our Condensed Consolidated Financial Statements.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage). In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of production facilities. SFAS 151 was effective January 1, 2006 and did not have a material impact on our Condensed Consolidated Financial Statements.

NOTE 3 - SHARE-BASED PAYMENT AWARDS

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which revised SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and superseded APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. SFAS 123R requires the grant-date fair value of all share-based payment awards that are expected to vest, including employee share options, to be recognized as employee compensation expense over the requisite service period. We adopted SFAS

6




 

123R on January 1, 2006 and applied the modified prospective transition method. Under this transition method, we (1) did not restate any prior periods and (2) are recognizing compensation expense for all share-based payment awards that were outstanding, but not yet vested, as of January 1, 2006, based upon the same estimated grant-date fair values and service periods used to prepare our SFAS 123 pro forma disclosures.

Prior to adopting SFAS 123R, we accounted for our share-based payment awards using the intrinsic value method of APB 25 and related interpretations. Under APB 25, we did not record compensation expense for employee share options, unless the awards were modified, because our share options were granted with exercise prices equal to or greater than the fair value of our stock on the date of grant. The following table illustrates the effect on reported net income and earnings per share for the three and nine months ended September 30, 2005, had we accounted for our share-based payment awards using the fair value method of SFAS 123 (in millions, except per share data):

 

Three Months
Ended

 

Nine Months
Ended

 

 

 

2005

 

2005

 

Net income, as reported

 

$

192

 

$

571

 

Add: Total share-based employee compensation costs included in net income, net of tax

 

4

 

12

 

Less: Share-based employee compensation costs determined under the fair value method for all awards, net of tax

 

(11

)

(36

)

Net income, pro forma

 

$

185

 

$

547

 

Net income per share:

 

 

 

 

 

Basic – as reported

 

$

0.41

 

$

1.21

 

Basic – pro forma

 

$

0.39

 

$

1.16

 

Diluted – as reported

 

$

0.40

 

$

1.20

 

Diluted – pro forma

 

$

0.39

 

$

1.15

 

 

During the three and nine months ended September 29, 2006, we recorded $16 million and $47 million, respectively, in compensation expense related to our share-based payment awards. These amounts included $9 million ($5 million net of tax, or $0.01 per diluted common share) and $26 million ($16 million net of tax, or $0.03 per diluted common share), respectively, in incremental expense as a result of adopting SFAS 123R. Our share-based compensation expense for the nine months ended September 29, 2006 also included $5 million related to the modification of certain awards in connection with our restructuring activities (refer to Note 13). We recognize compensation expense for our share-based payment awards on a straight-line basis over the requisite service period of the entire award, unless the awards are subject to market conditions, in which case we recognize compensation expense over the requisite service period of each separate vesting tranche. Compensation expense related to our share-based payment awards is recorded in selling, delivery, and administrative (“SD&A”) expenses. We determine the grant-date fair value of our share-based payment awards using a Black-Scholes model, unless the awards are subject to market conditions, in which case we use a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved.

Share Options
During the three and nine months ended September 29, 2006, we granted 2.7 million and 3.6 million share options, respectively. These share options (1) were granted with an exercise price equal to the fair value of our stock on the date of grant; (2) vest ratably over a period of three years; and (3) expire 10 years from the date of grant. Certain of the share options granted during the nine months ended September 29, 2006, are subject to market conditions that require our stock price to increase 25 percent and 50 percent for a defined period. The following table summarizes the weighted average grant-date fair values and assumptions that were used to

7




 

estimate the grant-date fair values of the share options granted during the three and nine months ended September 29, 2006:

 

Three Months
Ended

 

Nine Months
Ended

 

Grant-date fair value

 

 

 

2006

 

2006

 

Black-Scholes model

 

$

8.67

 

$

8.67

 

Monte Carlo model

 

 

7.84

 

 

 

 

 

 

 

Assumptions

 

 

 

 

 

 

Dividend yield (A)

 

 1.1%

 

 1.1%

 

Expected volatility (B)

 

33.6%

 

32.9%

 

Risk-free interest rate (C)

 

 5.0%

 

 5.0%

 

Expected life (D)

 

7.1 years

 

7.1 years

 

 


(A) The dividend yield was calculated by dividing our annual dividend by our average stock price on the date of grant.

(B) The expected volatility was determined by using a combination of the historical volatility of our stock, the implied volatility of our exchange-traded options, and other factors, such as a comparison to our peer group.

(C) The risk-free interest rate was based on the U.S. Treasury yield for a term equal to the expected life on the date of grant.

(D) The expected life was used for options valued by the Black-Scholes model. It was determined by using a combination of actual exercise and post-vesting cancellation history for the types of employees included in the grant population.

During the three and nine months ended September 29, 2006, we issued an aggregate of 1.5 million and 2.8 million shares of common stock, respectively, from the exercise of share options. As of September 29, 2006, we had approximately $48 million of unrecognized compensation expense related to our unvested share options. We expect to recognize this compensation expense over a weighted average period of 2.1 years.

Restricted Shares
During the three and nine months ended September 29, 2006, we granted 1.7 million and 1.8 million, respectively, of restricted shares and restricted share units (collectively “restricted shares”). These restricted shares (1) vest ratably over a period of four years, subject to certain market conditions that require our stock price to increase 25 percent for a defined period, and (2) expire 5 years from the date of grant. The following table summarizes the weighted average grant-date fair values and assumptions that were used to estimate the grant-date fair values of the restricted shares granted during the three and nine months ended September 29, 2006:

 

Three Months
Ended

 

Nine Months
Ended

 

Grant-date fair value

 

 

 

2006

 

2006

 

Monte Carlo model

 

$

18.89

 

$

18.89

 

 

 

 

 

 

 

Assumptions

 

 

 

 

 

 

Dividend yield (A)

 

 1.1%

 

 1.1%

 

Expected volatility (B)

 

33.6%

 

33.6%

 

Risk-free interest rate (C)

 

 5.1%

 

 5.1%

 

 


(A) The dividend yield was calculated by dividing our annual dividend by our average stock price on the date of grant.

8




 

(B) The expected volatility was determined by using a combination of the historical volatility of our stock, the implied volatility of our exchange-traded options, and other factors, such as a comparison to our peer group.

(C) The risk-free interest rate was based on the U.S. Treasury yield for a term equal to the expected life on the date of grant.

As of September 29, 2006, we had approximately $76 million of unrecognized compensation expense related to our unvested restricted shares. We expect to recognize this compensation expense over a weighted average period of 3.1 years.

For additional information about our share-based payment awards and for additional disclosures required under SFAS 123R, refer to Note 11 of the Notes to Consolidated Financial Statements in our Form 10-K.

NOTE 4 - INVENTORIES

We value our inventories at the lower of cost or market. Cost is determined using the first-in, first-out (“FIFO”) method. The following table summarizes our inventories as of September 29, 2006 and December 31, 2005 (in millions):

 

September 29,

 

December 31,

 

 

 

2006

 

2005

 

Finished goods

 

$

631

 

$

483

 

Raw materials and supplies

 

331

 

303

 

Total inventories

 

$

962

 

$

786

 

 

NOTE 5 - PROPERTY, PLANT, AND EQUIPMENT

The following table summarizes our property, plant, and equipment as of September 29, 2006 and December 31, 2005 (in millions):

 

September 29,

 

December 31,

 

 

 

2006

 

2005

 

Land

 

$

533

 

$

503

 

Building and improvements

 

2,307

 

2,176

 

Cold drink equipment

 

5,759

 

5,388

 

Fleet

 

1,665

 

1,610

 

Machinery and equipment

 

3,489

 

3,271

 

Furniture and office equipment

 

1,127

 

1,067

 

Property, plant, and equipment

 

14,880

 

14,015

 

Less: accumulated depreciation and amortization

 

8,558

 

7,756

 

 

 

6,322

 

6,259

 

Construction in process

 

238

 

301

 

Property, plant, and equipment, net

 

$

6,560

 

$

6,560

 

 

Depreciation and amortization expense on our property, plant, and equipment totaled $754 million and $777 million during the nine months ended September 29, 2006 and September 30, 2005, respectively.

9




NOTE 6 - RELATED PARTY TRANSACTIONS

We are a marketer, producer, and distributor principally of Coca-Cola products with 93 percent of our sales volume during the nine months ended September 29, 2006 consisting of sales of TCCC products. Our license arrangements with TCCC are governed by licensing territory agreements. TCCC owned 35 percent of our outstanding shares as of September 29, 2006. From time to time, the terms and conditions of programs with TCCC are modified upon mutual agreement of both parties. For additional information about our relationship with TCCC, refer to Note 3 of the Notes to Consolidated Financial Statements in our Form 10-K.

We have received an extension until January 2007 of our bottler agreements with TCCC for our territories in Belgium, continental France, and the Netherlands while we negotiate the renewal of these licenses. We believe that we and TCCC will enter into agreements without material modifications to the terms of the existing agreements and without substantial cost. For additional information about these agreements, refer to Item 1 of Part 1, “Business - European Beverage Agreements,” in our Form 10-K.

The following table summarizes the transactions with TCCC that directly affected our Condensed Consolidated Statements of Income for the three and nine months ended September 29, 2006 and September 30, 2005 (in millions):

 

Three Months Ended

 

Nine Months Ended

 

 

 

2006

 

2005

 

2006

 

2005

 

Amounts affecting net operating revenues:

 

 

 

 

 

 

 

 

 

Fountain syrup and packaged product sales

 

$

114

 

$

116

 

$

320

 

$

324

 

Dispensing equipment repair services

 

18

 

20

 

55

 

56

 

Other transactions

 

31

 

19

 

88

 

48

 

Total

 

$

163

 

$

155

 

$

463

 

$

428

 

Amounts affecting cost of sales:

 

 

 

 

 

 

 

 

 

Purchases of syrup, concentrate, mineral water, and juice

 

$

(1,189

)

$

(1,113

)

$

(3,566

)

$

(3,380

)

Purchases of sweeteners

 

(64

)

(69

)

(219

)

(170

)

Purchases of finished products

 

(267

)

(233

)

(675

)

(579

)

Marketing support funding earned

 

116

 

108

 

336

 

333

 

Cold drink equipment placement funding earned

 

31

 

10

 

88

 

33

 

Total

 

$

(1,373

)

$

(1,297

)

$

(4,036

)

$

(3,763

)

Amounts affecting selling, delivery, and administrative expenses:

 

 

 

 

 

 

 

 

 

Marketing program payments

 

$

(1

)

$

(1

)

$

(3

)

$

(3

)

Operating expense cost reimbursements

 

7

 

6

 

21

 

18

 

Other transactions

 

 

(1

)

(5

)

 

Total

 

$

6

 

$

4

 

$

13

 

$

15

 

 

During the second quarter of 2005, we received approximately $48 million in proceeds from the settlement of litigation against suppliers of high fructose corn syrup (“HFCS”). These proceeds were recorded as a reduction in our cost of sales and included a payment of approximately $44 million from TCCC, which represented our share of the proceeds received by TCCC from the claims administrator. The amount received from TCCC is included in purchases of sweeteners in the table above.

10




NOTE 7 - DEBT

The following table summarizes our debt as of September 29, 2006 and December 31, 2005 (in millions):

 

September 29, 2006

 

December 31, 2005

 

 

 

Principal

 

 

 

Principal

 

 

 

 

 

Balance

 

Rates(A)

 

Balance

 

Rates(A)

 

U.S. dollar commercial paper(B)

 

$

961

 

5.3

%

$

156

 

3.9

%

Euro commercial paper

 

120

 

3.1

 

236

 

2.4

 

Canadian dollar commercial paper

 

192

 

4.3

 

201

 

3.4

 

U.S. dollar notes due 2006-2037(B)

 

1,792

 

5.3

 

2,496

 

5.0

 

Euro and pound sterling notes due 2006-2021(C)

 

2,765

 

5.0

 

2,563

 

4.6

 

Canadian dollar notes due 2009

 

134

 

5.9

 

129

 

5.9

 

U.S. dollar debentures due 2012-2098

 

3,783

 

7.4

 

3,783

 

7.4

 

U.S. dollar zero coupon notes due 2020(D)

 

205

 

8.4

 

193

 

8.4

 

Various foreign currency debt and credit facilities

 

101

 

 

172

 

 

Capital lease obligations (E)

 

148

 

 

132

 

 

Other debt obligations

 

51

 

 

48

 

 

Total debt

 

10,252

 

 

 

10,109

 

 

 

Less: current portion of debt

 

846

 

 

 

944

 

 

 

Debt, less current portion

 

$

9,406

 

 

 

$

9,165

 

 

 


(A) These rates represent the weighted average interest rates or effective interest rates on the outstanding balances.

(B) In August 2006, a $450 million, 5.38 percent note matured. In September 2006, a $250 million, 2.50 percent note matured. In connection with the maturing of these notes, we increased our borrowings under our U.S. dollar commercial paper program.

(C) In May 2006, a £175 million British pound sterling, 4.13 percent note (U.S. $330 million) matured. In connection with the maturing of this note, we issued a new £175 million British pound sterling, 5.25 percent note (U.S. $325 million) due May 2009.

(D) Amounts are shown net of unamortized discounts of $424 million and $436 million as of September 29, 2006 and December 31, 2005, respectively.

(E) These amounts represent the present value of our minimum capital lease payments as of September 29, 2006 and December 31, 2005, respectively.

At September 29, 2006 and December 31, 2005, approximately $1.6 billion and $849 million, respectively, of borrowings due in the next 12 months, including commercial paper, were classified as long-term on our Condensed Consolidated Balance Sheets as a result of our intent and ability to refinance these borrowings through amounts available under committed credit facilities.

11




Debt and Credit Facilities

We have amounts available to us for borrowing under various debt and credit facilities. Amounts available under committed credit facilities serve as back-up to our domestic and international commercial paper programs and support our working capital needs.  Amounts available under our public debt facilities could be used for long-term financing, refinancing of debt maturities, and refinancing of commercial paper. The following table summarizes our availability under debt and credit facilities as of September 29, 2006 and December 31, 2005 (in millions):

 

September 29,

 

December 31,

 

 

 

2006

 

2005

 

Amounts available for borrowing:

 

 

 

 

 

Amounts available under committed credit facilities (A)

 

$

2,920

 

$

2,890

 

Amounts available under public debt facilities:(B)

 

 

 

 

 

Shelf registration statement with the U.S. Securities and Exchange Commission

 

3,221

 

3,221

 

Euro medium-term note program

 

1,514

 

1,557

 

Total amounts available under public debt facilities

 

4,735

 

4,778

 

 

 

 

 

 

 

Total amounts available

 

$

7,655

 

$

7,668

 


(A) At September 29, 2006, there were no outstanding borrowings under our committed credit facilities. Our primary committed credit facility was established in 2004 and matures in 2009. This $2.5 billion revolving credit facility is with a syndicate of 26 banks and serves as a backstop to our various commercial paper programs and for general corporate borrowing purposes.

(B) Amounts available under each of these public debt facilities and the related costs to borrow are subject to market conditions at the time of borrowing.

Covenants

Our credit facilities and outstanding notes and debentures contain various provisions that, among other things, require us to limit the incurrence of certain liens or encumbrances in excess of defined amounts. Additionally, our credit facilities require us to maintain a defined net debt to total capital ratio. We were in compliance with these requirements as of September 29, 2006. These requirements currently are not, and it is not anticipated they will become, restrictive to our liquidity or capital resources.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

Affiliate Guarantees

We guarantee debt and other obligations of certain third parties. In North America, we guarantee the repayment of debt owed by a PET (plastic) bottle manufacturing cooperative in which we have an equity interest. We also guarantee the repayment of debt owed by a vending partnership in which we have a limited partnership interest.

The following table summarizes the maximum amounts of our guarantees and the amounts outstanding under these guarantees as of September 29, 2006 and December 31, 2005 (in millions):

 

 

 

Guaranteed

 

Outstanding

Category

 

Expiration

 

2006

 

2005

 

2006

 

2005

Manufacturing cooperative

 

Various through 2015

 

$

239

 

$

236

 

$

209

 

$

223

Vending partnership

 

November 2006

 

25

 

25

 

15

 

13

Other

 

Renewable

 

1

 

1

 

1

 

1

 

 

 

 

$

265

 

$

262

 

$

225

 

$

237

 

12




We hold no assets 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.

Legal Contingencies

On February 7, 2006, a purported class action lawsuit was filed against us and several of our current and former officers and directors (the “Argento Suit”). The lawsuit alleged that we engaged in “channel stuffing” with customers and raised certain insider trading claims. “Copycat” lawsuits virtually identical to this suit, some raising derivative claims under Delaware state law and others bringing claims under the Employees’ Retirement Income Security Act, were filed in courts in Delaware and Georgia. The Delaware suit names TCCC as a defendant and alleges that we are “controlled” by TCCC to our detriment and to the detriment of our shareowners. It is possible that additional suits may be filed in the future. The various suits have been consolidated in each court by suit type. We moved to dismiss the Argento Suit, and by order dated May 19, 2006 that suit was dismissed. On June 30, 2006, an amended complaint was filed, containing allegations substantially similar to those in the Argento Suit. Amended complaints have been filed in the other suits as well.  We possess strong defenses to the claims raised in these lawsuits and either have asked or will ask the courts to dismiss each of the suits. At this time, it is not possible for us to predict the ultimate outcome of these matters.

On February 14, 2006, a lawsuit was filed by a group of United States Coca-Cola bottlers against TCCC and us (the “Ozarks Suit”). This lawsuit brings claims for breach of contract and breach of duty, along with other related claims arising out of our plan to offer warehouse delivery of Powerade to a specific customer within our exclusive territory. The lawsuit seeks unspecified compensatory and exemplary damages and seeks preliminary and permanent injunctive relief. Also, on February 14, 2006, a second lawsuit was filed in Alabama state court by additional bottler plaintiffs. This lawsuit brings claims that are substantially similar to those in the Ozarks Suit, although it does not contain a request for preliminary injunctive relief. On March 17, 2006, the Ozarks Suit was transferred to the U.S. District Court for the Northern District of Georgia. On April 21, 2006, the Ozarks plaintiffs filed a pleading with the federal court suggesting that the court defer any hearing or further briefing on the plaintiffs’ motion for preliminary injunction. Plaintiffs have filed amended complaints in both actions raising comparable allegations regarding programs to offer warehouse delivery of certain Dasani and Minute Maid products to specific customers within our exclusive territory.  We possess strong defenses to the claims. At this time, it is not possible for us to predict the ultimate outcome of these matters.

In 2000, we 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 we 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 argued our appeals before the Texas Supreme Court in November 2004. In an opinion issued October 20, 2006, the Texas Supreme Court reversed the Texas Court of Appeals’ judgment and either dismissed or rendered judgment in favor of us on the claims that were the subject of the appeal. The plaintiffs, however, have the right to file a motion for rehearing. The claims of three remaining plaintiffs in this case remain to be tried. We intend to vigorously defend against an unfavorable outcome in these claims. At this time, we have not recorded any amounts for potential awards related to these additional claims.

Our California subsidiary has been sued by several current and former employees over alleged violations of state wage and hour rules. Several of these suits have now been resolved and are to be dismissed. Amounts to be paid toward the settlements reached in these suits have been recorded in our Condensed Consolidated Financial Statements. Our California subsidiary is vigorously defending against the remaining claims. At this time, it is not possible for us to predict the ultimate outcome of these matters.

13




We are a party to various other matters of litigation or claims, including other employment matters, generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these matters, we believe that any ultimate liability would not have a material adverse effect on our Condensed Consolidated Financial Statements.

Environmental

At September 29, 2006, there were two federal and two state superfund sites for which we and our bottling subsidiaries’ involvement or liability as a potentially responsible party (“PRP”) was unresolved. We believe any ultimate liability under these PRP designations will not have a material adverse effect on our Condensed Consolidated Financial Statements. In addition, we or our bottling subsidiaries have been named as a PRP at 38 other federal and 10 other state superfund sites under circumstances that have led us to conclude that either (1) we will have no further liability because we had no responsibility for depositing hazardous waste; (2) our ultimate liability, if any, would be less than $100,000 per site; or (3) payments made to date will be sufficient to satisfy our liability.

Income Taxes

Our tax filings for various periods are 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 involving certain of our subsidiaries, including one of our Canadian subsidiaries, some of which may not be resolved for many years. We believe we have substantial defenses to the questions being raised and would pursue all legal remedies before an unfavorable outcome would result. We believe we have adequately provided for any amounts that could result from these proceedings where (1) it is probable we will pay some amount and (2) the amount can be estimated. At this time, it is not possible for us to predict the ultimate outcome of some of these matters.

Cold Drink Equipment Placement

We participate in programs with TCCC designed to promote the placement of cold drink equipment (“Jumpstart Programs”). Under the Jumpstart Programs, as amended, we agree to (1) purchase and place specified numbers of venders/coolers or other cold drink equipment each year through 2010; (2) maintain the equipment in service, with certain exceptions, for a minimum period of 12 years after placement; (3) maintain and stock the equipment in accordance with specified standards for marketing TCCC products; (4) report to TCCC during the period the equipment is in service whether, on average, the equipment purchased under the programs has generated a stated minimum sales volume of TCCC products; and (5) achieve for TCCC a certain gross profit on TCCC products sold through energy coolers. We have agreed to relocate equipment if it is not generating sufficient volume to meet minimum requirements. Movement of the equipment is required only if it is determined that, on average, sufficient volume is not being generated and it would help to ensure our performance under the programs.

Should we not satisfy the provisions of the Jumpstart Programs, the agreements provide for the parties to meet to work out a mutually agreeable solution. Should the parties be unable to agree on alternative solutions, TCCC would be able to seek a partial refund. No refunds of amounts previously earned have ever been paid under the programs, and we believe the probability of a partial refund of amounts previously earned under the programs is remote. We believe we would in all cases resolve any matters that might arise regarding these programs. We and TCCC have amended prior agreements to reflect, where appropriate, modified goals and we believe that we can continue to resolve any differences that might arise over our performance requirements under the Jumpstart Programs.

Franchise License Intangible Assets

We perform an annual impairment test of our franchise license intangible assets on the last day of our fiscal October. In performing our 2005 annual impairment test, we estimated that the fair value of our North American franchise license intangible assets exceed their carrying amount by approximately 7 percent. Accordingly, if the estimated value of these rights declined greater than this amount, we would need to record an impairment charge for these assets. Due to the potential impact that the current cost, interest rate, and marketplace environments may have on our future forecasts, there is a possibility that the estimated value of our North American franchise licenses may not exceed their carrying amount when we perform our 2006 annual impairment test. For additional information about our annual impairment test of our franchise license intangible assets, refer to Note 1 of the Notes to Consolidated Financial Statements in our Form 10-K.

Letters of Credit

At September 29, 2006, we had letters of credit issued as collateral for claims incurred under self-insurance programs for workers’ compensation and large deductible casualty insurance programs aggregating $399 million and letters of credit for certain operating activities aggregating $4 million.

 

14




Indemnifications

In the normal course of business, we enter into agreements that provide general indemnifications.  We have not made significant indemnification payments under such agreements in the past and we believe the likelihood of incurring such obligations in the future is remote. Furthermore, we cannot reasonably estimate future potential payment obligations because we cannot predict when and under what circumstances they may be incurred.  As a result, we have not recorded a liability in our Condensed Consolidated Financial Statements with respect to these general indemnifications.

NOTE 9 - PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

Pension Plans

We sponsor a number of defined benefit pension plans covering substantially all of our employees in North America and Europe. The following table summarizes the net periodic benefit costs of our pension plans for the three and nine months ended September 29, 2006 and September 30, 2005 (in millions):

 

Three Months Ended

 

Nine Months Ended

 

 

 

2006

 

2005

 

2006

 

2005

 

Components of net periodic benefit costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

37

 

$

34

 

$

110

 

$

99

 

Interest cost

 

40

 

39

 

118

 

113

 

Expected return on plan assets

 

(47

)

(41

)

(140

)

(121

)

Amortization of actuarial loss

 

20

 

17

 

60

 

49

 

Net periodic benefit cost

 

$

50

 

$

49

 

$

148

 

$

140

 

 

Other Postretirement Benefit Plans

We sponsor unfunded defined benefit postretirement plans, which provide healthcare and life insurance benefits based on defined formulas to substantially all U.S. and Canadian employees who retire or terminate after qualifying for such benefits. Retirees of our European operations are covered primarily by government-sponsored programs and the specific cost to us for those programs and other postretirement healthcare is not significant. The following table summarizes the net periodic benefit costs of our other postretirement benefit plans for the three and nine months ended September 29, 2006 and September 30, 2005 (in millions):

 

Three Months Ended

 

Nine Months Ended

 

 

 

2006

 

2005

 

2006

 

2005

 

Components of net periodic benefit costs:

 

 

 

 

 

 

 

 

 

Service cost

 

$

4

 

$

3

 

$

10

 

$

9

 

Interest cost

 

6

 

6

 

17

 

17

 

Amortization of prior service cost

 

(3

)

(4

)

(10

)

(10

)

Amortization of actuarial loss

 

 

1

 

3

 

3

 

Net periodic benefit cost

 

$

7

 

$

6

 

$

20

 

$

19

 

 

15




Contributions

Contributions to our pension and other postretirement benefit plans were $208 million and $261 million for the nine months ended September 29, 2006 and September 30, 2005, respectively. The following table summarizes our projected contributions for the full year ending December 31, 2006, as well as our actual contributions for the year ended December 31, 2005 (in millions):

 

Projected

 

Actual

 

 

 

2006

 

2005

 

Pension - U.S.

 

$

136

 

$

204

 

Pension - Foreign

 

71

 

70

 

Other Postretirement

 

21

 

22

 

Total contributions

 

$

228

 

$

296

 

 

NOTE 10 - INCOME TAXES

Our effective tax rate was 19 percent and 23 percent for the nine months ended September 29, 2006 and September 30, 2005, respectively. The following table provides a reconciliation of the income tax provision at the statutory federal rate to our actual income tax provision for the nine months ended September 29, 2006 and September 30, 2005 (in millions):

 

Nine Months Ended

 

 

 

2006

 

2005

 

U.S. federal statutory expense

 

$

245

 

$

262

 

State expense, net of federal benefit

 

7

 

12

 

Taxation of European and Canadian operations, net

 

(68

)

(65

)

Rate and law change benefit

 

(71

)

(35

)

Valuation allowance provision

 

7

 

 

Nondeductible items

 

14

 

8

 

Revaluation of income tax obligations

 

(2

)

(3

)

Other, net

 

 

(2

)

Total provision for income taxes

 

$

132

 

$

177

 

 

NOTE 11 - EARNINGS PER SHARE

We calculate our basic earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated in a similar manner, but include the effect of dilutive securities. The following table summarizes our basic and diluted earnings per share calculations for the three and nine months ended September 29, 2006 and September 30, 2005 (in millions, except per share data; per share data is calculated prior to rounding to millions):

 

Three Months Ended

 

Nine Months Ended

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income

 

$

213

 

$

192

 

$

568

 

$

571

 

Basic weighted average common shares outstanding (A)

 

476

 

472

 

474

 

471

 

Effect of dilutive securities (B)

 

6

 

4

 

6

 

4

 

Diluted weighted average common shares outstanding

 

482

 

476

 

480

 

475

 

Basic net income per share

 

$

0.45

 

$

0.41

 

$

1.20

 

$

1.21

 

Diluted net income per share

 

$

0.44

 

$

0.40

 

$

1.18

 

$

1.20

 


(A) At September 29, 2006 and September 30, 2005, we were obligated to issue, for no additional consideration, 2.9 million and 3.3 million common shares, respectively, under deferred share plans and other agreements. These shares were included in our calculation of basic and diluted earnings per share.

(B) Options to purchase 53 million common shares were outstanding as of September 29, 2006 and September 30, 2005. Of these amounts, options to purchase 32 million common shares for the three months ended September 29, 2006 and September 30, 2005 and options to purchase 36 million and 32 million common shares for the nine months ended September 29, 2006 and September 30, 2005, respectively, were not included in the computation of diluted earnings per share, because the effect of including the options in the computation would have been antidilutive. The dilutive impact of the remaining options outstanding in each period was included in the effect of dilutive securities.

 

16




During the nine months ended September 29, 2006 and September 30, 2005, we made dividend payments on our common stock totaling $86 million and $57 million, respectively.

NOTE 12 - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) is comprised of net income and other adjustments, including items such as foreign currency translation adjustments, hedges of net investments in international subsidiaries, minimum pension liability adjustments, gains and losses on certain investments in marketable equity securities, and changes in the fair value of certain derivative financial instruments qualifying as cash flow hedges. We do not provide income taxes on currency translation adjustments, as the earnings from our international subsidiaries are considered to be indefinitely reinvested. The following table summarizes our comprehensive income (loss) for the three and nine months ended September 29, 2006 and September 30, 2005 (in millions):

 

Three Months Ended

 

Nine Months Ended

 

 

 

2006

 

2005

 

2006

 

2005

 

Net income

 

$

213

 

$

192

 

$

568

 

$

571

 

Currency translations

 

12

 

93

 

175

 

(261

)

Net investment hedges, net of tax

 

2

 

2

 

(17

)

49

 

Other adjustments, net of tax

 

4

 

1

 

6

 

(4

)

Net comprehensive income adjustments, net of tax

 

18

 

96

 

164

 

(216

)

Comprehensive income

 

$

231

 

$

288

 

$

732

 

$

355

 

 

NOTE 13 - RESTRUCTURING ACTIVITIES

During the three and nine months ended September 29, 2006, we recorded restructuring charges totaling $5 million and $52 million, respectively. These charges, included in SD&A expenses, were primarily related to (1) the reorganization of certain aspects of our operations in Europe; (2) workforce reductions associated with the reorganization of our North American operations into six United States business units and Canada; and (3) changes in our executive management. The reorganization of our North American operations (1) has resulted in a simplified and flatter organizational structure; (2) has helped facilitate a closer interaction between our front-line employees and our customers; and (3) will provide long-term cost savings through improved administrative and operating efficiencies. Similarly, the reorganization of certain aspects of our operations in Europe has helped improve operating effectiveness and efficiency while enabling our front-line employees to better meet the needs of our customers. During the remainder of 2006, we expect to incur additional restructuring charges of approximately $10 million primarily associated with relocations, workforce reductions, and vacating certain real property leases in connection with these restructuring activities. We expect to be substantially complete with these restructuring activities by the end of 2006.

During the three and nine months ended September 30, 2005, we recorded restructuring charges totaling $24 million and $32 million, respectively. These charges, included in SD&A expenses, were primarily related to (1) workforce reductions associated with the reorganization of our North American operations into six United States

17




business units and Canada; (2) changes in our executive management; and (3) the elimination of certain corporate headquarters positions.

The following table summarizes our restructuring activities for the year ended December 31, 2005 and for the nine months ended September 29, 2006 (in millions):

 

Severance Pay
and Benefits

 

Consulting,
Relocation,

and Other

 

Total

 

Balance at December 31, 2004

 

$

 

$

 

$

 

Provision

 

61

 

19

 

80

 

Cash payments

 

(18

)

(19

)

(37

)

Non-cash

 

(10

)

 

(10

)

Balance at December 31, 2005

 

33

 

 

33

 

Provision

 

41

 

11

 

52

 

Cash payments

 

(38

)

(7

)

(45

)

Non-cash

 

(5

)

(1

)

(6

)

Balance at September 29, 2006

 

$

31

 

$

3

 

$

34

 

 

NOTE 14 - CENTRAL ACQUISITION

On February 28, 2006, we acquired the bottling operations of Central Coca-Cola Bottling Company, Inc. (“Central”) for a total purchase price of $102 million, net of cash acquired. The acquisition of Central, which operates in parts of Virginia, West Virginia, Pennsylvania, Maryland, and Ohio, bolsters our customer and supply chain alignment in the United States. Based upon our preliminary purchase price allocation, we have assigned a value of $6 million to customer relationships, $81 million to franchise license rights, and $23 million to goodwill. The value of the customer relationships is being amortized over a period of 15 years. We have assigned an indefinite life to the franchise license rights since our domestic cola franchise license agreements with TCCC do not expire and our domestic non-cola franchise license agreements with TCCC can be renewed for additional terms with minimal cost (refer to Note 1 of the Notes to Consolidated Financial Statements in our Form 10-K for additional information about our franchise license agreements with TCCC). The preliminary purchase price allocation is subject to change and will be revised, as necessary, based upon the final determination of the fair value of the assets and liabilities assumed as of the date of the acquisition. In connection with this acquisition, we recorded a liability as of the acquisition date totaling $1 million for costs associated with the severance and relocation of certain Central employees and the elimination of duplicate facilities. The operating results of Central have been included in our Condensed Consolidated Statement of Income from the date of acquisition. This acquisition did not have a material impact on our Condensed Consolidated Financial Statements.

18




Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS OVERVIEW

Coca-Cola Enterprises Inc. (“we,” “our,” or “us”) is the world’s largest marketer, producer, and distributor of bottle and can nonalcoholic beverages. We market, produce, and distribute our bottle and can products to customers and consumers through license territories in 46 states in the United States, the District of Columbia, the United States Virgin Islands, and the 10 provinces of Canada (collectively referred to as “North America”). We are also the sole licensed bottler for products of The Coca-Cola Company (“TCCC”) in Belgium, continental France, Great Britain, Luxembourg, Monaco, and the Netherlands (collectively referred to as “Europe”). Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying Notes in this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2005 (“Form 10-K”).

Licensee of The Coca-Cola Company
Our relationship with TCCC has a great impact on our success. Our collaborative efforts will continue to be beneficial to us as we work to create new brands, to market our products more effectively, to find ways to profitably grow the entire Coca-Cola business on a sustainable basis, and to make our system more efficient.

Seasonality
Our operating results for the third quarter and first nine months of 2006 are not necessarily indicative of the results that may be expected for the full-year ending December 31, 2006 due to business seasonality.  Business seasonality is the result of traditionally higher unit sales of our products in the second and third quarters versus the first and fourth quarters of the year, combined with the methods of accounting for fixed costs such as depreciation, amortization, and interest expense, which are not significantly impacted by business seasonality.

Financial Results
Our net income in the third quarter of 2006 was $213 million, or $0.44 per diluted common share, compared to net income of $192 million, or $0.40 per diluted common share, in the third quarter of 2005.

Our third quarter of 2006 results included the following items of significance:

·                  a $5 million ($3 million net of tax, or $0.01 per diluted common share) charge related to restructuring activities, primarily in Europe; and

·                  a $9 million ($5 million net of tax, or $0.01 per diluted common share) increase in compensation expense related to the adoption of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) on January 1, 2006.

Our third quarter of 2005 results included the following items of significance:

·                  a $24 million ($15 million net of tax, or $0.04 per diluted common share) charge related to restructuring activities; and

·                  a $24 million ($15 million net of tax, or $0.03 per diluted common share) charge primarily related to asset write-offs associated with Hurricane Katrina.

Our financial results in the third quarter of 2006 were negatively impacted by marketplace pressures that limited our volume and pricing growth in North America. We also experienced a modestly higher cost of goods environment across our territories. These challenges were offset by (1) the positive impact of continued operating improvement in Europe; (2) the benefit of higher Jumpstart income as a result of increased cold drink equipment placements, primarily related to the rollout of our energy drink portfolio; and (3) a continued focus on controlling our operating expense growth. In North America, we experienced weak CSD category trends, particularly in

19




regular soft drinks, and ongoing pricing pressures in the water category. These items were partially offset by positive volume growth attributable to product innovation, such as Coke Zero. In Europe, we achieved solid operating performance improvement due to a combination of strong volume growth and moderate pricing improvement. These results were achieved despite persistent CSD category weakness in Great Britain.

2006 Outlook

For North America, we expect volume growth to be flat and net price per case growth of approximately 2.0 to 3.0 percent. For Europe, our goals include volume growth of approximately 3.0 percent and net price per case growth of approximately 1.0 to 2.0 percent. We expect our consolidated cost of goods per case to increase approximately 4.0 percent during 2006, which includes the impact of package mix shifts and moderate increases in the cost of concentrate and other ingredient and packaging materials. We expect our overall capital spending to be less than $1.0 billion during 2006.

 

20




RESULTS OF OPERATIONS

The following table summarizes our Condensed Consolidated Statements of Income data as a percentage of net operating revenues for the periods presented:

 

 

Third Quarter

 

First Nine Months

 

 

 

2006

 

2005

 

2006

 

2005

 

Net operating revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

60.9

 

59.5

 

60.3

 

59.3

 

Gross profit

 

39.1

 

40.5

 

39.7

 

40.7

 

Selling, delivery, and administrative expenses

 

30.5

 

31.8

 

31.9

 

32.0

 

Operating income

 

8.6

 

8.7

 

7.8

 

8.7

 

Interest expense, net

 

3.1

 

3.2

 

3.2

 

3.3

 

Other nonoperating income (expense), net

 

0.1

 

0.0

 

0.0

 

(0.1

)

Income before income taxes

 

5.6

 

5.5

 

4.6

 

5.3

 

Income tax expense

 

1.6

 

1.5

 

0.8

 

1.3

 

Net income

 

4.0

%

4.0

%

3.8

%

4.0

%

 

Operating Income

Operating income increased $24 million, or 5.5 percent, in the third quarter of 2006 to $449 million from $425 million in the third quarter of 2005. Operating income decreased $67 million, or 5.5 percent, in the first nine months of 2006 to $1.2 billion. The following table summarizes the significant components of the change in our operating income for the periods presented (in millions; percentages rounded to the nearest ½ percent):

 

 

Third Quarter 2006

 

First Nine Months 2006

 

 

 


Amount

 

Change Percent
of Total

 


Amount

 

Change
Percent of Total

 

Changes in operating income:

 

 

 

 

 

 

 

 

 

Impact of bottle and can price, cost, and mix on gross profit

 

$

(45

)

(10.5

)%

$

6

 

0.5

%

Impact of bottle and can volume on gross profit

 

34

 

8.0

 

97

 

8.0

 

Impact of Jumpstart funding on gross profit

 

21

 

5.5

 

55

 

4.5

 

Net impact of acquired bottler

 

2

 

0.5

 

5

 

0.5

 

Selling, delivery, and administrative expenses

 

(29

)

(7.0

)

(159

)

(13.0

)

Change in accounting for share-based payment awards

 

(9

)

(2.0

)

(26

)

(2.0

)

Net impact of restructuring charges in 2006 and 2005

 

19

 

4.5

 

(20

)

(1.5

)

Hurricane Katrina asset write-offs in 2005

 

24

 

5.5

 

24

 

2.0

 

HFCS litigation settlement proceeds in 2005

 

 

0.0

 

(48

)

(4.0

)

Asset sale in 2005

 

 

0.0

 

(7

)

(0.5

)

Currency exchange rate changes

 

11

 

2.5

 

4

 

0.0

 

Other changes

 

(4

)

(1.5

)

2

 

0.0

 

Change in operating income

 

$

24

 

5.5

%

$

(67

)

(5.5

)%

 

Net Operating Revenues

Net operating revenues increased 6.5 percent in the third quarter of 2006 to $5.2 billion from $4.9 billion in the third quarter of 2005. The percentage of our third quarter of 2006 net operating revenues derived from North America and Europe was 71 percent and 29 percent, respectively. Great Britain contributed 46 percent of Europe’s net operating revenues in the third quarter of 2006.

Net operating revenues increased 5.5 percent in the first nine months of 2006 to $15.0 billion from $14.2 billion in the first nine months of 2005. The percentage of our first nine months of 2006 net operating revenues derived

21




from North America and Europe was 72 percent and 28 percent, respectively. Great Britain contributed 45 percent of Europe’s net operating revenues in the first nine months of 2006.

Our net operating revenues in the third quarter of 2006 were negatively impacted by limited volume and pricing growth in North America due to weak CSD category trends and ongoing pricing pressures in the water category. In Europe, we achieved strong volume growth and moderate pricing improvement, despite persistent CSD category weakness in Great Britain. We continued to benefit from product innovation and experienced increases in the sale of our lower-calorie beverages, water brands, isotonics, and energy drinks.

Net operating revenue per case increased 4.0 percent in the third quarter of 2006 versus the third quarter of 2005 and increased 3.0 percent in the first nine months of 2006 versus the first nine months of 2005. The following table summarizes the significant components of the change in our net operating revenue per case for the periods presented (rounded to the nearest ½ percent and based on wholesale physical case volume):

 

 

Third Quarter 2006

 

First Nine Months 2006

 

 

 


Consolidated

 

North
America

 


Europe

 


Consolidated

 

North
America

 


Europe

 

Changes in net operating revenue per case:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bottle and can net pricing per case

 

1.0

%

1.0

%

1.5

%

2.0

%

2.0

%

1.5

%

Belgium excise and VAT tax changes

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

(0.5

)

Post mix, agency, and other revenues

 

1.0

 

1.0

 

0.5

 

1.0

 

1.0

 

0.5

 

Currency exchange rate changes

 

2.0

 

0.5

 

5.0

 

0.0

 

1.0

 

(1.0

)

Change in net operating revenue per case

 

4.0

%

2.5

%

7.0

%

3.0

%

4.0

%

0.5

%

 

During the third quarter and the first nine months of 2006, our bottle and can sales accounted for 89 percent and 90 percent of our total net operating revenues, respectively. Bottle and can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle and can 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. To the extent we are able to increase volume in higher margin packages that are sold through higher margin channels, our bottle and can net pricing per case will increase without an actual increase in wholesale pricing. The increase in our third quarter of 2006 bottle and can net pricing per case was primarily achieved through higher rates, offset partially by negative mix in North America due to slower immediate consumption sales and increased pricing pressures in the water category.

We participate in various programs and arrangements with customers designed to increase the sale of our products by these customers. Among the programs negotiated are arrangements under which allowances can be earned by customers for attaining agreed-upon sales levels or for participating in specific marketing programs. In the United States, we participate in cooperative trade marketing programs, which are typically developed by us but are administered by TCCC. We are responsible for all costs of these programs in our territories, except for some costs related to a limited number of specific customers. Under these programs, we pay TCCC and TCCC pays our customers as a representative for the North American bottling system. Coupon programs are also developed on a territory-specific basis with the intent of increasing sales by all customers. We believe our participation in these programs is essential to ensuring continued volume and revenue growth in the competitive marketplace. The cost of all of these various programs, included as a reduction in net operating revenues, totaled $570 million and $565 million in the third quarter of 2006 and 2005, respectively, and $1.6 billion and $1.7 billion in the first nine months of 2006 and 2005, respectively. These amounts include net customer marketing accrual reductions related to prior year programs of $13 million and $8 million in the third quarter of 2006 and 2005, respectively, and $39 million and $45 million in the first nine months of 2006 and 2005, respectively. The cost of these various programs as a percentage of gross revenues was 6.2 percent in the third quarter and first

22




nine months of 2006 and 6.6 percent and 6.8 percent in the third quarter and first nine months of 2005, respectively. The decrease in the cost of these various programs as a percentage of gross revenues was the result of higher promotional activities in the third quarter and first nine months of 2005 in conjunction with the significant product innovation that occurred during 2005.

Cost of Sales

Cost of sales increased 9.0 percent in the third quarter of 2006 to $3.2 billion from $2.9 billion in the third quarter of 2005 and increased 7.0 percent in the first nine months of 2006 to $9.0 billion from $8.4 billion in the first nine months of 2005.

Cost of sales per case increased 6.5 percent in the third quarter of 2006 versus the third quarter of 2005 and increased 5.0 percent in the first nine months of 2006 versus the first nine months of 2005. The following table summarizes the significant components of the change in our cost of sales per case for the periods presented (rounded to the nearest ½ percent and based on wholesale physical case volume):

 

 

Third Quarter 2006

 

First Nine Months 2006

 



 


Consolidated

 

North
America

 


Europe

 


Consolidated

 

North
America

 


Europe

 

Changes in cost of sales per case:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bottle and can ingredient and packaging costs

 

4.0

%

4.5

%

2.0

%

3.5

%

4.0

%

2.0

%

Belgium excise and VAT tax changes

 

0.0

 

0.0

 

0.0

 

0.0

 

0.0

 

(0.5

)

HFCS litigation settlement proceeds in 2005

 

0.0

 

0.0

 

0.0

 

0.5

 

1.0

 

0.0

 

Bottle and can marketing credits and Jumpstart funding

 

(1.0

)

(1.5

)

(0.5

)

(1.0

)

(1.5

)

0.0

 

Costs related to post mix, agency, and other revenues

 

1.5

 

2.0

 

0.5

 

1.5

 

2.0

 

0.5

 

Currency exchange rate changes

 

2.0

 

0.5

 

5.0

 

0.5

 

1.0

 

(1.0

)

Change in cost of sales per case

 

6.5

%

5.5

%

7.0

%

5.0

%

6.5

%

1.0

%

 

The increase in our bottle and can ingredient and packaging costs during the third quarter of 2006 was primarily the result of increases in the cost of certain materials, particularly fuel. We also experienced higher costs associated with package mix shifts and moderate increases in the cost of concentrate, PET (plastic), and cans.

We implemented a project in the Netherlands to transition from the production and sale of refillable PET (plastic) bottles to the production and sale of non-refillable PET (plastic) bottles. The transition commenced in 2004 and was completed in the first quarter of 2006. We expect the increased packaging flexibility to increase sales in the Netherlands by offering added variety and convenience to consumers. The transition resulted in (1) accelerated depreciation for certain machinery and equipment, plastic crates, and refillable plastic bottles; (2) costs for removing current production lines; (3) termination and severance costs; (4) training costs; (5) external warehousing costs; and (6) operational inefficiencies. These expenses totaled approximately $19 million, net of $8 million in gains related to the forfeiture of deposits and the sale of refillable PET (plastic) bottles and crates. We recognized $11 million and $16 million of these expenses during 2005 and 2004, respectively, and recorded the $8 million in gains during the first nine months of 2006.

Volume

The following table summarizes the change in our bottle and can volume for the periods presented, as adjusted to reflect the impact of an acquisition completed on February 28, 2006, as if that acquisition was completed on January 1, 2005 (no acquisitions were made in 2005; selling days were the same in the third quarter and first nine months of 2006 and 2005; rounded to the nearest ½ percent):

23




 

 

 

Third Quarter 2006

 

First Nine Months 2006

 

 

 


Consolidated

 

North
America

 


Europe

 


Consolidated

 

North
America

 


Europe

 

Change in volume

 

2.5

%

1.5

%

5.5

%

2.5

%

2.0

%

3.0

%

Impact of acquisitions

 

(0.5

)

(1.0

)

0.0

 

(0.5

)

(0.5

)

0.0

 

Change in volume, adjusted for acquisitions

 

2.0

%

0.5

%

5.5

%

2.0

%

1.5

%

3.0

%

 

North America comprised approximately 76 percent of our consolidated bottle and can volume during the third quarter and first nine months of 2006 and 2005.

Brands

The following table summarizes our volume results by major brand category for the periods presented, as adjusted to reflect the impact of an acquisition completed on February 28, 2006, as if that acquisition was completed on January 1, 2005 (no acquisitions were made in 2005; selling days were the same in the third quarter and first nine months of 2006 and 2005; rounded to the nearest ½ percent):

 

 

Third Quarter 2006

 

First Nine Months 2006

 

 

 


Change

 

Percent
of Total

 


Change

 

Percent
of Total

 

Consolidated:

 

 

 

 

 

 

 

 

 

Coca-Cola trademark

 

(1.0

)%

57.5

%

(1.0

)%

59.5

%

Soft-drink flavors and energy

 

3.5

 

24.5

 

4.5

 

24.5

 

Juices, isotonics, and other

 

3.5

 

10.5

 

2.5

 

9.0

 

Water

 

16.0

 

7.5

 

18.0

 

7.0

 

Total

 

2.0

%

100.0

%

2.0

%

100.0

%

North America:

 

 

 

 

 

 

 

 

 

Coca-Cola trademark

 

(3.0

)%

55.0

%

(2.5

)%

56.5

%

Soft-drink flavors and energy

 

3.5

 

25.5

 

6.0

 

26.0

 

Juices, isotonics, and other

 

2.0

 

10.5

 

1.5

 

9.0

 

Water