COCA-COLA ENTERPRISES INC.
FORM 10-Q
QUARTERLY REPORT
FOR THE QUARTER ENDED JULY 2, 2004
FILED PURSUANT TO SECTION 13
OF THE
SECURITIES EXCHANGE ACT OF 1934
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended July 2, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-09300
COCA-COLA ENTERPRISES INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-0503352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 WINDY RIDGE PARKWAY, SUITE 700
ATLANTA, GEORGIA 30339
(Address of principal executive offices) (Zip Code)
770-989-3000
(Registrant's telephone number, including area code)
__________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock.
469,005,178 SHARES OF $1 PAR VALUE COMMON STOCK AS OF JULY 30, 2004
================================================================================
COCA-COLA ENTERPRISES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JULY 2, 2004
INDEX
Page
-----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Income Statements for the Quarters ended
July 2, 2004 and June 27, 2003................................ 1
Condensed Consolidated Income Statements for the Six Months ended
July 2, 2004 and June 27, 2003................................ 2
Condensed Consolidated Balance Sheets as of July 2, 2004
and December 31, 2003......................................... 3
Condensed Consolidated Statements of Cash Flows for the
Six Months ended July 2, 2004 and June 27, 2003............... 5
Notes to Condensed Consolidated Financial Statements.............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 47
Item 4. Controls and Procedures........................................... 47
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................. 48
Signatures...................................................................... 50
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
QUARTER ENDED
-------------------------
JULY 2, JUNE 27,
2004 2003
---------- ---------
NET OPERATING REVENUES............................................................... $ 4,844 $ 4,617
Cost of sales, transactions with The Coca-Cola Company
$1,313 and $1,206, respectively................................................. 2,884 2,690
---------- ---------
GROSS PROFIT......................................................................... 1,960 1,927
Selling, delivery, and administrative expenses....................................... 1,509 1,399
---------- ---------
OPERATING INCOME..................................................................... 451 528
Interest expense, net................................................................ 157 156
Other nonoperating income, net....................................................... - 2
---------- ---------
INCOME BEFORE INCOME TAXES........................................................... 294 374
Income tax expense................................................................... 91 114
---------- ---------
NET INCOME........................................................................... 203 260
Preferred stock dividends............................................................ - 1
---------- ---------
NET INCOME APPLICABLE TO COMMON SHAREOWNERS.......................................... $ 203 $ 259
========== =========
BASIC NET INCOME PER SHARE APPLICABLE TO COMMON SHAREOWNERS.......................... $ 0.44 $ 0.57
========== =========
DILUTED NET INCOME PER SHARE APPLICABLE TO COMMON SHAREOWNERS........................ $ 0.43 $ 0.56
========== =========
DIVIDENDS PER SHARE APPLICABLE TO COMMON SHAREOWNERS................................. $ 0.04 $ 0.04
========== =========
See Notes to Condensed Consolidated Financial Statements.
-1-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(UNAUDITED; IN MILLIONS EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
-------------------------
JULY 2, JUNE 27,
2004 2003
---------- ---------
NET OPERATING REVENUES............................................................... $ 9,083 $ 8,284
Cost of sales, transactions with The Coca-Cola Company
$2,451 and $2,138, respectively................................................. 5,344 4,838
--------- ---------
GROSS PROFIT......................................................................... 3,739 3,446
Selling, delivery, and administrative expenses....................................... 2,984 2,740
--------- ---------
OPERATING INCOME..................................................................... 755 706
Interest expense, net................................................................ 313 296
Other nonoperating income, net....................................................... 1 6
--------- ---------
INCOME BEFORE INCOME TAXES........................................................... 443 416
Income tax expense................................................................... 136 128
--------- ---------
NET INCOME........................................................................... 307 288
Preferred stock dividends............................................................ - 2
--------- ---------
NET INCOME APPLICABLE TO COMMON SHAREOWNERS.......................................... $ 307 $ 286
========= =========
BASIC NET INCOME PER SHARE APPLICABLE TO COMMON SHAREOWNERS.......................... $ 0.67 $ 0.63
========= =========
DILUTED NET INCOME PER SHARE APPLICABLE TO COMMON SHAREOWNERS........................ $ 0.65 $ 0.62
========= =========
DIVIDENDS PER SHARE APPLICABLE TO COMMON SHAREOWNERS................................. $ 0.08 $ 0.08
========= =========
See Notes to Condensed Consolidated Financial Statements.
-2-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JULY 2, DECEMBER 31,
ASSETS 2004 2003
-------------- -------------
(Unaudited)
CURRENT
Cash and cash investments, at cost approximating market........................ $ 21 $ 80
Trade accounts receivable, less allowance reserves of $50 and $52, respectively 2,067 1,735
Amounts receivable from The Coca-Cola Company, net ............................ - 37
Inventories:
Finished goods............................................................... 593 475
Raw materials and supplies................................................... 329 250
--------- ----------
922 725
Current deferred income tax assets............................................. 76 42
Prepaid expenses and other current assets...................................... 358 381
--------- ----------
Total Current Assets....................................................... 3,444 3,000
PROPERTY, PLANT, AND EQUIPMENT
Land........................................................................... 458 445
Buildings and improvements..................................................... 2,092 2,064
Machinery and equipment........................................................ 11,007 10,743
--------- ---------
13,557 13,252
Less allowances for depreciation............................................... 7,136 6,729
--------- ----------
6,421 6,523
Construction in progress....................................................... 237 271
--------- ----------
Net Property, Plant, and Equipment........................................... 6,658 6,794
GOODWILL.......................................................................... 578 578
LICENSE INTANGIBLE ASSETS......................................................... 14,173 14,171
LONG-TERM CUSTOMER CONTRACTS AND OTHER NONCURRENT ASSETS.......................... 1,128 1,157
--------- ----------
$ 25,981 $ 25,700
========= ==========
See Notes to Condensed Consolidated Financial Statements.
-3-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS EXCEPT SHARE DATA)
JULY 2, DECEMBER 31,
LIABILITIES AND SHAREOWNERS' EQUITY 2004 2003
-------------- ---------------
(Unaudited)
CURRENT
Accounts payable and accrued expenses.......................................... $ 2,628 $ 2,760
Amounts payable to The Coca-Cola Company, net ................................. 53 -
Deferred cash payments from The Coca-Cola Company.............................. 44 87
Current portion of long-term debt.............................................. 735 1,094
--------- ---------
Total Current Liabilities.................................................. 3,460 3,941
LONG-TERM DEBT, LESS CURRENT MATURITIES........................................... 10,674 10,552
RETIREMENT AND INSURANCE PROGRAMS AND OTHER LONG-TERM OBLIGATIONS................. 1,564 1,522
DEFERRED CASH PAYMENTS FROM THE COCA-COLA COMPANY................................. 366 355
LONG-TERM DEFERRED INCOME TAX LIABILITIES......................................... 5,093 4,965
SHAREOWNERS' EQUITY
Common stock, $1 par value - Authorized - 1,000,000,000 shares;
Issued - 474,795,059 and 462,084,668 shares, respectively................... 475 462
Additional paid-in capital..................................................... 2,807 2,611
Reinvested earnings............................................................ 1,510 1,241
Accumulated other comprehensive income......................................... 120 133
Common stock in treasury, at cost - 6,589,049 and 6,330,513 shares,
respectively................................................................ (88) (82)
--------- ---------
Total Shareowners' Equity.................................................. 4,824 4,365
--------- ---------
$ 25,981 $ 25,700
========= =========
See Notes to Condensed Consolidated Financial Statements.
-4-
COCA-COLA ENTERPRISES INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED; IN MILLIONS)
SIX MONTHS ENDED
--------------------------
JULY 2, JUNE 27,
2004 2003
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................................ $ 307 $ 288
Adjustments to reconcile net income to net cash derived from operating activities:
Depreciation.................................................................... 521 510
Amortization.................................................................... 15 39
Deferred income tax expense..................................................... 81 87
Deferred cash payments from The Coca-Cola Company............................... (32) (41)
Pension costs in excess of cash contributions................................... 62 33
Net changes in current assets and current liabilities........................... (424) (234)
Other........................................................................... (80) (82)
--------- ---------
Net cash derived from operating activities........................................ 450 600
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in capital assets..................................................... (406) (460)
Proceeds from fixed asset disposals, $58 from
The Coca-Cola Company in 2003.................................................. 8 63
Cash investments in bottling operations, net of cash acquired..................... - (13)
--------- ---------
Net cash used in investing activities............................................. (398) (410)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in commercial paper.................................................. 502 24
Issuances of long-term debt....................................................... 187 400
Payments on long-term debt........................................................ (928) (570)
Cash dividend payments on common and preferred stock.............................. (37) (20)
Cash received from stock option exercises......................................... 165 15
Cash received from settlement of interest rate swap............................... - 28
--------- ---------
Net cash used in financing activities............................................. (111) (123)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS................................. (59) 67
Cash and cash investments at beginning of period.................................. 80 68
--------- ---------
CASH AND CASH INVESTMENTS AT END OF PERIOD........................................... $ 21 $ 135
========= =========
See Notes to Condensed Consolidated Financial Statements.
-5-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States generally accepted accounting
principles (GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments consisting of normal recurring
accruals considered necessary for a fair presentation have been included. For
further information, refer to the consolidated financial statements and
footnotes included in the Coca-Cola Enterprises Inc. (CCE) Annual Report on Form
10-K for the year ended December 31, 2003.
NOTE B - RECLASSIFICATIONS
Classifications in the condensed consolidated statement of cash flows for the
prior year have been conformed to classifications used in the current year for
payments and amortization expense associated with contracts for pouring or
vending rights in specific athletic venues, specific school districts, or other
locations. In addition, prior year classifications have been conformed to
classifications used in the current year for the presentation of pension expense
in excess of retirement plan contributions.
NOTE C - SEASONALITY OF BUSINESS
Operating results for the second quarter and six months ended July 2, 2004 are
not indicative of results that may be expected for the year ending December 31,
2004 because of business seasonality. Business seasonality results from a
combination of higher unit sales of our products in the second and third
quarters versus the first and fourth quarters of the year and the methods of
accounting for fixed costs such as depreciation, amortization, and interest
expense which are not significantly impacted by business seasonality.
-6-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE D - EARNINGS PER SHARE
The following table presents information concerning basic and diluted earnings
per share (in millions except per share data; per share data is calculated prior
to rounding to millions):
QUARTER ENDED SIX MONTHS ENDED
----------------- -----------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
---- ---- ---- -----
Net income ................................. $ 203 $ 260 $ 307 $ 288
Preferred stock dividends .................. - 1 - 2
----- ----- ----- -----
Net income applicable to common
shareowners ............................ $ 203 $ 259 $ 307 $ 286
===== ===== ===== =====
Basic average common shares outstanding..... 465 453 461 453
Effect of dilutive securities:
Stock compensation awards(A) ............ 11 6 10 7
----- ---- ---- -----
Diluted average common shares
outstanding ............................. 476 459 471 460
===== ==== ==== =====
Basic net income per share applicable
to common shareowners ................... $0.44 $0.57 $0.67 $0.63
===== ===== ===== ====
Diluted net income per share applicable
to common shareowners ................... $0.43 $0.56 $0.65 $0.62
===== ===== ===== =====
(A) Prior to the conversion into common stock during the third quarter of 2003,
the preferred stock outstanding was not included in our computation of
diluted earnings per share because the effect of its inclusion would have
been antidilutive. Options to purchase 57.6 million and 65.2 million common
shares were outstanding at July 2, 2004 and June 27, 2003, respectively. Of
these amounts, options to purchase 13.9 million and 29.6 million shares for
the quarters and six months ended July 2, 2004 and June 27, 2003,
respectively, are not included in the computation of diluted earnings per
share because the effect of including the options in the computation would
be antidilutive. The dilutive impact of the remaining options outstanding
each year is included in the stock compensation awards line above.
-7-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE E - COMPREHENSIVE INCOME
The following table (in millions) presents a calculation of comprehensive
income, comprised of net income and other adjustments. Other adjustments include
currency items such as foreign currency translation adjustments and hedges of
net investments in international subsidiaries, gains and losses on certain
investments in debt and equity securities, changes in the fair value of certain
derivative financial instruments qualifying as cash flow hedges, and minimum
pension liability adjustments, where applicable. We adjust for the income tax
effect on all items comprising comprehensive income, excluding the impact of
currency translations as earnings from international subsidiaries are determined
to be indefinitely reinvested.
QUARTER ENDED SIX MONTHS ENDED
---------------------- -------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
------- --------- -------- ---------
Net income .............................................. $ 203 $ 260 $ 307 $ 288
Currency translations ................................... 17 135 (20) 272
Hedges of net investments, net of tax ................... (6) (26) 7 (53)
Unrealized gains (losses) on securities, net of tax ..... 3 2 2 (4)
Realized losses on securities included in net income,
net of tax ........................................... - - - (2)
Unrealized gains (losses) on cash flow hedges, net of tax 1 - (4) 5
Realized losses (gains) on cash flow hedges included in
net income, net of tax ............................... 1 (1) 2 (8)
----- ----- ----- -----
Net change to derive comprehensive income for the period 16 110 (13) 210
----- ----- ----- -----
Comprehensive income .................................... $ 219 $ 370 $ 294 $ 498
===== ===== ===== =====
-8-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - RELATED PARTY TRANSACTIONS
The following table presents transactions with The Coca-Cola Company (TCCC), and
their impact on the income statement categories, for the periods presented (in
millions):
QUARTER ENDED SIX MONTHS ENDED
----------------------- -------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
--------- ---------- ------------ ----------
Amounts affecting net operating revenues:
Fountain syrup and packaged product sales........... $ 130 $ 130 $ 248 $ 231
Dispensing equipment repair services................ 13 15 27 27
Other transactions.................................. 3 4 5 8
--------- ---------- ---------- ----------
$ 146 $ 149 $ 280 $ 266
========= ========== ========== ==========
Amounts affecting cost of sales:
Purchases of syrup and concentrate.................. $ (1,233) $ (1,231) $ (2,384) $ (2,190)
Purchases of sweetener.............................. (82) (84) (158) (156)
Purchases of finished products...................... (171) (140) (319) (259)
Marketing support funding earned.................... 156 225 378 418
Cold drink equipment placement funding earned....... 17 24 32 41
Cost recovery from sale of hot fill production
facility.......................................... - - - 8
--------- ---------- ---------- ----------
$ (1,313) $ (1,206) $ (2,451) $ (2,138)
========= ========== ========== ==========
Amounts affecting selling, delivery, and
administrative expenses:
Marketing program payments $ (8) $ 1 $ (20) $ 1
Operating expense cost reimbursements:
To TCCC.......................................... -- (4) - (8)
From TCCC........................................ 6 9 12 18
--------- ---------- ---------- ----------
$ (2) $ 6 $ (8) $ 11
========= ========== ========== ==========
As part of our strategic planning project with TCCC, we agreed that an increase
in the level of spending in the areas of brand building and innovation is
necessary to promote our objective of building value. In support of this
strategy, we agreed to pay TCCC approximately $20 million for the first six
months of 2004 for participation in marketing activities. This amount is
included in marketing program payments in the table above.
-9-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - RELATED PARTY TRANSACTIONS (CONTINUED)
Effective May 1, 2004, we agreed with TCCC that a significant portion of our
funding from TCCC will be netted against the price we pay TCCC for concentrate
in our United States territories. Effective June 1, 2004, similar changes were
made in our Canadian territories. As a result, our cost of sales increased by
approximately $41 million during the second quarter of 2004 as inventory on hand
was sold without funding and replaced with lower cost inventory. We agreed to
terminate the Strategic Growth Initiative (SGI) program and eliminate the
Special Marketing Funds (SMF) funding program. TCCC has paid us all funding
earned under the SMF funding program. Under the SGI program, we received $41.3
million from TCCC during the first quarter of 2004 and TCCC has agreed to pay us
$6.8 million as a final payment for the second quarter of 2004.
Also effective May 1, 2004, TCCC agreed to establish a Global Marketing Fund,
under which TCCC will pay us $61.5 million annually through December 31, 2014,
as support for marketing activities. The term of the agreement will
automatically be extended for successive ten-year periods thereafter unless
either party gives written notice of termination of this agreement. The
marketing activities to be funded under this agreement will be agreed upon each
year as part of the annual joint planning process and will be incorporated into
the annual marketing plans of both companies. We will receive a pro rata amount
of $41.5 million for 2004. We recognized $10 million during the second quarter
of 2004 which is included in marketing support funding earned in the table
above.
During the first quarter of 2004, TCCC revised our base SMF funding rate to
include reimbursements between the companies for expenses related to the
assumption of customer marketing group responsibilities from TCCC and the
transfer of local media activities from us to TCCC in prior years. These amounts
are included in marketing support funding earned for 2004 in the table above,
through April 2004 when, as noted above, the SMF funding program was terminated.
The amounts shown above as reimbursements to us from TCCC for the second quarter
and first six months of 2004 relate to the staffing costs transferred to us
under another agreement with TCCC.
Pursuant to our concentrate agreement, in second quarter 2004, TCCC changed the
distribution route for concentrate of certain brands we source from them. This
change resulted in an approximate $34 million increase in inventory and amounts
payable to TCCC as of July 2, 2004. Extension of due dates for concentrate
payments will result in no material impact to working capital.
We participate in cooperative trade marketing arrangements (CTM) in the United
States administered by TCCC. Beginning in 2002, we became responsible for all
costs of the programs in our territories, other than costs relative to a limited
number of specified customers. We transfer amounts to TCCC under the program for
payment to customers. Pursuant to these arrangements, amounts paid or payable to
TCCC for the six months ended July 2, 2004 and June 27, 2003 totaled
approximately $119 million and $130 million, respectively, and are recognized as
a reduction of net operating revenues.
-10-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - RELATED PARTY TRANSACTIONS (CONTINUED)
Deferred cash payments from TCCC include amounts deferred under Jumpstart and
other miscellaneous programs. Under our Jumpstart agreements with TCCC, we were
required to purchase and place targeted amounts of cold drink equipment through
2008. We amended our Jumpstart agreements with TCCC for the United States and
Canada to reduce the cold drink equipment purchase and placement requirements by
70,000 units per year for 2004 and 2005 and extend our North American purchase
and placement requirements into 2010. By placing approximately 103,000 units in
2004, as required by the amended agreements, we will earn approximately $50
million of funding in 2004 versus $72 million earned in 2003. Support funding
earned under the Jumpstart programs with TCCC is shown as cold drink equipment
placement funding earned in the table above. In return for TCCC's postponement
of our purchase and placement obligations, we have agreed to pay TCCC $1.5
million in 2004, $3.0 million in 2005 through 2008, and $1.5 million in 2009.
In March 2004, we recalled the recently launched Dasani water brand in Great
Britain because of bromate levels exceeding British regulatory standards. We
recognized a $32 million reimbursement for recall costs from TCCC in the first
quarter of 2004 as an offset to related costs. There may be adjustments to this
amount to be recovered from TCCC, or we may make additional claims against TCCC,
over the balance of the year as we refine and TCCC validates our estimates of
costs.
-11-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE G - GEOGRAPHIC OPERATING INFORMATION
We operate in one industry: the marketing, distribution, and production of
liquid nonalcoholic refreshments. On July 2, 2004, we operated in 46 states in
the United States, the District of Columbia, all 10 provinces of Canada
(collectively referred to as the North American territories), and in Belgium,
continental France, Great Britain, Luxembourg, Monaco, and the Netherlands
(collectively referred to as the European territories).
The following presents net operating revenues for the six months ended July 2,
2004 and June 27, 2003 and long-lived assets as of July 2, 2004 and December 31,
2003 by geographic territory (in millions):
2004 2003
---------------------------------- ----------------------------------
NET LONG- NET LONG-
OPERATING LIVED OPERATING LIVED
REVENUES ASSETS REVENUES ASSETS
---------------- ---------------- ---------------- ----------------
North American....................... $ 6,489 $ 17,016 $ 6,048 $ 17,180
European(A).......................... 2,594 5,521 2,236 5,520
------------ ------------- ------------- ------------
Consolidated......................... $ 9,083 $ 22,537 $ 8,284 $ 22,700
============ ============= ============= ============
(A) Great Britain contributed approximately 46% and 47% of European net
operating revenues for the first six months of 2004 and 2003,
respectively, and at July 2, 2004 and December 31, 2003, represented
approximately 64% and 63%, respectively, of European long-lived assets.
We have no significant amounts of sales or transfers between our North American
and European territories and no significant United States export sales.
NOTE H - INCOME TAXES
Our effective tax rates for the first six months of 2004 and 2003 were
approximately 31%. These rates were reduced by the benefit of the favorable
settlements of various income tax items reducing income tax expense through the
first six months by approximately $3 million and $7 million in 2004 and 2003,
respectively. A reconciliation of the income tax provisions at the statutory
federal rate to our actual income tax provisions follows (in millions):
SIX MONTHS ENDED
------------------------
JULY 2, JUNE 27,
2004 2003
------------ ---------
U.S. federal statutory expense...................................... $ 155 $ 146
State expense, net of federal expense............................... 7 7
Impact of lower taxes on European and Canadian operations, net...... (30) (27)
Valuation allowance provision....................................... 1 3
Nondeductible items................................................. 6 6
Settlement of tax items............................................. (3) (7)
------ ------
$ 136 $ 128
====== ======
-12-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - LONG-TERM DEBT
Total long-term debt balances summarized below are adjusted for the effects of
interest rate and currency swap agreements (in millions):
JULY 2, 2004 DECEMBER 31, 2003
----------------------- ----------------------------
BALANCE RATES(A) BALANCE RATES(A)
---------- ---------- ------------- ------------
U.S. commercial paper................................ $ 958 1.2% $ 655 1.1%
Euro commercial paper................................ 283 2.1 208 2.1
Canadian dollar commercial paper..................... 270 2.1 148 2.8
U.S. dollar notes due 2004-2037 (B).................. 3,976 4.1 4,510 3.5
Euro and pound sterling notes due 2004-2021.......... 1,585 5.9 1,560 5.9
Canadian dollar notes due 2004-2009 (C).............. 113 5.9 432 5.4
U.S. dollar debentures due 2012-2098................. 3,783 7.4 3,783 7.4
U.S. dollar zero coupon notes due 2020............... 170 8.4 164 8.4
Various foreign currency debt........................ 222 - 129 -
Additional debt...................................... 49 - 57 -
---------- ---------
Long-term debt....................................... $ 11,409 $ 11,646
========== =========
(A) Weighted average annual interest costs on balances outstanding.
(B) U.S. dollar note of $500 million matured on April 26, 2004.
(C) Canadian Medium Term Note of 350 million CAD (266 million USD)
matured on March 17, 2004 and Canadian Medium Term Note of 60
million CAD (44 million USD) matured on May 13, 2004.
-13-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE I - LONG-TERM DEBT (CONTINUED)
The credit facilities and outstanding notes and debentures contain various
provisions that, among other things, require us to maintain a defined leverage
ratio and limit the incurrence of certain liens or encumbrances in excess of
defined amounts. These requirements currently are not, and it is not anticipated
they will become, restrictive to our liquidity or capital resources.
The following table provides additional information on debt facilities (in
billions):
JULY 2, DECEMBER 31,
2004 2003
--------- ------------
Borrowings due in the next 12 months, including commercial paper, classified
as long-term due to our intent and our ability through our
credit facilities to refinance on a long-term basis...................... $ 1.4 $ 1.3
========= ==========
Amounts Available for Borrowing:
Amounts available under committed domestic and international credit
facilities(A).......................................................... $ 2.9 $ 3.3
Amounts available under public debt facilities which could be used for
long-term financing, refinancing of debt maturities, and refinancing
of commercial paper:
Shelf Registration statement with the Securities and Exchange
Commission........................................................ 3.2 3.2
Euro medium-term note program(B) - 2.1
Canadian medium-term note program (C)............................... 1.5 1.5
-------- ----------
Total amounts available under public debt facilities...................... 4.7 6.8
-------- ----------
Total Amounts Available..................................................... $ 7.6 $ 10.1
======== ==========
(A) At July 2, 2004 and December 31, 2003, we had $163 million and $45 million,
respectively, of short-term borrowings outstanding under these facilities.
(B) At July 2, 2004, the Euro medium-term note program was not available to
use; however, the intent is to renew the program in August 2004 at which
time there will be $2.1 billion available.
(C) In Canadian dollars, amounts available under the Canadian medium-term note
program totaled $2 billion at July 2, 2004 and December 31, 2003.
-14-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE J - STOCK-BASED COMPENSATION PLANS
We granted approximately 6.5 million service-vesting stock options to certain
executive and management level employees during the first six months of 2004.
These options primarily vest over a period of 3 years and expire 10 years from
the date of grant. All of the options were granted at an exercise price equal to
the fair market value of the stock on the grant date.
We also granted approximately 1 million shares of restricted stock and 120,500
restricted stock units to certain employees during the first six months of 2004.
These awards vest upon continued employment for a period of at least 5 years and
the attainment of certain stock price targets.
An aggregate of 11.6 million shares of common stock were issued during the first
six months of 2004 from the exercise of stock options.
We apply APB Opinion No. 25 and related interpretations in accounting for our
stock-based compensation plans. FAS 123, if fully adopted, would change the
method for cost recognition on our stock-based compensation plans.
-15-
NOTE J - STOCK-BASED COMPENSATION PLANS (CONTINUED)
The following table illustrates the effect of stock-based employee compensation
costs on reported net income applicable to common shareowners and also
illustrates the effect on reported net income applicable to common shareowners
and earnings per share as if compensation cost for our grants under stock-based
compensation plans had been determined under FAS 123, for the quarters and six
months ended July 2, 2004 and June 27, 2003 (in millions, except per share
data):
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
-------------------------- ----------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
---------- ------------ ------------ -------------
Net income applicable to common shareowners before
effects of stock-based employee compensation costs
included in net income, net of tax ................ $ 207 $ 261 $ 314 $ 290
Deduct: Total stock-based employee compensation
expense, net of tax, included in net income
applicable to common shareowners .................. (4) (2) (7) (4)
------ ------ ------- -------
Net income applicable to common shareowners, as ...... 203 259 307 286
reported
Deduct: Incremental stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax ........................ (14) (16) (26) (31)
------ ------ ------- -------
Pro forma net income applicable to common shareowners $ 189 $ 243 $ 281 $ 255
====== ====== ======= =======
Net income per share applicable to common shareowners:
Basic - as reported ............................... $ 0.44 $ 0.57 $ 0.67 $ 0.63
====== ====== ======= =======
Basic - pro forma ................................. $ 0.41 $ 0.54 $ 0.61 $ 0.57
====== ====== ======= =======
Diluted - as reported ............................. $ 0.43 $ 0.56 $ 0.65 $ 0.62
====== ====== ======= =======
Diluted - pro forma ............................... $ 0.40 $ 0.53 $ 0.60 $ 0.56
====== ====== ======= =======
-16-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pension expense for the current year is determined using the prior year
valuation of liabilities and the projected values of pension assets. Net
periodic benefit costs consisted of the following for the quarters ended (in
millions):
PENSION PLANS OTHER POSTRETIREMENT PLANS
-------------------------- --------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
----------- ----------- ----------- ----------
Service cost............................ $ 27 $ 20 $ 2 $ 2
Interest cost........................... 33 30 5 5
Expected return on plan assets.......... (34) (30) - -
Recognized actuarial loss............... 13 3 1 -
Amortization of prior service cost...... - - (3) (2)
---------- ---------- ---------- ----------
Net periodic benefit cost............... $ 39 $ 23 $ 5 $ 5
========== ========== ========== ==========
Net periodic benefit costs consisted of the following for the six months ended
(in millions):
PENSION PLANS OTHER POSTRETIREMENT PLANS
-------------------------- --------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
----------- ----------- ----------- ----------
Service cost............................ $ 54 $ 41 $ 5 $ 5
Interest cost........................... 66 58 10 11
Expected return on plan assets.......... (68) (59) - -
Recognized actuarial loss............... 25 5 2 -
Amortization of prior service cost...... - - (6) (4)
---------- ---------- ---------- ----------
Net periodic benefit cost............... $ 77 $ 45 $ 11 $ 12
========== ========== ========== ==========
Contributions to pension and other postretirement benefit plans of the Company
were $26 million and $22 million for the six months ended July 2, 2004 and June
27, 2003, respectively. Projected annual contributions for 2004 are, and
contributions for 2003 were, as follows:
PROJECTED ACTUAL
2004 2003
----------- ----------
U. S. - Pension........................ $ 225 $ 168
European - Pension..................... 33 29
North America - Postretirement......... 22 20
---------- ----------
$ 280 $ 217
========== ==========
-17-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE K - PENSIONS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
Our policy is to fund the U.S. pension plans at a level to maintain, within
established guidelines, the IRS defined 90% Current Liability Funded status. The
Pension Funding Equity Act of 2004, signed by President Bush on April 10, 2004,
established new benchmark interest rates for the determination of that status.
While we believe these rates allow us to contribute less than our planned
contributions to U.S. plans during 2004, we have not reduced our planned
contributions at this time. At January 1, 2003, the date of the most recent
determination for all U.S. funded defined benefit pension plans, the Current
Liability Funded status equaled or exceeded 90%.
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("the Act") into law. The Act expanded
Medicare to include, for the first time, coverage for prescription drugs. We
expect that this legislation may reduce our costs for some of these programs. At
this point, our investigation into our response to the legislation is
preliminary. We anticipate guidance from various governmental and regulatory
agencies concerning the requirements that must be met to obtain these cost
reductions as well as the manner in which such savings should be measured. Based
on this preliminary analysis, it appears that some of our retiree medical plans
would need to be changed to qualify for beneficial treatment under the Act,
while other plans may continue unchanged.
Because of various uncertainties regarding how companies are responding to this
legislation and the accounting methodology to be applied, we are deferring
financial recognition of this legislation pending final guidance from the
Financial Accounting Standards Board. Once issued, updated guidance could result
in changes to previously reported information. However, because our
postretirement medical benefits are limited, any reductions in postretirement
benefit costs resulting from the Act are not expected to be material.
NOTE L - HEDGING FINANCIAL INSTRUMENTS
We use certain risk management instruments to manage our interest rate and
foreign exchange exposures. These instruments are accounted for as fair value
and cash flow hedges, as appropriate, under SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," as amended.
At July 2, 2004, a net of tax loss of approximately $2 million related to cash
flow hedges of forecasted international raw materials purchases was included in
accumulated other comprehensive income. We expect these adjustments to be
reclassified into income over the next 12 months.
We enter into certain Euro-denominated borrowings to hedge net investments in
international subsidiaries. During the first six months of 2004, the net amount
recorded in comprehensive income related to these borrowings was a gain of
approximately $7 million.
-18-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - COMMITMENTS AND CONTINGENCIES
We guarantee debt and other obligations of certain third parties. In North
America, we guarantee repayment of indebtedness owed by a PET (plastic) bottle
manufacturing cooperative. We also guarantee repayment of indebtedness owed by a
vending partnership in which we have a limited partnership interest.
The following table presents amounts owed by third parties that we guarantee and
amounts outstanding on these guarantees as of July 2, 2004 and December 31, 2003
(in millions):
GUARANTEED OUTSTANDING
-------------------------------- -------------------------------
JULY 2, DECEMBER 31, JULY 2, DECEMBER 31,
CATEGORY EXPIRATION 2004 2003 2004 2003
-------------------- ---------- ---------- ------------ ---------- -----------
Manufacturing Various
cooperatives..... through 2015 $ 236 $ 236 $ 188 $ 176
Vending partnership. Nov 2006 25 25 18 19
Other............... Renewable 1 1 1 1
---------- ------------ ---------- --------
$ 262 $ 262 $ 207 $ 196
========== ============ ========== ========
We do not hold any assets that serve as collateral against these guarantees and
no contractual recourse provisions exist that would enable us to recover amounts
we guarantee in the event of an occurrence of a triggering event under these
guarantees. These guarantees arose as a result of our ongoing business
relationships. No amounts are recorded for our obligations under these
guarantees as we consider the risk of default to be remote.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," revised December 2003. FIN 46 requires variable
interest entities to be consolidated by the primary beneficiary of the entity in
certain instances. Our adoption of FIN 46 did not have an impact on our
financial position, cash flows, and results of operations.
In addition to the above, we have letters of credit issued as collateral for
claims incurred under self-insurance programs for workers' compensation and
large deductible casualty insurance programs aggregating $358 million and
letters of credit on certain operating activities aggregating $5 million.
-19-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Our business practices are being reviewed in various jurisdictions by the
European Commission for alleged abuses of an alleged dominant position under
Article 82 of the EU Treaty. We do not believe we have a dominant position in
the relevant markets, or that our current or past commercial practices violate
EU law. Settlement discussions with the Commission are ongoing. However, the
Commission has indicated it will continue its review of our commercial practices
during this process. The Commission has considerable discretion in reaching
conclusions and levying fines, which are subject to judicial review.
We are also the subject of investigations by Belgian and French competition law
authorities for our compliance under competition laws. We intend to continue to
vigorously defend against an unfavorable outcome, although it is not possible
for us to determine the ultimate outcome of these matters at this time.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in a
combined amount of $15.2 million to five plaintiffs, each a distributor of
competing beverage products. These distributors sued alleging that CCE and TCCC
engaged in anticompetitive marketing practices. The trial court's verdict was
upheld by the Texas Court of Appeals in July 2003; we and TCCC have applied to
the Texas Supreme Court for leave to appeal to that court. Should the judgment
not be overturned, this fact would not have an adverse effect on our financial
condition. The claims of the three remaining plaintiffs in this case remain to
be tried and one additional competitor has filed a similar claim against us. We
intend to vigorously defend against these claims and have not provided for any
potential awards for these additional claims.
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. In one case, the parties
have accepted a mediator's proposed settlement for which we have provided in our
financial statements. The terms of the release in this case remain the subject
of negotiation, and any settlement is subject to final approval by the trial
court having jurisdiction over the lawsuit. Our subsidiary is vigorously
defending against other similar claims, but it is not possible to predict the
outcomes at this time.
-20-
COCA-COLA ENTERPRISES INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE M - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Under the Jumpstart programs with TCCC, we received payments from TCCC for a
portion of the cost of developing the infrastructure necessary to support
accelerated placements of cold drink equipment. We have agreed with TCCC to
reduce the equipment purchases and placements by 70,000 units in 2004 and 2005.
In doing so, we extended the agreement to 2010. For consideration of this change
we agreed to pay TCCC $15 million over the period of the extended agreement.
$1.5 million will be due for 2004 with $3 million per year due for the years
2005 through 2008 and a final payment of $1.5 million due in 2009. Under the
recently amended Jumpstart agreements, we recognize the payments primarily as
cold drink equipment is placed, through 2010, and over the period we have the
potential requirement to move the equipment, through 2022.
Should we not satisfy the provisions of the programs, the agreement provides for
the parties to meet to work out mutually agreeable solutions. We continue to
believe we would in all cases resolve any matters with TCCC that might arise
under these programs, and we believe the probability of a refund of amounts
previously paid under these programs is remote.
Our tax filings are routinely subjected to audit by tax authorities in most
jurisdictions where we conduct business. These audits may result in assessments
of additional taxes that are subsequently resolved with the authorities or
potentially through the courts. Currently, there are assessments or audits
involving certain of our subsidiaries, including our subsidiary in Canada, that
may not be resolved in the foreseeable future. We believe we have substantial
defenses to the questions being raised and intend to pursue all legal remedies
available if we are unable to reach a resolution with the authorities. We
believe we have adequately provided for any ultimate amounts that would result
from these proceedings, however, it is too early to predict a final outcome in
these matters. Final assessments could be materially different than the amounts
provided in the financial statements.
We are a defendant in various other matters of litigation generally arising out
of the normal course of business. Although it is difficult to predict the
ultimate outcome of these cases or the other cases discussed above, management
believes, based on discussions with counsel, that any ultimate liability would
not materially affect our financial position, results of operations, or
liquidity.
-21-
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
BUSINESS SUMMARY AND OBJECTIVES
Coca-Cola Enterprises Inc. (CCE) is the world's largest marketer, producer, and
distributor of products of The Coca-Cola Company (TCCC). We also distribute
other beverage brands in select territories. We operate in 46 states in the
United States, the District of Columbia, all 10 provinces of Canada, and in
portions of Europe, including Belgium, continental France, Great Britain,
Luxembourg, Monaco, and the Netherlands.
FORWARD-LOOKING STATEMENTS
Certain expectations and projections regarding the future performance of
Coca-Cola Enterprises Inc. ("CCE," "we," "our," "us," or "the Company")
referenced in this report are forward-looking statements. Officers may also make
verbal statements to analysts, investors, the media, and others that are
"forward-looking." Forward-looking statements include, but are not limited to:
o Projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure or other financial
measures;
o Descriptions of anticipated plans or objectives of our management for
operations, products or services;
o Proposed amendments to existing funding arrangements with TCCC;
o Forecasts of performance; and
o Assumptions regarding any of the foregoing.
Forward-looking statements involve matters which are not historical
facts. Because these statements involve anticipated events or conditions,
forward-looking statements often include words such as "anticipate," "believe,"
"estimate," "expect," "intend," "plan," "project," "target," "can," "could,"
"may," "should," "will," "would" or similar expressions. They represent our
expectations about the future and are not guarantees. Forward-looking statements
are only as of the date they are made and they might not be updated to reflect
changes as they occur after the forward-looking statements are made.
-22-
OUTLOOK
Our plans for 2004 are categorized into four key areas of emphasis we identify
as essential to improve our business performance.
o First, we are working to strengthen our brands. We must constantly
focus on building brand equity and creating demand for our brands.
Continuous brand innovation is also imperative to satisfy the
ever-changing demands of consumers. For example, we introduced
Coca-Cola C2, a mid-calorie cola, in June of 2004 in response to the
growing number of consumers seeking products that are lower in calories
with the same refreshing good taste of our other products.
o Second, we will improve revenue management, a function of price, brand
equity, innovation, and the value we create. Strong net revenue per
case growth in North America and Europe in the second quarter of 2004
reflects our dedication to effective revenue management. We will
continue to focus on rate increases, package mix, volume growth, and
brand equity growth during 2004.
o Third, we will improve our customer management capabilities. We will
strive to become an even better partner to our customers, both in terms
of service and profitability, and help them grow their businesses as we
grow ours.
o Finally, we will continue to focus on efficiency and cost
effectiveness. The creation of Coca-Cola Bottlers' Sales and Services
Company (CCBSS), our goals under Project Pinnacle, and the
consolidation of a significant portion of our administrative functions
into a Shared Services Center have contributed to this initiative in
the past. We are continuing to develop efficiencies through the use of
our Shared Services Center.
We recently participated in a strategic planning project with TCCC to more
closely align our businesses. As a result of the project, we are pursuing
various initiatives to simplify our relationship with TCCC. During 2004, we will
continue to identify ways to become more efficient and cost effective.
-23-
We expect revenue management strategies to produce currency neutral net price
per case growth of approximately 3 percent in North America and approximately 2
1/2 percent in Europe for 2004.
We expect operating income for the year of approximately $1.63 billion compared
to $1.58 billion for 2003 which included net insurance proceeds of $68 million,
settlement of pre-acquisition contingencies of $14 million, and a gain on the
sale of our hot-fill facility in Truesdale, Missouri to TCCC of $8 million. This
projection includes the impact of a significant increase in pension expense and
difficult growth comparisons in our European territory which will negatively
impact 2004 growth. The projection excludes a non-cash increase in cost of sales
in 2004 resulting from the implementation of a new concentrate pricing model in
North America, discussed below.
We expect comparable earnings per diluted common share to grow to a range of
$1.48 to $1.52 as compared to 2003 reported earnings per diluted common share of
$1.46 which included $0.01 from the gain on the sale of our hot-fill facility in
Truesdale, Missouri to TCCC, a net effect of tax rate changes, revaluation of
tax obligations, and other tax adjustments of $0.01, $0.10 from net insurance
proceeds received, and $0.02 from the settlement of pre-acquisition
contingencies in 2003. We anticipate earnings in the lower end of this range.
Our ability to reach this range is dependent on operating trends in North
America and Europe improving from the softness we experienced in June and July,
and existing currency translation rates continuing for the remainder of the
year. We expect third quarter volume and operating income to be below prior
year. Our full-year expectations incorporate higher expectations for operating
income growth in North America in the fourth quarter, partially offset by lower
non-cash funding due to the amendment to our Jumpstart agreement with TCCC, and
exclude the $0.05 per share related to higher cost of sales from the transition
to a new North American concentrate price structure with TCCC.
We are working with TCCC to simplify and enhance our financial and operating
relationships. Effective May 1, 2004, we moved to a new pricing structure in the
United States under which a significant portion of the annual funding received
from TCCC has been netted against the price we pay for concentrate. Effective
June 1, 2004, similar changes were made in our Canadian territories. As a
result, our cost of sales increased by approximately $41 million during the
second quarter of 2004 as higher cost inventory on hand was sold without funding
and replaced with lower cost inventory.
Also effective May 1, 2004, TCCC agreed to establish the Global Marketing Fund,
under which TCCC will pay us $61.5 million annually through December 31, 2014,
in marketing activities support. We will receive a pro rata funding amount of
$41.5 million in 2004. We recognized $10 million during the second quarter of
2004.
In August 2004, we amended our Jumpstart agreements with TCCC for the United
States and Canada to reduce the cold drink equipment purchase and placement
requirements by 70,000 units per year for 2004 and 2005 and extend our North
American purchase and placement requirements into 2010. In return for extending
our obligations under the Jumpstart program, we have agreed to pay TCCC a total
of $15 million over the period beginning this year and ending in 2009.
-24-
Project Pinnacle, our multi-year effort to redesign business processes and
implement the SAP software platform, continues to progress. The implementation
of SAP financial systems and processes in North America occurred in July 2004.
Including the costs of our internal resources assigned to the project, we
project we will spend approximately $112 million in 2004. The estimated capital
costs of this project total approximately $215 million, of which $100 million
will be expended in 2004 and after to complete the project.
Management's Discussion and Analysis should be read in conjunction with our
accompanying unaudited condensed consolidated financial statements and the
accompanying footnotes along with the cautionary statements at the end of this
section.
-25-
OPERATING RESULTS
OVERVIEW
The following table presents consolidated income statement data as a percentage
of net operating revenues for the periods presented:
QUARTER ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
-------------- -------------- -------------- ------------
Net operating revenues............................. 100.0% 100.0 % 100.0 % 100.0 %
Cost of sales...................................... 59.5 58.3 58.8 58.4
-------------- -------------- -------------- ------------
Gross profit....................................... 40.5 41.7 41.2 41.6
Selling, delivery, and administrative expenses..... 31.2 30.3 32.9 33.1
-------------- -------------- -------------- ------------
Operating income................................... 9.3 11.4 8.3 8.5
Interest expense, net.............................. 3.2 3.4 3.4 3.6
Other nonoperating income, net..................... 0.0 0.0 0.0 0.1
-------------- -------------- -------------- ------------
Income before income taxes ........................ 6.1 8.0 4.9 5.0
Income tax expense................................. 1.9 2.5 1.5 1.5
-------------- -------------- -------------- ------------
Net income applicable to common shareowners........ 4.2 % 5.5 % 3.4 % 3.5 %
============== ============== ============== ============
Our operating performance in the second quarter of 2004 continues to reflect
balanced volume and pricing growth in North America. In Europe, solid pricing
growth and benefits of cost management initiatives were offset by the challenge
to overcome summer volume decreases. Our European comparisons were affected by
record volumes achieved during the extraordinary summer heat of a year ago and
unusually cold rainy weather in the second quarter of 2004. Second quarter 2004
currency-neutral bottle and can net price per case increased 2 1/2 percent in
both North America and Europe. Physical case bottle and can volume increased 1
percent in North America and decreased 6 1/2 percent in Europe from the second
quarter of 2003.
For the second quarter of 2004, net income applicable to common shareowners
decreased to $203 million, or $0.43 per diluted common share, compared to net
income applicable to common shareowners of $259 million, or $0.56 per diluted
common share, for the second quarter of 2003. Operating income decreased
approximately 15% from second quarter 2003 results of $528 million to $451
million for the second quarter of 2004. Comparison of operating income for the
second quarters of 2003 and 2004 is affected by the settlement of promotional
programs and accruals in the second quarter of 2003, adding $24 million to
operating results, and $41 million of expense related to the change in
concentrate pricing during the second quarter of 2004.
-26-
In March 2004, we recalled the recently launched Dasani water brand in Great
Britain because the level of bromate in Dasani was in excess of Great Britain's
regulatory standards. We expensed approximately $37 million of costs associated
with this recall in the first six months of 2004, of which $36 million was
expensed in the first quarter, and recognized a reimbursement due from TCCC of
$32 million as an offset to the costs. This reimbursement has been netted in the
amounts due to TCCC in our condensed consolidated balance sheet as of July 2,
2004. There may be adjustments to this amount to be recovered from TCCC, or we
may make additional claims against TCCC, over the balance of the year as we
refine and TCCC validates our estimates of costs.
On April 27, 2004, our Board of Directors approved a project to be implemented
in the Netherlands to transition from the production and sale of refillable PET
bottles to the production and sale of non-refillable PET bottles. The transition
is planned to commence in early 2005 and be completed in early 2006. The
transition will result in accelerated depreciation charges for certain machinery
and equipment, plastic crates, and refillable plastic bottles; costs for
removing current production lines; termination and severance costs; training
costs; external warehousing costs; and operational inefficiencies. The total of
these expenses over the period commencing May 1, 2004 and ending in the second
quarter of 2006 is estimated to be approximately $26 million. During the second
quarter of 2004, we expensed $3 million of these costs. We expect to record $16
million for the full year 2004. We expect the increased packaging flexibility to
accelerate sales in the Netherlands by offering added variety and convenience to
consumers.
NET OPERATING REVENUES
Our second quarter 2004 net operating revenues increased 5 percent to $4.8
billion, on a consolidated basis, from the second quarter of 2003. Second
quarter net operating revenues increased 3 1/2% in North America and 8 1/2% in
Europe from 2003 to 2004. Net operating revenues increased 9 1/2% on a
consolidated basis from $8.3 billion for the first six months of 2003 to $9.1
billion for the first six months of 2004. The following table outlines the
significant components of the increase in net operating revenues:
SECOND QUARTER 2004 CHANGE FIRST SIX MONTHS 2004 CHANGE
-------------------------------- ----------------------------------
NORTH NORTH
TOTAL AMERICA EUROPE TOTAL AMERICA EUROPE
---------- -------- --------- ------- --------- ---------
Change in Net Operating Revenues:
Net price per case growth............... 2.0% 2.5% 2.5% 2.5% 3.0% 2.0%
Incremental net operating revenues from
increased volume....................... (1.0) 1.0 (6.0) 2.5 3.5 0.0
Impact of currency exchange rate changes 3.5 0.5 11.0 4.5 1.0 13.0
Other................................... 0.5 (0.5) 1.0 0.0 0.0 1.0
------- ------- ----- ------ ------ -------
TOTAL PERCENTAGE INCREASE IN NET OPERATING
REVENUES............................... 5.0% 3.5% 8.5% 9.5% 7.5% 16.0%
====== ====== ===== ====== ====== =======
-27-
The percentage of consolidated net operating revenues derived from our North
American and European groups was 71% and 29%, respectively, for the second
quarter and first six months of 2004. In the second quarter and first six months
of 2004, Great Britain contributed approximately 47% and 46% of European
revenues, respectively.
We earn revenues from products when the product is delivered or when we collect
cash from vending machines. We earn funding from licensors as performance
measures are met. We earn service revenues for equipment maintenance and
production when services are performed.
"Bottle and Can Net Pricing per Case" and "Currency-Neutral Bottle and Can Net
Pricing per Case" are provided to assist in evaluation of bottle and can pricing
trends in the marketplace and to distinguish the impact of foreign currency
exchange rate changes to our operations. Bottle and can net price per case is
based on the invoice price charged to customers reduced by promotional
allowances.
Our bottle and can sales accounted for 91% of our net revenue for the first
half of 2004.
The following table presents the reconciliation of these measures to the change
in net revenues per case for the second quarter and the first six months of
2004. All per case percentage changes are rounded to the nearest 1/2% and are
based on wholesale physical case volume.
SECOND QUARTER 2004 CHANGE FIRST SIX MONTHS 2004 CHANGE
------------------------------ ---------------------------------
NORTH NORTH
TOTAL AMERICA EUROPE TOTAL AMERICA EUROPE
------- -------- --------- ------- --------- --------
Change in Net Revenues per Case........... 5.5% 2.5% 14.5% 7.0% 3.5% 15.5%
Impact of excluding post-mix sales
and agency sales .................... 0.0 0.5 0.0 0.0 0.5 0.0
Other................................. 0.0 0.0 (1.0) 0.0 0.0 (0.5)
----- ----- ----- ----- ------ -----
CHANGE IN BOTTLE AND CAN NET PRICING
PER CASE............................. 5.5 3.0 13.5 7.0 4.0 15.0
Impact of currency exchange rate
changes............................ (3.5) (0.5) (11.0) (4.5) (1.0) (13.0)
----- ----- ----- ----- ------ -----
CURRENCY NEUTRAL CHANGE IN BOTTLE AND
CAN NET PRICING PER CASE............ 2.0% 2.5% 2.5% 2.5% 3.0% 2.0%
===== ===== ===== ===== ===== =====
Net pricing per case is impacted by the price charged per package, the volume
generated in each package, and the channels in which those packages are sold.
Increases in volume in higher margin packages or in higher margin channels may
increase net pricing per case without an actual increase in wholesale pricing.
The increases in pricing in the second quarter of 2004 reflect our continued
commitment to our revenue management initiative.
-28-
We participate in various programs with customers to promote the sale of our
products. Among our programs with customers are arrangements under which
allowances may be earned by the customer for attaining agreed upon sales levels
and/or for participating in specific marketing programs. We also participate in
contractual arrangements providing us pouring or vending rights in athletic
venues, school districts, or similar venues. Coupon programs and under-the-cap
promotions are also developed in various territories for the purpose of
increasing sales by all customers. The costs of these programs, included as
deductions in net operating revenues, totaled approximately $563 million and
$489 million for the quarters ended July 2, 2004 and June 27, 2003,
respectively, and approximately $1,023 million and $886 million for the six
month periods ended July 2, 2004 and June 27, 2003, respectively.
-29-
COST OF SALES
Cost of sales for the second quarter of 2004 increased approximately 7 percent
from the second quarter of 2003 from $2.7 billion to $2.9 billion. "Bottle and
Can Cost of Sales per Case" and "Currency-Neutral Bottle and Can Cost of Sales
per Case" are provided to assist in evaluating cost trends for bottle and can
products and to distinguish the impact of foreign currency exchange rate changes
on our operations. These measures exclude the impact of fountain ingredient
costs, as well as marketing credits and Jumpstart funding to isolate the change
in bottle and can ingredient and packaging costs.
The following table presents the reconciliation between these measures and
change in cost of sales per case for the second quarter and the first six months
of 2004. All per case percentage changes are rounded to the nearest 1/2% and are
based on wholesale physical case volume.
SECOND QUARTER 2004 CHANGE FIRST SIX MONTHS 2004 CHANGE
------------------------------ ---------------------------------
NORTH NORTH
TOTAL AMERICA EUROPE TOTAL AMERICA EUROPE
------- -------- --------- ------- --------- --------
Change in Cost of Sales per Case.......... 8.0% 6.5% 14.5% 7.5% 4.5% 15.5%
Impact of New Concentrate Pricing.... (1.5) (2.5) 0.0 (1.0) (1.5) 0.0
Impact of excluding bottle and can
marketing credits and Jumpstart
funding............................ (0.5) (1.0) (0.5) 0.0 0.0 0.0
Impact of excluding post-mix sales
and agency sales................... (0.5) (0.5) (0.5) (0.5) (0.5) (0.5)
Other................................ (0.5) 0.0 (1.5) 0.0 0.0 (1.0)
------ ------ ------ ------ ------ -----
Change in Bottle and Can Cost of Sales
per Case............................... 5.0 2.5 12.0 6.0 2.5 14.0
Impact of currency exchange rate
changes............................ (3.5) (0.5) (10.5) (4.5) (1.0) (13.0)
------ ------ ------ ------ ------ ------
Currency Neutral Change in Bottle and Can
Cost of Sales per Case................. 1.5% 2.0% 1.5% 1.5% 1.5% 1.0%
====== ====== ====== ====== ====== ======
-30-
VOLUME
Comparable volume results, as adjusted for 4 more selling days in the first
quarter of 2004 and the acquisition of Chaudfontaine in the second quarter of
2003, are reconciled to volume changes for the second quarter and the first six
months of 2004 in the following table:
SECOND QUARTER 2004 CHANGE FIRST SIX MONTHS 2004 CHANGE
------------------------------ ---------------------------------
NORTH NORTH
TOTAL AMERICA EUROPE TOTAL AMERICA EUROPE
------- -------- --------- ------- --------- --------
Change in Volume......................... (1.0)% 1.0% (6.0)% 2.5% 3.5% 0.0%
Impact of acquisitions................ 0.0 0.0 (0.5) 0.0 0.0 (1.0)
Impact of selling day shift........... 0.0 0.0 0.0 (2.5) (2.5) (2.0)
------- ------- ------- ------- ------- ------
CHANGE IN COMPARABLE BOTTLE AND CAN
VOLUME ............................... (1.0)% 1.0% (6.5)% 0.0% 1.0% (3.0)%
======= ======= ======= ======= ======= ======
Comparable volume results are presented below for the second quarter and the
first six months of 2004 by major brand category:
SECOND-QUARTER 2004 FIRST SIX-MONTHS 2004
------------------------------------- --------------------------------
CHANGE % OF TOTAL CHANGE % OF TOTAL
------------------ ------------------ ----------------- --------------
North America:
My Coke Portfolio .......... 1.5% 61.0% 0.5% 61.5%
Soft Drink Flavors ......... (4.0) 25.0 (2.5) 25.0
Juices, Isotonics, and Other 6.5 8.5 5.5 8.0
Water ...................... 10.5 5.5 13.5 5.5
----- ----- ----- -----
Total ...................... 1.0% 100.0% 1.0% 100.0%
===== ===== ===== =====
Europe:
My Coke Portfolio .......... (5.5)% 67.5% (1.0)% 68.0%
Soft Drink Flavors ......... (4.0) 22.5 (3.5) 21.5
Juices, Isotonics, and Other 2.0 8.5 2.5 8.5
Water ...................... (66.5) 1.5 (49.5) 2.0
----- ----- ----- -----
Total ...................... (6.5)% 100.0% (3.0)% 100.0%
===== ===== ===== =====
Consolidated:
My Coke Portfolio .......... (0.5)% 62.5% 0.0% 63.0%
Soft Drink Flavors ......... (4.0) 24.5 (2.5) 24.0
Juices, Isotonics, and Other 5.0 8.5 5.0 8.5
Water ...................... (5.0) 4.5 1.5 4.5
----- ----- ----- -----
Total ...................... (1.0)% 100.0% 0.0% 100.0%
===== ===== ===== =====
-31-
On a physical case basis, North American operations comprised 76 percent of our
volume for the second quarter of 2004 and 74 percent of our volume for the
second quarter of 2003. In North America, our volume increase for the second
quarter was mostly attributable to a significant increase in the volume of our
cases of 8-ounce cans and a substantial increase in our 24-ounce PET volume. In
Europe, most of the second quarter volume decrease was attributable to an 8 1/2
percent decrease in 330 ML cans and a 5 percent decrease in total PET volume.
The performance of our My Coke Portfolio brands (which includes all regular and
diet Coca-Cola trademark products) in the second quarter of 2004 reflects a
consumer preference for lower-calorie refreshment. Our diet My Coke Portfolio
volume increased approximately 4 1/2 percent on a consolidated basis, with a 7
percent increase in North America and a 3 1/2 percent decrease in Europe. The
introduction of our mid-calorie cola, Coca-Cola C2, in June of 2004 also
contributed to the growth in our My Coke Portfolio volume in the second quarter.
In North America, decreases in Coke Classic, diet Coke with Lemon, Vanilla Coke,
and Diet Vanilla Coke volume were more than offset by increases in diet Coke and
diet Coke with Lime volume and the introduction of Coca-Cola C2. In Europe,
decreases in Coke Classic, diet Coke/Coke Light with Lemon, Vanilla Coke, and
Diet Vanilla Coke volume were partially offset by increases in diet Coke/Coke
Light and Cherry Coke volume, which contributed to a 5 1/2 percent decrease in
Europe's My Coke Portfolio.
On a consolidated basis, the decrease in flavors volume was attributable to
significant decreases in Sprite and Sprite Remix volume in North America, as
well as a decrease in Lilt volume in Europe.
In North America, the increase in juices, juice drinks, isotonics, and other
volume is mostly attributable to increases in Powerade, Minute Maid Refreshment,
and Minute Maid To-Go Light volume. In Europe, the increase in juices, juice
drinks, isotonics, and other volume is mostly attributable to an increase in
Oasis volume.
The increase in water volume in North America is attributable to strong sales of
Dasani. The decrease in water volume in Europe is mostly due to our
discontinuing the distribution of Nestle water brands in Great Britain in
anticipation of the launch of Dasani in that market, and our subsequent
withdrawal of Dasani there.
-32-
SELLING, DELIVERY, AND ADMINISTRATIVE EXPENSES
Selling, delivery, and administrative (SD&A) expenses increased 8 percent from
$1,399 million for the second quarter of 2003 to $1,509 million for the second
quarter of 2004 on a consolidated basis. SD&A expenses increased 9 percent from
the first six months of 2003 from $2,740 million to $2,984 million for the first
six months of 2004. The following table presents the impact of currency exchange
rate changes on the change in selling, delivery, and administrative expenses
from the prior year:
SECOND QUARTER 2004 CHANGE FIRST SIX MONTHS 2004 CHANGE
------------------------------ ---------------------------------
NORTH NORTH
TOTAL AMERICA EUROPE TOTAL AMERICA EUROPE
------- -------- --------- ------- --------- --------
Reported change in Selling, Delivery, and
Administrative Expenses................. 8.0% 8.5% 5.0% 9.0% 7.5% 14.5%
Impact of currency exchange rate
changes.............................. (2.5) (2.5) (3.0) (3.0) (1.5) (10.0)
------ ------- ------- ------- ------- -------
CURRENCY-NEUTRAL CHANGE IN SELLING,
DELIVERY, AND ADMINISTRATIVE
EXPENSES............................. 5.5% 6.0% 2.0% 6.0% 6.0% 4.5%
====== ======= ======= ======= ======= ======
The following table presents selling, delivery, and administrative expenses as a
percentage of net operating revenues for the periods presented (in millions):
QUARTER ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
----------- -------------- ------------- -------------
Selling, Delivery, and Administrative Expenses....... $ 1,509 $ 1,399 $ 2,984 $ 2,740
Net Operating Revenues............................... $ 4,844 $ 4,617 $ 9,083 $ 8,284
Selling, Delivery, and Administrative Expenses as a
percentage of Net Operating Revenues.............. 31.2% 30.3% 32.9% 33.1%
-33-
INTEREST EXPENSE
Net interest expense for the first six months of 2004 increased 5 1/2 percent
from the same period of 2003 due to an increase in our weighted average cost of
debt and six more interest days in the first six months of 2004 than in the
first six months of 2003. The weighted average cost of debt for the second
quarter and first six months of 2004 was 5.3% compared to 4.9% for the second
quarter and first six months of 2003.
INCOME TAXES
Our effective tax rate was 31% for the first six months of 2004 and 2003. Our
effective tax rate for the remainder of 2004 will depend upon operating results
and may change if the results for the year are different from current
expectations.
PER SHARE DATA
Our reported net income applicable to common shareowners was $203 million, or
$0.43 per diluted common share, for the second quarter of 2004. Second quarter
2004 net income included $41 million, or $0.05 per diluted common share, related
to higher cost of sales from the transition to a new North American concentrate
price structure with TCCC. For the second quarter of 2003, reported net income
was $259 million, or $0.56 per diluted common share.
-34-
TRANSACTIONS WITH THE COCA-COLA COMPANY
The following table presents transactions with The Coca-Cola Company (TCCC) and
the income statement impact of those transactions for the periods presented (in
millions):
QUARTER ENDED SIX MONTHS ENDED
----------------------------- -------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
---------- ----------- ---------- -----------
Amounts from TCCC to CCE:
Marketing support funding earned.................. $ 156 $ 225 $ 378 $ 418
Fountain syrup and packaged product sales......... 130 130 248 231
Cold drink equipment placement funding earned..... 17 24 32 41
Dispensing equipment repair services.............. 13 15 27 27
Operating expense cost reimbursements............. 6 9 12 18
Cost recovery from sale of hot-fill production
facility (proceeds of $58 million).............. - - - 8
Marketing program payments........................ - 1 - 1
Other transactions................................ 3 4 5 8
---------- --------- ---------- -----------
$ 325 $ 408 $ 702 $ 752
========== ========= ========== ===========
Amounts from CCE to TCCC:
Purchases from TCCC:
Syrup and concentrate........................... $ 1,233 $ 1,231 $ 2,384 $ 2,190
Sweetener....................................... 82 84 158 156
Finished products............................... 171 140 319 259
---------- --------- --------- -----------
1,486 1,455 2,861 2,605
Marketing program payments........................ 8 - 20 -
Operating expense cost reimbursements............. - 4 - 8
---------- --------- ---------- -----------
$ 1,494 $ 1,459 $ 2,881 $ 2,613
========== ========= ========== ===========
As part of our strategic planning project with TCCC, we agreed that an increase
in the level of spending in the areas of brand building and innovation is
necessary to promote our objective of building value. In support of this
strategy, we agreed to pay TCCC approximately $20 million for the first six
months of 2004 for participation in marketing activities. This amount is
included in marketing program payments in the table above.
-35-
Effective May 1, 2004, we agreed with TCCC that a significant portion of our
funding from TCCC will be netted against the price we pay TCCC for concentrate
in our United States territories. Effective June 1, 2004, similar changes were
made in our Canadian territories. As a result, our cost of sales increased by
approximately $41 million during the second quarter of 2004 as inventory on hand
was sold without funding and replaced with lower cost inventory. We agreed to
terminate the Strategic Growth Initiative (SGI) program and eliminate the
Special Marketing Funds (SMF) funding program. TCCC has paid us all funding
earned under the SMF funding program. Under the SGI program, we received $41.3
million from TCCC during the first quarter of 2004 and TCCC has agreed to pay us
$6.8 million as a final payment for the second quarter of 2004.
Also effective May 1, 2004, TCCC agreed to establish a Global Marketing Fund,
under which TCCC will pay us $61.5 million annually through December 31, 2014,
as support for marketing activities. The term of the agreement will
automatically be extended for successive ten-year periods thereafter unless
either party gives written notice of termination of this agreement. The
marketing activities to be funded under this agreement will be agreed upon each
year as part of the annual joint planning process and will be incorporated into
the annual marketing plans of both companies. We will receive a pro rata amount
of $41.5 million for 2004. We recognized $10 million during the second quarter
of 2004 which is included in marketing support funding earned in the table
above.
During the first quarter of 2004, TCCC revised our base SMF funding rate to
include reimbursements between the companies for expenses related to the
assumption of customer marketing group responsibilities from TCCC and the
transfer of local media activities from us to TCCC in prior years. These amounts
are included in marketing support funding earned for 2004 in the table above,
through April 2004 when, as noted above, the SMF funding program was terminated.
The amounts shown above as reimbursements to us from TCCC for the second quarter
and first six months of 2004 relate to the staffing costs transferred to us
under another agreement with TCCC.
Pursuant to our concentrate agreement, in second quarter 2004, TCCC changed the
distribution route for concentrate of certain brands we source from them. This
change resulted in an approximate $34 million increase in inventory and amounts
payable to TCCC as of July 2, 2004. Extension of due dates for concentrate
payments will result in no material impact to working capital.
We participate in cooperative trade marketing arrangements (CTM) in the United
States administered by TCCC. Beginning in 2002, we became responsible for all
costs of the programs in our territories, other than costs relative to a limited
number of specified customers. We transfer amounts to TCCC under the program for
payment to customers. Pursuant to these arrangements, amounts paid or payable to
TCCC for the six months ended July 2, 2004 and June 27, 2003 totaled
approximately $119 million and $130 million, respectively, and are recognized as
a reduction of net operating revenues.
-36-
Deferred cash payments from TCCC include amounts deferred under Jumpstart and
other miscellaneous programs. Under our Jumpstart agreements with TCCC, we were
required to purchase and place targeted amounts of cold drink equipment through
2008. We amended our Jumpstart agreements with TCCC for the United States and
Canada to reduce the cold drink equipment purchase and placement requirements by
70,000 units per year for 2004 and 2005 and extend our North American purchase
and placement requirements into 2010. By placing approximately 103,000 units in
2004, as required by the amended agreements, we will earn approximately $50
million of funding in 2004 versus $72 million earned in 2003. Support funding
earned under the Jumpstart programs with TCCC is shown as cold drink equipment
placement funding earned in the table above. In return for TCCC's postponement
of our purchase and placement obligations, we have agreed to pay TCCC $1.5
million in 2004, $3.0 million in 2005 through 2008, and $1.5 million in 2009.
In March 2004, we recalled the recently launched Dasani water brand in Great
Britain because of bromate levels exceeding British regulatory standards. We
recognized a $32 million reimbursement for recall costs from TCCC in the first
quarter of 2004 as an offset to related costs. There may be adjustments to this
amount to be recovered from TCCC, or we may make additional claims against TCCC,
over the balance of the year as we refine and TCCC validates our initial
estimates of costs.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Pension expense for the current year is determined using the prior year
valuation of liabilities and the projected values of pension assets. The
following tables outline significant assumptions used in the determination of
pension obligations and expense:
Weighted-average assumptions used to determine benefit obligations at December
31:
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2003 2002 2003 2002
------ ------ ------ ------
Discount Rate........................... 6.0% 6.8% 6.1% 7.0%
Rate of compensation increase........... 4.6 4.6 - -
Weighted-average assumptions used to determine net cost for the six months ended
July 2, 2004 and June 27, 2003:
PENSION BENEFITS OTHER BENEFITS
----------------- -----------------
2004 2003 2004 2003
------ ------ ------ ------
Discount Rate........................... 6.0% 6.8% 6.1% 7.0%
Expected return on plan assets.......... 8.3 8.3 - -
Rate of compensation increase........... 4.6 4.6 - -
-37-
Net periodic benefit costs consisted of the following for the six months ended
(in millions):
PENSION PLANS OTHER POSTRETIREMENT PLANS
-------------------------- --------------------------
JULY 2, JUNE 27, JULY 2, JUNE 27,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Service cost............................ $ 54 $ 41 $ 5 $ 5
Interest cost........................... 66 58 10 11
Expected return on plan assets.......... (68) (59) - -
Recognized actuarial loss............... 25 5 2 -
Amortization of prior service cost...... - - (6) (4)
---------- ---------- ---------- ----------
Net periodic benefit cost............... $ 77 $ 45 $ 11 $ 12
========== ========== ========== ==========
Pension assets of the North American and UK plans represent approximately 96% of
pension plan assets. Below is a summary of targeted pension plan asset
allocation, actual allocation of those assets at the end of the second quarter
of 2004 and 2003 along with expected long-term rate of return by asset category.
WEIGHTED-
% OF PLAN ASSETS AVERAGE
WEIGHTED ------------------------------------ EXPECTED
AVERAGE TARGET JULY 2, JUNE 27, LONG-TERM
ASSET CATEGORY ALLOCATION 2004 2003 RATE OF RETURN
---------------------------------------- ------------------- ----------------- ------------------ ------------------
Equity Securities...................... 65% 72% 68% 8.7%
Fixed Income Securities................ 20 20 23 5.7
Real Estate............................ 5 3 3 9.6
Other.................................. 10 5 6 10.4
---------- --------- --------- --------
Total.................................. 100% 100% 100% 8.3%
========== ========= ========= ========
At July 2, 2004 Equity Securities were 72% of total assets, 7% above the
targeted level of 65% for this class of assets. This is largely driven by the
U.S. where efforts are underway to bring Real Estate and Private Equity closer
to their respective target allocations. On an interim basis, funds that will
ultimately be redirected to Real Estate and Private Equity are being invested in
Equity Securities. Currently, we project Real Estate should be in line with its
target by the end of 2005. The reallocation of Private Equity will be completed
within the next few years.
Our Fixed Income Securities portfolio is invested primarily in commingled funds
and managed in terms of overall return expectations rather than matching
duration against plan liabilities, therefore debt maturities are not significant
to the plan performance.
-38-
Contributions to pension and other postretirement benefit plans of the Company
were $26 million and $22 million for the six months ended July 2, 2004 and June
27, 2003, respectively. Projected annual contributions for 2004 are, and
contributions for 2003 were, as follows:
PROJECTED ACTUAL
2004 2003
----------- -----------
U. S. - Pension........................ $ 225 $ 168
European - Pension..................... 33 29
North America - Postretirement......... 22 20
----------- -----------
$ 280 $ 217
=========== ===========
Our policy is to fund the U.S. pension plans at a level to maintain, within
established guidelines, the IRS defined 90% Current Liability Funded status. The
Pension Funding Equity Act of 2004, signed by President Bush on April 10, 2004,
established new benchmark interest rates for the determination of that status.
While we believe these rates allow us to contribute less than our planned
contributions to U.S. plans during 2004, we have not reduced our planned
contributions at this time. At January 1, 2003, the date of the most recent
determination for all U.S. funded defined benefit pension plans, the Current
Liability Funded status equaled or exceeded 90%.
On December 8, 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("the Act") into law. The Act expanded
Medicare to include, for the first time, coverage for prescription drugs. We
expect that this legislation may reduce our costs for some of these programs. At
this point, our investigation into our response to the legislation is
preliminary. We anticipate guidance from various governmental and regulatory
agencies concerning the requirements that must be met to obtain these cost
reductions as well as the manner in which such savings should be measured. Based
on this preliminary analysis, it appears that some of our retiree medical plans
would need to be changed to qualify for beneficial treatment under the Act,
while other plans may continue unchanged.
Because of various uncertainties regarding how companies are responding to this
legislation and the accounting methodology to be applied, we are deferring
financial recognition of this legislation pending final guidance from the
Financial Accounting Standards Board. Once issued, updated guidance could result
in changes to previously reported information. However, because our
postretirement medical benefits are limited, any reductions in postretirement
benefit costs resulting from the Act are not expected to be material.
-39-
CASH FLOW AND LIQUIDITY REVIEW
CAPITAL RESOURCES
Our sources of capital include, but are not limited to, cash flows from
operations, the issuance of public or private placement debt, bank borrowings,
and the issuance of equity securities. We believe that available short-term and
long-term capital resources are sufficient to fund our capital expenditure and
working capital requirements, scheduled debt payments, interest and income tax
obligations, dividends to our shareowners, acquisitions, and share repurchases.
The following table provides additional information on debt facilities (in
billions):
JULY 2, DECEMBER 31,
2004 2003
------------------ ------------------
Amounts Available for Borrowing:
Amounts available under committed domestic and international credit
facilities(A)............................................................. $ 2.9 $ 3.3
Amounts available under public debt facilities which could be used for
long-term financing, refinancing of debt maturities, and refinancing of
commercial paper:
Registration statements with the Securities and Exchange Commission. 3.2 3.2
Euro medium-term note program(B)........................................ - 2.1
Canadian medium-term note program (C)................................... 1.5 1.5
--------- --------
Total amounts available under public debt facilities...................... 4.7 6.8
--------- --------
Total Amounts Available..................................................... $ 7.6 $ 10.1
========= ========
(A) At July 2, 2004 and December 31, 2003, we had $163 million and $45 million,
respectively, of short-term borrowings outstanding under these facilities.
(B) At July 2, 2004, the Euro medium-term note program was not available to
use; however, the intent is to renew the program in August 2004 at which
time there will be $2.1 billion available.
(C) In Canadian dollars, amounts available under the Canadian medium-term note
program totaled $2 billion at July 2, 2004 and December 31, 2003.
In addition, we satisfy seasonal working capital needs and other financing
requirements with short-term borrowings under our commercial paper programs,
bank borrowings, and various lines of credit in the countries in which we
operate. At July 2, 2004, we had approximately $1.5 billion outstanding in
commercial paper and approximately $2.9 billion available as a back-up to
commercial paper under working capital lines of credit. We intend to continue
refinancing borrowings under our commercial paper programs and our short-term
credit facilities with longer-term fixed and floating rate financings. At the
end of the second quarter, our debt portfolio contained 72% fixed rate debt and
28% floating rate debt.
-40-
SUMMARY OF CASH ACTIVITIES
Cash and cash investments decreased $59 million during the first six months of
2004 from net cash transactions. Our primary sources of cash for the first six
months of 2004 were operations, providing $450 million, and proceeds from the
issuance of debt aggregating $689 million. Our primary uses of cash were debt
repayments totaling $928 million and capital expenditures totaling $406 million.
OPERATING ACTIVITIES: Operating activities resulted in $450 million of net cash
provided during the first six months of 2004 compared to $600 million provided
by operating activities for the same period in 2003. This decrease is primarily
the result of an increase in inventory and decrease in accounts payable at July
2, 2004 compared to June 27, 2003.
INVESTING ACTIVITIES: Net cash used in investing activities resulted primarily
from our capital investments of $406 million for the first six months of 2004.
We expect full-year 2004 capital expenditures to total approximately $1.1
billion.
FINANCING ACTIVITIES: The following table presents issuances of long-term debt
and payments on long-term debt as noted in our condensed consolidated statements
of cash flows for the six months ended (in millions):
JULY 2, JUNE 27,
MATURITY RATE 2004 2003
----------- ------------ --------- ----------
ISSUANCES OF LONG-TERM DEBT
French revolving credit
facilities..................................... $ 128 $ 15
British revolving credit facilities............ 55 -
British pound notes............................ May.2006 4.13% - 276
Other issuances................................ 4 109
--------- ----------
Total........................................... $ 187 $ 400
========= ==========
PAYMENTS ON LONG-TERM DEBT
French revolving credit facilities.............. $ 39 $ -
British revolving credit facilities............. 55 -
$350 million Canadian dollar note............... Mar.2004 5.65% 266 -
$500 million US dollar note..................... Apr.2004 500 -
$60 million Canadian dollar note................ May.2004 44 -
French franc notes.............................. Jan.2003 5.00% - 27
Eurobonds....................................... Feb.2003 5.00% - 160
$100 million Canadian dollar note............... Mar.2003 5.31% - 65
British pound notes............................. May.2003 6.50% - 276
Other payments.................................. 24 42
--------- ----------
Total........................................... $ 928 $ 570
========= ==========
NET INCREASE IN COMMERCIAL PAPER $ 502 $ 24
========= ==========
-41-
We continue to refinance portions of our short-term borrowings as they mature
with short-term and long-term fixed and floating rate debt. Exchange rate
changes during the first six months of 2004 resulted in an increase in long-term
debt of $21 million.
-42-
FINANCIAL CONDITION
The seasonality of our business results from higher sales in the second and
third quarters versus the first and fourth quarters of the year. Inventory
increased approximately 27% and trade accounts receivable increased
approximately 19% from December 31, 2003 to July 2, 2004 due to the seasonality
of our business.
The current portion of deferred cash payments from TCCC decreased from December
31, 2003 because of the amendment to our Jumpstart agreement with TCCC. This
amendment reduces the cold drink equipment purchase and placement requirements
for 2004 and 2005 and extends placement requirements into 2010. We will earn
approximately $50 million of non-cash funding in 2004 as we place cold drink
equipment. This is approximately $35 million less than we would have earned
under the previous Jumpstart agreements.
Pursuant to our concentrate agreement, in second quarter 2004, TCCC changed the
distribution route for concentrate of certain brands we source from them. This
change resulted in an approximate $34 million increase in inventory and amounts
payable to TCCC as of July 2, 2004. Extension of due dates for concentrate
payments will result in no material impact to working capital.
KNOWN TRENDS AND UNCERTAINTIES
CONTINGENCIES
Our business practices are being reviewed in various jurisdictions by the
European Commission for alleged abuses of an alleged dominant position under
Article 82 of the EU Treaty. We do not believe we have a dominant position in
the relevant markets, or that our current or past commercial practices violate
EU law. Settlement discussions with the Commission are ongoing. However, the
Commission has indicated it will continue its review of our commercial practices
during this process. The Commission has considerable discretion in reaching
conclusions and levying fines, which are subject to judicial review.
We are also the subject of investigations by Belgian and French competition law
authorities for our compliance under competition laws. We intend to continue to
vigorously defend against an unfavorable outcome, although it is not possible
for us to determine the ultimate outcome of these matters at this time.
In 2000, CCE and TCCC were found by a Texas jury to be jointly liable in a
combined amount of $15.2 million to five plaintiffs, each a distributor of
competing beverage products. These distributors sued alleging that CCE and TCCC
engaged in anticompetitive marketing practices. The trial court's verdict was
upheld by the Texas Court of Appeals in July 2003; we and TCCC have applied to
the Texas Supreme Court for leave to appeal to that court. Should the judgment
not be overturned, this fact would not have an adverse effect on our financial
condition. The claims of the three remaining plaintiffs in this case remain to
be tried and one additional competitor has filed a similar claim against us. We
intend to vigorously defend against these claims and have not provided for any
potential awards for these additional claims.
-43-
Our California subsidiary has been sued by several current and former employees
over alleged violations of state wage and hour rules. In one case, the parties
have accepted a mediator's proposed settlement for which we have provided in our
financial statements. The terms of the release in this case remain the subject
of negotiation, and any settlement is subject to final approval by the trial
court having jurisdiction over the lawsuit. Our subsidiary is vigorously
defending against other similar claims, but it is not possible to predict the
outcomes at this time.
Under the Jumpstart programs with TCCC, we received payments from TCCC for a
portion of the cost of developing the infrastructure necessary to support
accelerated placements of cold drink equipment. We have agreed with TCCC to
reduce the equipment purchases and placements by 70,000 units in 2004 and 2005.
In doing so, we extended the agreement to 2010. For consideration of this change
we agreed to pay TCCC $15 million over the period of the extended agreement.
$1.5 million will be due for 2004 with $3 million per year due for the years
2005 through 2008 and a final payment of $1.5 million due in 2009. Under the
recently amended Jumpstart agreements, we recognize the payments primarily as
cold drink equipment is placed, through 2010, and over the period we have the
potential requirement to move the equipment, through 2022.
Should we not satisfy the provisions of the programs, the agreement provides for
the parties to meet to work out mutually agreeable solutions. We continue to
believe we would in all cases resolve any matters with TCCC that might arise
under these programs, and we believe the probability of a refund of amounts
previously paid under these programs is remote.
Our tax filings are routinely subjected to audit by tax authorities in most
jurisdictions where we conduct business. These audits may result in assessments
of additional taxes that are subsequently resolved with the authorities or
potentially through the courts. Currently, there are assessments or audits
involving certain of our subsidiaries, including our subsidiary in Canada, that
may not be resolved in the foreseeable future. We believe we have substantial
defenses to the questions being raised and intend to pursue all legal remedies
available if we are unable to reach a resolution with the authorities. We
believe we have adequately provided for any ultimate amounts that would result
from these proceedings, however, it is too early to predict a final outcome in
these matters. Final assessments could be materially different than the amounts
provided in the financial statements.
We are a defendant in various other matters of litigation generally arising out
of the normal course of business. Although it is difficult to predict the
ultimate outcome of these cases or the other cases discussed above, management
believes, based on discussions with counsel, that any ultimate liability would
not materially affect our financial position, results of operations, or
liquidity.
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ACCOUNTING DEVELOPMENTS
We currently apply APB Opinion No. 25 and related interpretations in accounting
for our stock-based compensation plans. In March 2004, the FASB issued the
Exposure Draft, SHARE-BASED PAYMENT - AN AMENDMENT OF STATEMENTS NO. 123 AND 95
(Proposed Statement of Financial Accounting Standards). The Exposure Draft would
replace existing requirements under FAS 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, and APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
Under the Exposure Draft, all equity-based awards to employees would be required
to be recognized in the income statement based on their fair value. The Exposure
Draft is expected to be finalized in late 2004 and would be effective for us
beginning in 2005.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, and revised it in December 2003. FIN 46 requires
variable interest entities to be consolidated by the primary beneficiary of the
entity in certain instances. Our adoption of FIN 46 did not have an impact on
our financial position, cash flows, and results of operations.
CAUTIONARY STATEMENTS
There are several factors - many beyond our control - that could cause results
to differ significantly from our expectations. Our expectations are based on
then currently available competitive, financial, and economic data along with
our operating plans and are subject to future events and uncertainties. We
caution readers that in addition to the important factors described elsewhere in
this report, the following factors, among others, could cause our business,
results of operations and/or financial condition in 2004 and thereafter to
differ significantly from those expressed in any forward-looking statements.
There are also other factors not described in this report that could cause
results to differ from our expectations.
MARKETPLACE: The Company's response to continued and increased customer and
competitor consolidations and marketplace competition may result in lower than
expected net pricing of our products. In addition, competitive pressures may
cause channel and product mix to shift from more profitable cold drink channels
and packages and adversely affect our overall pricing. Efforts to improve
pricing in the future consumption channels of our business may result in lower
than expected volume. There is a consumer trend toward beverage products that
are lower in calories and carbohydrates than many of the Company's products. In
addition, weather conditions, particularly in Europe, may have a significant
impact on our sales volume. Net pricing, volume, and costs of sales are the
primary determinants of net earnings.
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COST PARTICIPATION PAYMENTS FROM THE COCA-COLA COMPANY (TCCC): Material changes
in levels of payments historically provided under various programs with TCCC, or
our inability to meet the performance requirements for the anticipated levels of
such support payments, could adversely affect future earnings.
The amount of infrastructure funding from TCCC recognized as an offset to cost
of sales in a given year is dependent upon the actual number of units placed in
service. Actual results may differ materially from projections should placement
levels be significantly different than program requirements. Should we not
satisfy the provisions of the infrastructure funding programs and we are unable
to agree with TCCC on an alternative solution, TCCC would be entitled to seek
partial refund of amounts previously paid.
RAW MATERIALS: Our forecasts assume no unplanned increases in the costs of raw
materials, ingredients, packaging materials, or supplies. If such increases
occur, and we are unable to achieve an increase in pricing to customers by
comparable amounts, earnings could be adversely affected.
INFRASTRUCTURE INVESTMENT: Projected capacity levels of our infrastructure
investments may differ from actual if our volume growth is not as anticipated.
Significant changes from our expected timing of returns on cold drink equipment
and employee, fleet, and plant infrastructure investments could adversely impact
our net income.
FINANCING CONSIDERATIONS: Changes from our expectations for interest and
currency exchange rates can have a material impact on our forecasts. We may not
be able to completely mitigate the effect of significant interest rate or
currency exchange rate changes. Changes in our debt rating can have a material
adverse effect on interest costs and our financing sources.
LEGAL CONTINGENCIES: Changes from expectations for the resolution of outstanding
legal claims and assessments, including the investigation by the European
Commission, could have a material impact on our forecasts and financial
condition.
LEGISLATIVE RISK: Our business model is dependent on the availability of our
products in multiple channels and locations to better satisfy our customers'
needs. Laws that restrict our ability to distribute products in schools and
other venues or materially impact our cash flows could negatively impact our
revenue and profit.
TAX CONTINGENCIES: Assessments of additional taxes resulting from audits
conducted by tax authorities, such as those involving our Canada subsidiary,
could have a material impact on our earnings and financial condition.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no material changes to the disclosure on this matter made in
"Management's Financial Review - Interest Rate and Currency Risk Management" on
Pages 76 and 77 of our Annual Report to Shareowners for the year ended December
31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, with the participation
of management, evaluated the effectiveness of our "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the Exchange Act)) as of the end of the period covered by this report.
Based on that evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that our disclosure controls and procedures are effective in
timely making known to them material information required to be disclosed in our
reports filed or submitted under the Exchange Act. There has been no change in
our internal control over financial reporting during the quarter ended July 2,
2004 that has materially affected, or is reasonably likely to affect, our
internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit (numbered in accordance with Item 601 of Regulation S-K):
INCORPORATED
REFERENCE
EXHIBIT NUMBER DESCRIPTION OR FILED HEREWITH
----------------------- --------------------------------------------------- -------------------
3 Bylaws of Coca-Cola Enterprises Inc. as amended Filed herewith.
through July 27, 2004.
10.1 Agreement between Coca-Cola Enterprises Inc. and Filed herewith.
The Coca-Cola Company to terminate the Growth
Initiative program agreement, eliminate SMF
funding, and implement new concentrate pricing
schedules for the United States and Canada, dated
July 13, 2004.
10.2 Separation Agreement between Coca-Cola Enterprises Filed herewith.
Inc. and Patrick J. Mannelly, dated as of July 29,
2004.
10.3 Amendment dated August 9, 2004 to 1999-2008 Cold Filed herewith.
Drink Equipment Purchase Partnership Program for
the United States between Coca-Cola Enteprises Inc.
and The Coca-Cola Company.*
10.4 Amendment dated August 9, 2004 to 1999-2008 Cold Filed herewith.
Drink Equipment Purchase Partnership Program for
Canada between Coca-Cola Bottling Company and
Coca-Cola Ltd.*
12 Earnings to Combined Fixed Charges and Preferred Filed herewith.
Stock Dividends.
31.1 Certificate of John R. Alm, filed pursuant to Filed herewith.
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Patrick J. Mannelly, filed pursuant Filed herewith.
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of John R. Alm, furnished pursuant to Furnished herewith.
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Patrick J. Mannelly, furnished Furnished herewith.
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* The filer has requested confidential treatment with respect to portions of
this document.
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(b) Reports on Form 8-K:
During the second quarter of 2004, we filed the following current reports on
Form 8-K:
DATE OF REPORT DESCRIPTION
---------------------------- -------------------------------------------------------------
April 20, 2004 Press release announcing webcast of first quarter 2004
earnings conference call on April 28, 2004 (Item 9). Filed
April 20, 2004.
April 27, 2004 Press release announcing that the Board of Directors
promoted two on senior management team (Item 9). Filed April
27, 2004.
April 28, 2004 Press release reporting first quarter results (Items 9 and
12). Filed April 28, 2004.
May 17, 2004 Press release naming William W. Douglas Controller,
Principal Accounting Officer effective July 2004 (Items 5
and 7). Filed May 18, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COCA-COLA ENTERPRISES INC.
(Registrant)
Date: August 11, 2004 /s/ Patrick J. Mannelly
----------------------------------
Patrick J. Mannelly
Senior Vice President and Chief
Financial Officer
Date: August 11, 2004 /s/ William W. Douglas, III
----------------------------------
William W. Douglas, III
Vice President, Controller and
Principal Accounting Officer
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