10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 29, 2013

Commission File Number 0-9286

COCA-COLA BOTTLING CO. CONSOLIDATED

(Exact name of registrant as specified in its charter)

 

Delaware   56-0950585

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4100 Coca-Cola Plaza, Charlotte, North Carolina 28211

(Address of principal executive offices) (Zip Code)

(704) 557-4400

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at October 31, 2013

Common Stock, $1.00 Par Value

  7,141,447

Class B Common Stock, $1.00 Par Value

  2,108,962


Table of Contents

COCA-COLA BOTTLING CO. CONSOLIDATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2013

INDEX

 

         Page  
PART I – FINANCIAL INFORMATION   
Item 1.   Financial Statements (Unaudited)   
  Consolidated Statements of Operations      2   
  Consolidated Statements of Comprehensive Income      3   
  Consolidated Balance Sheets      4   
  Consolidated Statements of Changes in Equity      6   
  Consolidated Statements of Cash Flows      7   
  Notes to Consolidated Financial Statements      8   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      62   
Item 4.   Controls and Procedures      63   
PART II – OTHER INFORMATION   
Item 1A.   Risk Factors      64   
Item 6.   Exhibits      64   
  Signatures      65   


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

In Thousands (Except Per Share Data)

 

     Third Quarter      First Nine Months  
     2013      2012      2013      2012  

Net sales

   $ 434,464       $ 419,855       $ 1,246,994       $ 1,227,733   

Cost of sales

     258,352         248,927         746,868         727,798   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     176,112         170,928         500,126         499,935   

Selling, delivery and administrative expenses

     145,912         143,490         427,539         425,315   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     30,200         27,438         72,587         74,620   

Interest expense, net

     7,361         9,033         22,149         27,183   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     22,839         18,405         50,438         47,437   

Income tax expense

     4,756         7,191         14,550         19,228   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     18,083         11,214         35,888         28,209   

Less: Net income attributable to noncontrolling interest

     1,914         1,135         3,628         2,818   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Coca-Cola Bottling Co. Consolidated

   $ 16,169       $ 10,079       $ 32,260       $ 25,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per share based on net income attributable to Coca-Cola Bottling Co. Consolidated:

           

Common Stock

   $ 1.75       $ 1.09       $ 3.49       $ 2.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding

     7,141         7,141         7,141         7,141   

Class B Common Stock

   $ 1.75       $ 1.09       $ 3.49       $ 2.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Class B Common Stock shares outstanding

     2,109         2,089         2,104         2,084   

Diluted net income per share based on net income attributable to Coca-Cola Bottling Co. Consolidated:

           

Common Stock

   $ 1.74       $ 1.09       $ 3.47       $ 2.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding – assuming dilution

     9,290         9,270         9,285         9,265   

Class B Common Stock

   $ 1.74       $ 1.08       $ 3.46       $ 2.73   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Class B Common Stock shares outstanding – assuming dilution

     2,149         2,129         2,144         2,124   

Cash dividends per share:

           

Common Stock

   $ .25       $ .25       $ .75       $ .75   

Class B Common Stock

   $ .25       $ .25       $ .75       $ .75   

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

In Thousands

 

     Third Quarter     First Nine Months  
     2013     2012     2013     2012  

Net income

   $ 18,083      $ 11,214      $ 35,888      $ 28,209   

Other comprehensive income, net of tax:

        

Foreign currency translation adjustment

     (1     0        0        0   

Defined benefit plans reclassification included in pension costs:

        

Actuarial loss

     514        421        1,533        1,262   

Prior service costs

     2        3        7        9   

Postretirement benefits reclassification included in benefits costs:

        

Actuarial loss

     430        372        1,281        1,115   

Prior service costs

     (231     (231     (691     (690
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     714        565        2,130        1,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     18,797        11,779        38,018        29,905   

Less: Comprehensive income attributable to noncontrolling interest

     1,914        1,135        3,628        2,818   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Coca-Cola Bottling Co. Consolidated

   $ 16,883      $ 10,644      $ 34,390      $ 27,087   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In Thousands (Except Share Data)

 

     Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
 

ASSETS

        

Current Assets:

        

Cash and cash equivalents

   $ 25,283       $ 10,399       $ 112,661   

Accounts receivable, trade, less allowance for doubtful accounts of $1,553, $1,490 and $1,533, respectively

     114,068         103,524         111,153   

Accounts receivable from The Coca-Cola Company

     24,549         15,521         20,437   

Accounts receivable, other

     14,526         12,876         13,583   

Inventories

     70,255         65,924         74,492   

Prepaid expenses and other current assets

     32,209         33,068         29,900   
  

 

 

    

 

 

    

 

 

 

Total current assets

     280,890         241,312         362,226   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, net

     295,147         307,467         291,768   

Leased property under capital leases, net

     50,212         54,150         55,601   

Other assets

     62,621         53,801         54,573   

Franchise rights

     520,672         520,672         520,672   

Goodwill

     102,049         102,049         102,049   

Other identifiable intangible assets, net

     3,764         4,023         4,127   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,315,355       $ 1,283,474       $ 1,391,016   
  

 

 

    

 

 

    

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In Thousands (Except Share Data)

 

     Sept. 29,
2013
    Dec. 30,
2012
    Sept. 30,
2012
 

LIABILITIES AND EQUITY

      

Current Liabilities:

      

Current portion of debt

   $ 20,000      $ 20,000      $ 120,000   

Current portion of obligations under capital leases

     5,732        5,230        5,110   

Accounts payable, trade

     46,279        51,651        45,308   

Accounts payable to The Coca-Cola Company

     43,363        27,830        42,031   

Other accrued liabilities

     73,858        75,113        76,900   

Accrued compensation

     26,733        32,428        24,955   

Accrued interest payable

     9,380        4,060        12,121   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     225,345        216,312        326,425   

Deferred income taxes

     142,795        140,965        145,384   

Pension and postretirement benefit obligations

     138,288        140,719        119,767   

Other liabilities

     123,208        118,303        116,588   

Obligations under capital leases

     60,378        64,351        65,692   

Long-term debt

     393,520        403,386        403,344   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,083,534        1,084,036        1,177,200   
  

 

 

   

 

 

   

 

 

 

Commitments and Contingencies (Note 14)

      

Equity:

      

Common Stock, $1.00 par value:

      

Authorized – 30,000,000 shares;

      

Issued – 10,203,821 shares

     10,204        10,204        10,204   

Class B Common Stock, $1.00 par value:

      

Authorized – 10,000,000 shares;

      

Issued – 2,737,076, 2,716,956 and 2,716,956 shares, respectively

     2,735        2,715        2,715   

Capital in excess of par value

     108,959        107,681        107,600   

Retained earnings

     195,766        170,439        170,920   

Accumulated other comprehensive loss

     (92,396     (94,526     (79,124
  

 

 

   

 

 

   

 

 

 
     225,268        196,513        212,315   

Less-Treasury stock, at cost:

      

Common – 3,062,374 shares

     60,845        60,845        60,845   

Class B Common – 628,114 shares

     409        409        409   
  

 

 

   

 

 

   

 

 

 

Total equity of Coca-Cola Bottling Co. Consolidated

     164,014        135,259        151,061   

Noncontrolling interest

     67,807        64,179        62,755   
  

 

 

   

 

 

   

 

 

 

Total equity

     231,821        199,438        213,816   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,315,355      $ 1,283,474      $ 1,391,016   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

In Thousands (Except Share Data)

 

    Common
Stock
    Class B
Common
Stock
    Capital
in
Excess of
Par Value
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total
Equity
of CCBCC
    Noncontrolling
Interest
    Total
Equity
 

Balance on Jan. 1, 2012

  $ 10,204      $ 2,693      $ 106,201      $ 152,446      $ (80,820   $ (61,254   $ 129,470      $ 59,937      $ 189,407   

Net income

          25,391            25,391        2,818        28,209   

Other comprehensive income, net of tax

            1,696          1,696          1,696   

Cash dividends paid
Common ($.75 per share)

          (5,356         (5,356       (5,356

Class B Common
($.75 per share)

          (1,561         (1,561       (1,561

Issuance of 22,320 shares of
Class B Common Stock

      22        1,399              1,421          1,421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on Sept. 30, 2012

  $ 10,204      $ 2,715      $ 107,600      $ 170,920      $ (79,124   $ (61,254   $ 151,061      $ 62,755      $ 213,816   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on Dec. 30, 2012

  $ 10,204      $ 2,715      $ 107,681      $ 170,439      $ (94,526   $ (61,254   $ 135,259      $ 64,179      $ 199,438   

Net income

          32,260            32,260        3,628        35,888   

Other comprehensive income, net of tax

            2,130          2,130          2,130   

Cash dividends paid

                 

Common ($.75 per share)

          (5,356         (5,356       (5,356

Class B Common
($.75 per share)

          (1,577         (1,577       (1,577

Issuance of 20,120 shares of
Class B Common Stock

      20        1,278              1,298          1,298   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on Sept. 29, 2013

  $ 10,204      $ 2,735      $ 108,959      $ 195,766      $ (92,396   $ (61,254   $ 164,014      $ 67,807      $ 231,821   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In Thousands

 

     First Nine Months  
     2013     2012  

Cash Flows from Operating Activities

    

Net income

   $ 35,888      $ 28,209   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation expense

     43,655        46,075   

Amortization of intangibles

     250        312   

Deferred income taxes

     (1,376     3,409   

(Gain)/loss on sale of property, plant and equipment

     (264     467   

Amortization of debt costs

     1,453        1,726   

Amortization of deferred gain related to terminated interest rate agreements

     (411     (923

Stock compensation expense

     1,901        2,043   

(Increase) decrease in current assets less current liabilities

     (4,366     4,099   

Increase in other noncurrent assets

     (6,656     (5,461

Increase (decrease) in other noncurrent liabilities

     4,887        (15,599

Other

     12        (1
  

 

 

   

 

 

 

Total adjustments

     39,085        36,147   
  

 

 

   

 

 

 

Net cash provided by operating activities

     74,973        64,356   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Additions to property, plant and equipment

     (45,197     (35,541

Proceeds from the sale of property, plant and equipment

     6,056        548   

Change in restricted cash

     0        3,000   
  

 

 

   

 

 

 

Net cash used in investing activities

     (39,141     (31,993
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Borrowings under revolving credit facility

     55,000        0   

Payment on revolving credit facility

     (65,000     0   

Cash dividends paid

     (6,933     (6,917

Principal payments on capital lease obligations

     (3,926     (3,460

Other

     (89     (83
  

 

 

   

 

 

 

Net cash used in financing activities

     (20,948     (10,460
  

 

 

   

 

 

 

Net increase in cash

     14,884        21,903   

Cash at beginning of period

     10,399        90,758   
  

 

 

   

 

 

 

Cash at end of period

   $ 25,283      $ 112,661   
  

 

 

   

 

 

 

Significant non-cash investing and financing activities:

    

Issuance of Class B Common Stock in connection with stock award

   $ 1,298      $ 1,421   

Capital lease obligations incurred

     455        209   

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

1. Significant Accounting Policies

The consolidated financial statements include the accounts of Coca-Cola Bottling Co. Consolidated and its majority-owned subsidiaries (the “Company”). All intercompany accounts and transactions have been eliminated.

The consolidated financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal, recurring nature.

The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial reporting and 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. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 30, 2012 filed with the United States Securities and Exchange Commission.

Certain prior year amounts have been reclassified to conform to current classifications.

In the third quarter of 2013 (“Q3 2013”), the Company recorded an out-of-period adjustment of $1.3 million for reimbursements received in the third quarter from brand companies for net price reductions to certain of our customers on their products that occurred in the previous two quarters. This out-of-period item did not have a material impact on the current or either of the previously reported periods.

Revision of Prior Period Financial Statements

In connection with the preparation of the consolidated financial statements for the fourth quarter of 2012, the Company identified an error in the treatment of a certain prior year deferred tax asset in the Consolidated Balance Sheets. This resulted in an understatement of net noncurrent deferred income tax liability and an overstatement of retained earnings, and therefore equity, for each of the impacted periods. This error affected the Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity as presented in each of the quarters of 2012, 2011 and 2010, including the year-end consolidated financial statements for 2011 and 2010. This resulted in an understatement of deferred income taxes and an overstatement of retained earnings for each of the impacted periods. In accordance with accounting guidance presented in ASC 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), the Company assessed the materiality of the error and concluded that it was not material to any of the Company’s previously issued financial statements taken as a whole. The Company has revised previously issued financial statements to correct the effect of this error. This revision did not affect the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows for any of these periods.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

1. Significant Accounting Policies

 

     First Nine Months Ended September 30, 2012  

In Thousands

   As
Previously
Reported
     Adjustment     As
Revised
 

Deferred income taxes

   $ 143,553       $ 1,831      $ 145,384   

Total liabilities

     1,175,369         1,831        1,177,200   

Retained earnings

     172,751         (1,831     170,920   

Total equity of Coca-Cola Bottling Co. Consolidated

     152,892         (1,831     151,061   

Total equity

     215,647         (1,831     213,816   

2. Seasonality of Business

Historically, operating results for the third quarter of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters versus the first and fourth quarters of the fiscal year. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

3. Piedmont Coca-Cola Bottling Partnership

On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont Coca-Cola Bottling Partnership (“Piedmont”) to distribute and market nonalcoholic beverages primarily in portions of North Carolina and South Carolina. The Company provides a portion of the nonalcoholic beverage products to Piedmont at cost and receives a fee for managing the operations of Piedmont pursuant to a management agreement. These intercompany transactions are eliminated in the consolidated financial statements.

Noncontrolling interest as of September 29, 2013, December 30, 2012 and September 30, 2012 represents the portion of Piedmont owned by The Coca-Cola Company. The Coca-Cola Company’s interest in Piedmont was 22.7% for all periods presented.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

4. Inventories

Inventories were summarized as follows:

 

In Thousands

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
 

Finished products

   $ 42,695       $ 36,445       $ 43,809   

Manufacturing materials

     8,594         11,019         10,014   

Plastic shells, plastic pallets and other inventories

     18,966         18,460         20,669   
  

 

 

    

 

 

    

 

 

 

Total inventories

   $ 70,255       $ 65,924       $ 74,492   
  

 

 

    

 

 

    

 

 

 

5. Property, Plant and Equipment

The principal categories and estimated useful lives of property, plant and equipment were as follows:

 

In Thousands

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
     Estimated
Useful Lives
 

Land

   $ 12,307       $ 12,442       $ 12,443      

Buildings

     113,032         118,556         118,096         8-50 years   

Machinery and equipment

     143,518         140,963         134,808         5-20 years   

Transportation equipment

     159,012         163,586         157,006         4-20 years   

Furniture and fixtures

     42,403         41,580         40,126         3-10 years   

Cold drink dispensing equipment

     319,767         314,863         312,280         5-17 years   

Leasehold and land improvements

     72,632         71,956         77,425         5-20 years   

Software for internal use

     80,310         74,907         72,858         3-10 years   

Construction in progress

     3,266         8,264         3,674      
  

 

 

    

 

 

    

 

 

    

Total property, plant and equipment, at cost

     946,247         947,117         928,716      

Less: Accumulated depreciation and amortization

     651,100         639,650         636,948      
  

 

 

    

 

 

    

 

 

    

Property, plant and equipment, net

   $ 295,147       $ 307,467       $ 291,768      
  

 

 

    

 

 

    

 

 

    

Depreciation and amortization expense, which includes amortization expense for leased property under capital leases, was $14.8 million and $15.2 million in Q3 2013 and the third quarter of 2012 (“Q3 2012”), respectively. Depreciation and amortization expense, which includes amortization expense for leased property under capital leases, was $43.7 million and $46.1 million in the first nine months of 2013 (“YTD 2013”) and the first nine months of 2012 (“YTD 2012”), respectively.

The Company recognized a $1.2 million gain during the first quarter of 2013 (“Q1 2013”) on the sale of a distribution facility that was no longer in use. The gain on the sale of this property, plant and equipment was recorded in selling, delivery and administrative (S,D&A) expenses.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

5. Property, Plant and Equipment

 

The Company changed the useful lives of certain cold drink dispensing equipment in Q1 2013 to reflect the estimated remaining useful lives. The change in useful lives reduced depreciation expense in Q3 2013 and YTD 2013 by $0.4 million ($0.03 per basic and diluted Common Stock; $0.03 per basic and diluted Class B Common Stock) and $1.3 million ($0.09 per basic Common Stock and $0.08 per diluted Common Stock; $0.09 per basic Class B Common Stock and $0.08 per diluted Class B Common Stock), respectively.

6. Leased Property Under Capital Leases

Leased property under capital leases was summarized as follows:

 

In Thousands

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
     Estimated
Useful Lives
 

Leased property under capital leases

   $ 94,629       $ 94,180       $ 94,180         3-20 years   

Less: Accumulated amortization

     44,417         40,030         38,579      
  

 

 

    

 

 

    

 

 

    

Leased property under capital leases, net

   $ 50,212       $ 54,150       $ 55,601      
  

 

 

    

 

 

    

 

 

    

As of September 29, 2013, real estate represented $49.6 million of the leased property under capital leases, net and $33.4 million of this real estate is leased from related parties as described in Note 19 to the consolidated financial statements.

The Company’s outstanding obligations for capital leases were $66.1 million, $69.6 million and $70.8 million as of September 29, 2013, December 30, 2012 and September 30, 2012, respectively.

7. Franchise Rights and Goodwill

There were no changes in the carrying amounts of franchise rights and goodwill in the periods presented. The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During YTD 2013, the Company did not experience any triggering events or changes in circumstances that indicated the carrying amounts of the Company’s franchise rights or goodwill exceeded fair values. As such, the Company has not recognized any impairments of franchise rights or goodwill.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

8. Other Identifiable Intangible Assets

Other identifiable intangible assets were summarized as follows:

 

In Thousands

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
     Estimated
Useful Lives
 

Other identifiable intangible assets

   $ 8,547       $ 8,557       $ 8,557         20 years   

Less: Accumulated amortization

     4,783         4,534         4,430      
  

 

 

    

 

 

    

 

 

    

Other identifiable intangible assets, net

   $ 3,764       $ 4,023       $ 4,127      
  

 

 

    

 

 

    

 

 

    

Other identifiable intangible assets primarily represent customer relationships and distribution rights and are amortized on a straight line basis.

9. Other Accrued Liabilities

Other accrued liabilities were summarized as follows:

 

In Thousands

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
 

Accrued marketing costs

   $ 12,463       $ 12,506       $ 12,918   

Accrued insurance costs

     21,571         21,458         21,629   

Accrued taxes (other than income taxes)

     4,192         1,910         1,827   

Accrued income taxes

     0         0         5,500   

Employee benefit plan accruals

     16,754         16,988         17,294   

Checks and transfers yet to be presented for payment from zero balance cash accounts

     9,999         11,962         9,491   

All other accrued liabilities

     8,879         10,289         8,241   
  

 

 

    

 

 

    

 

 

 

Total other accrued liabilities

   $ 73,858       $ 75,113       $ 76,900   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

10. Debt

Debt was summarized as follows:

 

In Thousands

   Maturity      Interest
Rate
    Interest
Paid
     Sept. 29,
2013
    Dec. 30,
2012
    Sept. 30,
2012
 

Revolving credit facility

     2016         Variable        Varies       $ 20,000      $ 30,000      $ 0   

Line of credit

     2013         Variable        Varies         20,000        20,000        0   

Senior Notes

     2012         5.00     Semi-annually         0        0        150,000   

Senior Notes

     2015         5.30     Semi-annually         100,000        100,000        100,000   

Senior Notes

     2016         5.00     Semi-annually         164,757        164,757        164,757   

Senior Notes

     2019         7.00     Semi-annually         110,000        110,000        110,000   

Unamortized discount on Senior Notes

     2019              (1,237     (1,371     (1,413
          

 

 

   

 

 

   

 

 

 
             413,520        423,386        523,344   

Less: Current portion of debt

             20,000        20,000        120,000   
          

 

 

   

 

 

   

 

 

 

Long-term debt

           $ 393,520      $ 403,386      $ 403,344   
          

 

 

   

 

 

   

 

 

 

On September 21, 2011, the Company entered into a $200 million five-year unsecured revolving credit agreement (“$200 million facility”) replacing the Company’s previous $200 million five-year unsecured revolving credit facility. The $200 million facility has a scheduled maturity date of September 21, 2016 and up to $25 million is available for the issuance of letters of credit. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an interest rate spread, dependent on the Company’s credit rating at the time of borrowing. The Company must pay an annual facility fee of .175% of the lenders’ aggregate commitments under the facility. The $200 million facility contains two financial covenants: a cash flow/fixed charges ratio (“fixed charges coverage ratio”) and a funded indebtedness/cash flow ratio (“operating cash flow ratio”), each as defined in the credit agreement. The fixed charges coverage ratio requires the Company to maintain a consolidated cash flow to fixed charges ratio of 1.5 to 1.0 or higher. The operating cash flow ratio requires the Company to maintain a debt to operating cash flow ratio of 6.0 to 1.0 or lower. The Company is currently in compliance with these covenants. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

10. Debt

 

On September 4, 2013, the Company entered into an amendment to its $200 million facility. The amendment clarified that the non-cash charge to be incurred by the Company in the fourth quarter of 2013 (“Q4 2013”) as a result of the Company’s limited-time offer of a lump sum distribution of pension benefits to certain pension plan participants will be excluded from the calculation of the financial covenants described above to the extent that the non-cash charge is recognized on or before December 31, 2013 and does not exceed $12.0 million. See Note 18 to the consolidated financial statements for additional information on the limited-time pension distribution.

On September 29, 2013, the Company had $20.0 million of outstanding borrowings on the $200 million facility and had $180.0 million available to meet its cash requirements. On December 30, 2012, the Company had $30.0 million of outstanding borrowings on the $200 million facility. On September 30, 2012, the Company had no outstanding borrowings on the $200 million facility.

On February 10, 2010, the Company entered into an agreement for an uncommitted line of credit. Under this agreement, which is still in place, the Company may borrow up to a total of $20 million for periods of 7 days, 30 days, 60 days or 90 days at the discretion of the participating bank. On both September 29, 2013 and December 30, 2012, the Company had $20.0 million outstanding under the uncommitted line of credit at a weighted average interest rate of 0.93% and 0.94%, respectively. On September 30, 2012, the Company had no outstanding borrowings under the uncommitted line of credit.

The Company used a combination of available cash on hand, borrowings on the uncommitted line of credit and borrowings under the $200 million facility to repay $150 million of the Company’s senior notes that matured in November 2012.

As of September 29, 2013, December 30, 2012 and September 30, 2012, the Company had a weighted average interest rate of 6.1%, 5.9% and 6.1%, respectively, for its outstanding debt and capital lease obligations. The Company’s overall weighted average interest rate on its debt and capital lease obligations was 5.8% for YTD 2013 compared to 6.1% for YTD 2012. As of September 29, 2013, $40.0 million of the Company’s debt and capital lease obligations of $479.6 million were subject to changes in short-term interest rates.

The Company’s public debt is not subject to financial covenants but does limit the incurrence of certain liens and encumbrances as well as the incurrence of indebtedness by the Company’s subsidiaries in excess of certain amounts.

All of the outstanding long-term debt has been issued by the Company with none being issued by any of the Company’s subsidiaries. There are no guarantees of the Company’s debt.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Derivative Financial Instruments

Interest

The Company uses derivatives from time to time to partially manage the Company’s exposure to changes in interest rates on outstanding debt instruments.

The Company had no interest rate derivative contracts outstanding at September 29, 2013, December 30, 2012 and September 30, 2012.

Commodities

The Company is subject to the risk of increased costs arising from adverse changes in certain commodity prices. In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivative instruments. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recorded at fair value as either assets or liabilities in the Company’s consolidated balance sheets. These derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage commodity price risk. Derivative instruments are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. Settlements of derivative agreements are included in cash flows from operating activities on the Company’s consolidated statements of cash flows.

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company is exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these parties.

The Company periodically uses derivative instruments to hedge part or all of its requirements for diesel fuel and aluminum. In Q3 2012, the Company entered into agreements to hedge a portion of the Company’s 2013 aluminum purchases.

The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. The Company did not have any offsetting derivative transactions with its counterparties on December 30, 2012 and September 30, 2012. Accordingly, the gross amounts of derivative assets are recognized in prepaid expenses and other current assets in the consolidated balance sheet at December 30, 2012 and September 30, 2012. The Company did not have any outstanding derivative transactions at September 29, 2013.

The following summarizes Q3 2013 and Q3 2012 pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification, either as cost of sales or S,D&A expenses, of such changes in the consolidated statements of operations.

 

          Third Quarter  

In Thousands

   Classification of Gain (Loss)    2013      2012  

Commodity hedges

   Cost of sales    $ 0       $ 1,037   
     

 

 

    

 

 

 

Total

      $ 0       $ 1,037   
     

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Derivative Financial Instruments

 

The following summarizes YTD 2013 and YTD 2012 pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification, either as cost of sales or S,D&A expenses, of such changes in the consolidated statements of operations.

 

          First Nine Months  

In Thousands

   Classification of Gain (Loss)    2013     2012  

Commodity hedges

   Cost of sales    $ (500   $ 1,037   
     

 

 

   

 

 

 

Total

      $ (500   $ 1,037   
     

 

 

   

 

 

 

The following table summarizes the fair values and classification in the consolidated balance sheets of derivative instruments held by the Company:

 

In Thousands

  

Balance Sheet Classification

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
 

Commodity hedges at fair market value

   Prepaid expenses and other current assets    $ 0       $ 500       $ 1,037   

Unamortized cost of commodity hedging agreements

   Prepaid expenses and other current assets      0         562         562   
     

 

 

    

 

 

    

 

 

 

Total

      $ 0       $ 1,062       $ 1,599   
     

 

 

    

 

 

    

 

 

 

12. Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments:

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable

The fair values of cash and cash equivalents, accounts receivable and accounts payable approximate carrying values due to the short maturity of these items.

Public Debt Securities

The fair values of the Company's public debt securities are based on estimated current market prices.

Non-Public Variable Rate Debt

The carrying amounts of the Company's variable rate borrowings approximate their fair values due to variable interest rates with short reset periods.

Deferred Compensation Plan Assets/Liabilities

The fair values of deferred compensation plan assets and liabilities, which are held in mutual funds, are based upon the quoted market value of the securities held within the mutual funds.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

12. Fair Value of Financial Instruments

 

Derivative Financial Instruments

The fair values for the Company's commodity hedging agreements are based on current settlement values at each balance sheet date. The fair values of the commodity hedging agreements at each balance sheet date represent the estimated amounts the Company would have received or paid upon termination of these agreements. Credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair value of derivative financial instruments.

The carrying amounts and fair values of the Company's debt, deferred compensation plan assets and liabilities, and derivative financial instruments were as follows:

 

     Sept. 29, 2013     Dec. 30, 2012     Sept. 30, 2012  

In Thousands

   Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Public debt securities

   $ (373,520   $ (411,197   $ (373,386   $ (426,050   $ (523,344   $ (577,775

Deferred compensation plan assets

     15,875        15,875        13,011        13,011        12,854        12,854   

Deferred compensation plan liabilities

     (15,875     (15,875     (13,011     (13,011     (12,854     (12,854

Commodity hedging agreements

     0        0        500        500        1,037        1,037   

Non-public variable rate debt

     (40,000     (40,000     (50,000     (50,000     0        0   

GAAP requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The fair value estimates of the Company’s debt are classified as Level 2. Public debt securities are valued using quoted market prices of the debt or debt with similar characteristics.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

12. Fair Value of Financial Instruments

 

The following table summarizes, by assets and liabilities, the valuation of the Company’s deferred compensation plan and commodity hedging agreements:

 

     Sept. 29, 2013      Dec. 30, 2012      Sept. 30, 2012  

In Thousands

   Level 1      Level 2      Level 1      Level 2      Level 1      Level 2  

Assets

                 

Deferred compensation plan assets

   $ 15,875          $ 13,011          $ 12,854      

Commodity hedging agreements

      $ 0          $ 500          $ 1,037   

Liabilities

                 

Deferred compensation plan liabilities

     15,875            13,011            12,854      

The Company maintains a non-qualified deferred compensation plan for certain executives and other highly compensated employees. The investment assets are held in mutual funds. The fair value of the mutual funds is based on the quoted market value of the securities held within the funds (Level 1). The related deferred compensation liability represents the fair value of the investment assets.

The fair values of the Company’s commodity hedging agreements are based upon rates from public commodity exchanges that are observable and quoted periodically over the full term of the agreement and are considered Level 2 items.

The Company does not have Level 3 assets or liabilities. Also, there were no transfers of assets or liabilities between Level 1 and Level 2 for YTD 2013 and YTD 2012.

13. Other Liabilities

Other liabilities were summarized as follows:

 

In Thousands

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
 

Accruals for executive benefit plans

   $ 106,370       $ 101,220       $ 99,568   

Other

     16,838         17,083         17,020   
  

 

 

    

 

 

    

 

 

 

Total other liabilities

   $ 123,208       $ 118,303       $ 116,588   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

14. Commitments and Contingencies

The Company is a member of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative from which it is obligated to purchase 17.5 million cases of finished product on an annual basis through May 2014. The Company is also a member of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative from which it is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. See Note 19 to the consolidated financial statements for additional information concerning SAC and Southeastern.

The Company guarantees a portion of SAC’s and Southeastern’s debt. The amounts guaranteed were $33.5 million, $35.9 million and $36.6 million as of September 29, 2013, December 30, 2012 and September 30, 2012, respectively. The Company holds no assets as collateral against these guarantees, the fair value of which is immaterial. The guarantees relate to the debt of SAC and Southeastern, which resulted primarily from the purchase of production equipment and facilities. These guarantees expire at various dates through 2023. The members of both cooperatives consist solely of Coca-Cola bottlers. The Company does not anticipate either of these cooperatives will fail to fulfill its commitments. The Company further believes each of these cooperatives has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantees. In the event either of these cooperatives fails to fulfill its commitments under the related debt, the Company would be responsible for payments to the lenders up to the level of the guarantees. If these cooperatives had borrowed up to their aggregate borrowing capacity, the Company’s maximum exposure under these guarantees on September 29, 2013 would have been $23.9 million for SAC and $25.3 million for Southeastern and the Company’s maximum total exposure, including its equity investment, would have been $28.0 million for SAC and $46.1 million for Southeastern.

The Company has been purchasing plastic bottles from Southeastern and finished products from SAC for more than ten years and has never had to pay against these guarantees.

The Company has an equity ownership in each of the entities in addition to the guarantees of certain indebtedness and records its investment in each under the equity method. As of September 29, 2013, SAC had total assets of approximately $41 million and total debt of approximately $22 million. SAC had total revenues for YTD 2013 of approximately $138 million. As of September 29, 2013, Southeastern had total assets of approximately $348 million and total debt of approximately $139 million. Southeastern had total revenue for YTD 2013 of approximately $525 million.

The Company has standby letters of credit, primarily related to its property and casualty insurance programs. On September 29, 2013, these letters of credit totaled $23.1 million. The Company was required to maintain $4.5 million of restricted cash for letters of credit beginning in the second quarter of 2009, which was reduced to $3.5 million in the second quarter of 2010 and to $3.0 million in the second quarter of 2011. The requirement to maintain restricted cash for these letters of credit was eliminated in the first quarter of 2012.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

14. Commitments and Contingencies

 

The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. The future payments related to these contractual arrangements as of September 29, 2013 amounted to $40.7 million and expire at various dates through 2022.

The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes the ultimate disposition of these matters will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.

The Company is subject to audit by tax authorities in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolved with the tax authorities or potentially through the courts. Management believes the Company has adequately provided for any assessments that are likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the consolidated financial statements.

15. Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for YTD 2013 and YTD 2012 was 28.8% and 40.5%, respectively. The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, for YTD 2013 and YTD 2012 was 31.1% and 43.1%, respectively.

The following table provides a reconciliation of income tax expense at the statutory federal rate to actual income tax expense.

 

     First Nine Months  

In Thousands

   2013     2012  

Statutory expense

   $ 17,653      $ 16,603   

State income taxes, net of federal benefit

     2,093        2,052   

Valuation allowance change

     (1     1,172   

Noncontrolling interest – Piedmont

     (1,348     (1,324

Manufacturing deduction benefit

     (1,678     (1,412

Meals and entertainment

     1,070        1,024   

Adjustment for uncertain tax positions

     (223     378   

Adjustment for state tax legislation

     (2,261     0   

Other, net

     (755     735   
  

 

 

   

 

 

 

Income tax expense

   $ 14,550      $ 19,228   
  

 

 

   

 

 

 

 

20


Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

15. Income Taxes

 

As of September 29, 2013, the Company had $2.8 million of uncertain tax positions, including accrued interest, all of which would affect the Company’s effective tax rate if recognized. As of December 30, 2012, the Company had $5.5 million of uncertain tax positions, including accrued interest, of which $3.0 million would affect the Company’s effective tax rate if recognized. As of September 30, 2012, the Company had $5.1 million of uncertain tax positions, including accrued interest, of which $2.6 million would affect the Company’s effective tax rate if recognized. While it is expected that the amount of uncertain tax positions may change in the next 12 months, the Company does not expect any change to have a material impact on the consolidated financial statements.

In Q3 2013, the Company reduced its liability for uncertain tax positions by $3.4 million, of which only $0.9 million was a decrease to income tax expense. In Q3 2012, the Company reduced its liability for uncertain tax positions by $0.2 million all of which was a decrease to income tax expense. The reduction to the liability for uncertain tax positions was primarily due to the lapse of the applicable statute of limitations.

The Company recognizes potential interest and penalties related to uncertain tax positions in income tax expense. As of September 29, 2013, December 30, 2012, and September 30, 2012, the Company had $0.2 million, $0.5 million and $0.5 million, respectively, of accrued interest related to uncertain tax positions. Income tax expense included an interest credit of $0.3 million in YTD 2013 and interest expense of $0.1 million in YTD 2012.

The American Taxpayer Relief Act (“Act”) was signed into law on January 2, 2013. The Act approved a retroactive extension of certain favorable business and energy tax provisions that had expired at the end of 2011 which are applicable to the Company. The Company recorded a reduction to income tax expense totaling $0.4 million related to the Act in YTD 2013, which is included in the other, net line of the reconciliation of income tax expense table.

During Q3 2013, state tax legislation was enacted that reduces the corporate tax rate in that state from 6.9% to 6.0% effective January 1, 2014. A further reduction to the corporate tax rate from 6.0% to 5.0% will become effective January 1, 2015. This reduction in the corporate tax rate decreases the Company’s income tax expense by approximately $2.3 million due to the impact on the Company’s net deferred tax liabilities. The total impact of this legislation was recorded in Q3 2013.

In YTD 2012, the Company increased its valuation allowance by $1.2 million. The net effect of this adjustment was an increase to income tax expense. The increase to the valuation allowance was primarily due to the Company’s assessment of its ability to use certain net operating loss carryforwards.

Tax years from 2010 remain open to examination by the Internal Revenue Service, and various tax years from 1995 remain open to examination by certain state tax jurisdictions to which the Company is subject due to loss carryforwards.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

15. Income Taxes

 

On September 13, 2013, the Internal Revenue Service and the United States Treasury Department issued final tax regulations that provide guidance regarding the deduction and capitalization of expenditures related to tangible property. The Company does not expect the final tax regulations to have a material impact on the consolidated financial statements.

The Company’s income tax assets and liabilities are subject to adjustment in future periods based on the Company’s ongoing evaluations of such assets and liabilities and new information that becomes available to the Company.

16. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of adjustments relative to the Company’s pension and postretirement medical benefit plans and foreign currency translation adjustments required for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.

A summary of accumulated other comprehensive loss for Q3 2013 and Q3 2012 is as follows:

 

In Thousands

   June 30,
2013
    Pre-tax
Activity
    Tax
Effect
    Sept. 29,
2013
 

Net pension activity:

        

Actuarial loss

   $ (75,388   $ 837      $ (323   $ (74,874

Prior service costs

     (28     4        (2     (26

Net postretirement benefits activity:

        

Actuarial loss

     (21,574     700        (270     (21,144

Prior service costs

     3,874        (377     146        3,643   

Foreign currency translation adjustment

     6        (1     0        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (93,110   $ 1,163      $ (449   $ (92,396
  

 

 

   

 

 

   

 

 

   

 

 

 

 

In Thousands

   July 1,
2012
    Pre-tax
Activity
    Tax
Effect
    Sept. 30,
2012
 

Net pension activity:

        

Actuarial loss

   $ (63,948   $ 693      $ (272   $ (63,527

Prior service costs

     (38     5        (2     (35

Net postretirement benefits activity:

        

Actuarial loss

     (20,501     613        (241     (20,129

Prior service costs

     4,792        (379     148        4,561   

Foreign currency translation adjustment

     6        0        0        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (79,689   $ 932      $ (367   $ (79,124
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

16. Accumulated Other Comprehensive Loss

 

A summary of accumulated other comprehensive loss for YTD 2013 and YTD 2012 is as follows:

 

In Thousands

   Dec. 30,
2012
    Pre-tax
Activity
    Tax
Effect
    Sept. 29,
2013
 

Net pension activity:

        

Actuarial loss

   $ (76,407   $ 2,513      $ (980   $ (74,874

Prior service costs

     (33     12        (5     (26

Net postretirement benefits activity:

        

Actuarial loss

     (22,425     2,100        (819     (21,144

Prior service costs

     4,334        (1,133     442        3,643   

Foreign currency translation adjustment

     5        0        0        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (94,526   $ 3,492      $ (1,362   $ (92,396
  

 

 

   

 

 

   

 

 

   

 

 

 

 

In Thousands

   Jan. 1,
2012
    Pre-tax
Activity
    Tax
Effect
    Sept. 30,
2012
 

Net pension activity:

        

Actuarial loss

   $ (64,789   $ 2,080      $ (818   $ (63,527

Prior service costs

     (44     15        (6     (35

Net postretirement benefits activity:

        

Actuarial loss

     (21,244     1,838        (723     (20,129

Prior service costs

     5,251        (1,137     447        4,561   

Foreign currency translation adjustment

     6        0        0        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (80,820   $ 2,796      $ (1,100   $ (79,124
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

16. Accumulated Other Comprehensive Loss

 

A summary of the impact on the income statement line items is as follows:

 

In Thousands

   Net
Pension
Activity
     Net Postretirement
Benefits Activity
     Total  

Q3 2013

        

Cost of sales

   $ 76       $ 42       $ 118   

S,D&A expenses

     765         281         1,046   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     841         323         1,164   

Income tax expense

     325         124         449   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 516       $ 199       $ 715   
  

 

 

    

 

 

    

 

 

 

Q3 2012

        

Cost of sales

   $ 77       $ 28       $ 105   

S,D&A expenses

     621         206         827   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     698         234         932   

Income tax expense

     274         93         367   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 424       $ 141       $ 565   
  

 

 

    

 

 

    

 

 

 

YTD 2013

        

Cost of sales

   $ 227       $ 116       $ 343   

S,D&A expenses

     2,298         851         3,149   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     2,525         967         3,492   

Income tax expense

     985         377         1,362   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 1,540       $ 590       $ 2,130   
  

 

 

    

 

 

    

 

 

 

YTD 2012

        

Cost of sales

   $ 230       $ 84       $ 314   

S,D&A expenses

     1,865         617         2,482   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     2,095         701         2,796   

Income tax expense

     824         276         1,100   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 1,271       $ 425       $ 1,696   
  

 

 

    

 

 

    

 

 

 

17. Capital Transactions

The Company has two classes of common stock outstanding, Common Stock and Class B Common Stock. The Common Stock is traded on the NASDAQ Global Select Marketsm under the symbol COKE. There is no established public trading market for the Class B Common Stock. Shares of the Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock at any time at the option of the holders of Class B Common Stock.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

17. Capital Transactions

 

No cash dividend or dividend of property or stock other than stock of the Company, as specifically described in the Company’s certificate of incorporation, may be declared and paid on the Class B Common Stock unless an equal or greater dividend is declared and paid on the Common Stock. During YTD 2013 and YTD 2012, dividends of $.75 per share were declared and paid on both the Common Stock and Class B Common Stock.

Each share of Common Stock is entitled to one vote per share and each share of Class B Common Stock is entitled to 20 votes per share at all meetings of stockholders. Except as otherwise required by law, holders of the Common Stock and Class B Common Stock vote together as a single class on all matters brought before the Company’s stockholders. In the event of liquidation, there is no preference between the two classes of common stock.

On April 29, 2008, the stockholders of the Company approved a Performance Unit Award Agreement for J. Frank Harrison, III, the Company’s Chairman of the Board of Directors and Chief Executive Officer, consisting of 400,000 performance units (“Units”). Each Unit represents the right to receive one share of the Company’s Class B Common Stock, subject to certain terms and conditions. The Units are subject to vesting in annual increments over a ten-year period starting in fiscal year 2009. The number of Units that vest each year equals the product of 40,000 multiplied by the overall goal achievement factor (not to exceed 100%) under the Company’s Annual Bonus Plan.

Each annual 40,000 Unit tranche has an independent performance requirement as it is not established until the Company’s Annual Bonus Plan targets are approved each year by the Compensation Committee of the Board of Directors. As a result, each 40,000 Unit tranche is considered to have its own service inception date, grant-date and requisite service period. The Company’s Annual Bonus Plan targets, which establish the performance requirements for the Performance Unit Award Agreement, are approved by the Compensation Committee of the Board of Directors in the first quarter of each year. The Performance Unit Award Agreement does not entitle Mr. Harrison, III to participate in dividends or voting rights until each installment has vested and the shares are issued. Mr. Harrison, III may satisfy tax withholding requirements in whole or in part by requiring the Company to settle in cash such number of Units otherwise payable in Class B Common Stock to meet the maximum statutory tax withholding requirements.

On March 5, 2013 and March 6, 2012, the Compensation Committee determined that 40,000 shares of the Company’s Class B Common Stock should be issued in each year pursuant to a Performance Unit Award Agreement to J. Frank Harrison, III, in connection with his services in 2012 and 2011, respectively, as Chairman of the Board of Directors and Chief Executive Officer of the Company. As permitted under the terms of the Performance Unit Award Agreement, 19,880 and 17,680 of such shares were settled in cash in 2013 and 2012, respectively, to satisfy tax withholding obligations in connection with the vesting of the performance units.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

17. Capital Transactions

 

The increase in the total number of shares outstanding in YTD 2013 and YTD 2012 was due to the issuance of the 20,120 and 22,320 shares, respectively, of Class B Common Stock related to the Performance Unit Award Agreement in each year.

Compensation expense for the Performance Unit Award Agreement recognized in YTD 2013 was $1.9 million, which was based upon a common stock share price of $63.36 on September 27, 2013. Compensation expense for the Performance Unit Award Agreement recognized in YTD 2012 was $2.0 million, which was based upon a common stock share price of $68.10 on September 28, 2012.

18. Benefit Plans

Pension Plans

All benefits under the primary Company-sponsored pension plan were frozen as of June 30, 2006 and no benefits have accrued to participants after this date. The Company also sponsors a pension plan for certain employees under collective bargaining agreements. Benefits under the pension plan for collectively bargained employees are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarial determined amounts and are limited to the amounts currently deductible for income tax purposes.

The components of net periodic pension cost were as follows:

 

     Third Quarter     First Nine Months  

In Thousands

   2013     2012     2013     2012  

Service cost

   $ 32      $ 28      $ 96      $ 83   

Interest cost

     3,086        3,124        9,258        9,371   

Expected return on plan assets

     (3,546     (2,973     (10,640     (8,918

Amortization of prior service cost

     4        5        12        15   

Recognized net actuarial loss

     837        693        2,513        2,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 413      $ 877      $ 1,239      $ 2,631   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $0.1 million to the Company-sponsored pension plans during YTD 2013. Anticipated contributions for the two Company-sponsored pension plans will be in the range of $2 million to $3 million during the remainder of 2013.

In Q3 2013, the Company announced a limited Lump Sum Window distribution of present valued pension benefits to certain terminated plan participants meeting certain criteria. The benefit election window was open during Q3 2013 and benefit distributions will be made during Q4 2013. Based upon the number of plan participants electing to take a distribution, and the total amount of such distributions, the Company will incur a non-cash charge of approximately $12 million in Q4 2013 when the distributions are made in accordance with the relevant accounting standards. The reduction in the number of plan participants and the reduction of plan assets will reduce the cost of administering the pension plan in the future.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

18. Benefit Plans

 

Postretirement Benefits

The Company provides postretirement benefits for a portion of its current employees. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service. The Company does not pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.

The components of net periodic postretirement benefit cost were as follows:

 

     Third Quarter     First Nine Months  

In Thousands

   2013     2012     2013     2012  

Service cost

   $ 412      $ 316      $ 1,238      $ 948   

Interest cost

     715        781        2,145        2,344   

Recognized net actuarial loss

     700        613        2,100        1,838   

Amortization of prior service cost

     (377     (379     (1,133     (1,137
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement benefit cost

   $ 1,450      $ 1,331      $ 4,350      $ 3,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

401(k) Savings Plan

The Company provides a 401(k) Savings Plan for substantially all of its full-time employees who are not part of collective bargaining agreements.

During 2012, the Company changed the Company’s 401(k) Saving Plan matching contribution from fixed to discretionary, maintaining the option to make matching contributions for eligible participants of up to 5% based on the Company’s financial results for 2012 and future years. The 5% matching contribution was accrued during 2012. Based on the Company’s financial results, the Company decided to match 5% of eligible participants’ contributions for the entire year of 2012. The Company made this contribution payment for 2012 in Q1 2013. The Company has accrued the 5% discretionary matching contribution for YTD 2013, as this is the best estimate of the Company’s probable obligation. The total expense for this benefit was $5.8 million and $6.4 million in YTD 2013 and YTD 2012, respectively.

Multi-Employer Benefits

The Company currently has a liability to a multi-employer pension plan related to the Company’s exit from the plan in 2008. As of September 29, 2013, the Company had a liability of $9.4 million recorded. The Company is required to make payments of approximately $1 million each year through 2028 to this multi-employer pension plan.

 

27


Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

19. Related Party Transactions

The Company’s business consists primarily of the production, marketing and distribution of nonalcoholic beverages of The Coca-Cola Company, which is the sole owner of the secret formulas under which the primary components (either concentrate or syrup) of its soft drink products are manufactured. As of September 29, 2013, The Coca-Cola Company had a 34.8% interest in the Company’s total outstanding Common Stock, representing 5.0% of the total voting power of the Company’s Common Stock and Class B Common Stock voting together as a single class. The Coca-Cola Company does not own any shares of Class B Common Stock of the Company.

The following table summarizes the significant transactions between the Company and The Coca-Cola Company:

 

     First Nine Months  

In Millions

   2013      2012  

Payments by the Company for concentrate, syrup, sweetener and other purchases

   $ 309.9       $ 313.9   

Marketing funding support payments to the Company

     32.6         33.1   
  

 

 

    

 

 

 

Payments by the Company net of marketing funding support

   $ 277.3       $ 280.8   

Payments by the Company for customer marketing programs

   $ 43.2       $ 43.1   

Payments by the Company for cold drink equipment parts

     6.9         7.1   

Fountain delivery and equipment repair fees paid to the Company

     9.4         9.1   

Presence marketing funding support provided by The Coca-Cola Company on the Company’s behalf

     4.0         2.6   

Payments to the Company to facilitate the distribution of certain brands and packages to other Coca-Cola bottlers

     3.0         2.1   
  

 

 

    

 

 

 

The Company has a production arrangement with Coca-Cola Refreshments USA Inc. (“CCR”) to buy and sell finished products at cost. CCR is a wholly-owned subsidiary of The Coca-Cola Company. Sales to CCR under this arrangement were $45.4 million and $49.2 million in YTD 2013 and YTD 2012, respectively. Purchases from CCR under this arrangement were $34.9 million and $23.3 million in YTD 2013 and YTD 2012, respectively. In addition, CCR distributes one of the Company’s own brands (Tum-E Yummies). Total sales to CCR for this brand were $19.3 million and $18.3 million in YTD 2013 and YTD 2012, respectively.

Along with all other Coca-Cola bottlers in the United States, the Company is a member in Coca-Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”), which was formed in 2003 for the purposes of facilitating various procurement functions and distributing certain specified beverage products of The Coca-Cola Company with the intention of enhancing the efficiency and competitiveness of the Coca-Cola bottling system in the United States. CCBSS negotiates the procurement for the majority of the Company’s raw materials (excluding concentrate). The Company pays an administrative fee to CCBSS for its services. Administrative fees to CCBSS for its services were $0.3 million in both YTD 2013 and YTD 2012. Amounts due from CCBSS for rebates on raw materials were $5.0 million, $3.8 million and $4.0 million as of September 29, 2013, December 30, 2012 and September 30, 2012, respectively. CCR is also a member of CCBSS.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

19. Related Party Transactions

 

The Company is a member of SAC, a manufacturing cooperative. SAC sells finished products to the Company and Piedmont at cost. Purchases from SAC by the Company and Piedmont for finished products were $104.7 million and $106.9 million in YTD 2013 and YTD 2012, respectively. The Company also manages the operations of SAC pursuant to a management agreement. Management fees earned from SAC were $1.2 million and $1.1 million in YTD 2013 and YTD 2012, respectively. The Company has also guaranteed a portion of debt for SAC. Such guarantee amounted to $21.9 million as of September 29, 2013. The Company’s equity investment in SAC was $4.1 million as of September 29, 2013, December 30, 2012 and September 30, 2012 and was recorded in other assets on the Company’s consolidated balance sheets.

The Company is a shareholder in two entities from which it purchases a majority of its requirements for plastic bottles. Net purchases from these entities were $60.4 million in YTD 2013 and $63.3 million in YTD 2012. In conjunction with the Company’s participation in one of these entities, Southeastern, the Company has guaranteed a portion of the entity’s debt. Such guarantee amounted to $11.6 million as of September 29, 2013. The Company’s equity investment in Southeastern was $20.8 million, $19.5 million and $19.5 million as of September 29, 2013, December 30, 2012 and September 30, 2012, respectively, and was recorded in other assets on the Company’s consolidated balance sheets.

The Company holds no assets as collateral against SAC or Southeastern guarantees, the fair value of which is immaterial.

The Company monitors its investments in cooperatives and would be required to write down its investment if an impairment is identified and the Company determined it to be other than temporary. No impairment of the Company’s investments in cooperatives has been identified as of September 29, 2013 nor was there any impairment in 2012.

The Company leases from Harrison Limited Partnership One (“HLP”) the Snyder Production Center (“SPC”) and an adjacent sales facility, which are located in Charlotte, North Carolina. HLP is directly and indirectly owned by trusts of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, and Deborah H. Everhart, a director of the Company, are trustees and beneficiaries. Morgan H. Everett, a director of the Company, is a permissible, discretionary beneficiary of the trusts that directly or indirectly own HLP. The lease expires on December 31, 2020. The principal balance outstanding under this capital lease as of September 29, 2013, December 30, 2012 and September 30, 2012 was $22.7 million, $24.1 million and $24.6 million, respectively. Rental payments related to this lease were $2.7 million and $2.6 million in YTD 2013 and YTD 2012, respectively.

The Company leases from Beacon Investment Corporation (“Beacon”) the Company’s headquarters office facility and an adjacent office facility. The lease expires on December 31, 2021. Beacon’s sole shareholder is J. Frank Harrison, III. The principal balance outstanding under this capital lease as of September 29, 2013, December 30, 2012 and September 30, 2012 was $23.5 million, $25.1 million and $25.6 million, respectively. Rental payments related to this lease were $3.1 million and $3.0 million in YTD 2013 and YTD 2012, respectively.

 

29


Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

20. Net Sales by Product Category

Net sales by product category were as follows:

 

     Third Quarter      First Nine Months  

In Thousands

   2013      2012      2013      2012  

Bottle/can sales:

           

Sparkling beverages (including energy products)

   $ 273,905       $ 271,279       $ 798,271       $ 809,640   

Still beverages

     73,336         68,256         196,352         186,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bottle/can sales

     347,241         339,535         994,623         995,707   

Other sales:

           

Sales to other Coca-Cola bottlers

     42,030         39,160         126,621         111,855   

Post-mix and other

     45,193         41,160         125,750         120,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other sales

     87,223         80,320         252,371         232,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 434,464       $ 419,855       $ 1,246,994       $ 1,227,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sparkling beverages are carbonated beverages as well as energy products while still beverages are noncarbonated beverages.

 

30


Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

21. Net Income Per Share

The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method:

 

     Third Quarter      First Nine Months  

In Thousands (Except Per Share Data)

   2013      2012      2013      2012  

Numerator for basic and diluted net income per Common Stock and Class B Common Stock share:

           

Net income attributable to Coca-Cola Bottling Co. Consolidated

   $ 16,169       $ 10,079       $ 32,260       $ 25,391   

Less dividends:

           

Common Stock

     1,785         1,785         5,356         5,356   

Class B Common Stock

     527         522         1,577         1,561   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total undistributed earnings

   $ 13,857       $ 7,772       $ 25,327       $ 18,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common Stock undistributed earnings – basic

   $ 10,698       $ 6,013       $ 19,563       $ 14,301   

Class B Common Stock undistributed earnings – basic

     3,159         1,759         5,764         4,173   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total undistributed earnings – basic

   $ 13,857       $ 7,772       $ 25,327       $ 18,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common Stock undistributed earnings – diluted

   $ 10,652       $ 5,987       $ 19,479       $ 14,239   

Class B Common Stock undistributed earnings – diluted

     3,205         1,785         5,848         4,235   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total undistributed earnings – diluted

   $ 13,857       $ 7,772       $ 25,327       $ 18,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for basic net income per Common Stock share:

           

Dividends on Common Stock

   $ 1,785       $ 1,785       $ 5,356       $ 5,356   

Common Stock undistributed earnings – basic

     10,698         6,013         19,563         14,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for basic net income per Common Stock share

   $ 12,483       $ 7,798       $ 24,919       $ 19,657   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for basic net income per Class B Common Stock share:

           

Dividends on Class B Common Stock

   $ 527       $ 522       $ 1,577       $ 1,561   

Class B Common Stock undistributed earnings – basic

     3,159         1,759         5,764         4,173   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for basic net income per Class B Common Stock share

   $ 3,686       $ 2,281       $ 7,341       $ 5,734   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

21. Net Income Per Share

 

     Third Quarter      First Nine Months  

In Thousands (Except Per Share Data)

   2013      2012      2013      2012  

Numerator for diluted net income per Common Stock share:

           

Dividends on Common Stock

   $ 1,785       $ 1,785       $ 5,356       $ 5,356   

Dividends on Class B Common Stock assumed converted to Common Stock

     527         522         1,577         1,561   

Common Stock undistributed earnings – diluted

     13,857         7,772         25,327         18,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for diluted net income per Common Stock share

   $ 16,169       $ 10,079       $ 32,260       $ 25,391   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for diluted net income per Class B Common Stock share:

           

Dividends on Class B Common Stock

   $ 527       $ 522       $ 1,577       $ 1,561   

Class B Common Stock undistributed earnings – diluted

     3,205         1,785         5,848         4,235   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for diluted net income per Class B Common Stock share

   $ 3,732       $ 2,307       $ 7,425       $ 5,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

21. Net Income Per Share

 

     Third Quarter      First Nine Months  

In Thousands (Except Per Share Data)

   2013      2012      2013      2012  

Denominator for basic net income per Common Stock and Class B Common Stock share:

           

Common Stock weighted average shares outstanding – basic

     7,141         7,141         7,141         7,141   

Class B Common Stock weighted average shares outstanding – basic

     2,109         2,089         2,104         2,084   

Denominator for diluted net income per Common Stock and Class B Common Stock share:

           

Common Stock weighted average shares outstanding – diluted (assumes conversion of Class B Common Stock to Common Stock)

     9,290         9,270         9,285         9,265   

Class B Common Stock weighted average shares outstanding – diluted

     2,149         2,129         2,144         2,124   

Basic net income per share:

           

Common Stock

   $ 1.75       $ 1.09       $ 3.49       $ 2.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Class B Common Stock

   $ 1.75       $ 1.09       $ 3.49       $ 2.75   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share:

           

Common Stock

   $ 1.74       $ 1.09       $ 3.47       $ 2.74   
  

 

 

    

 

 

    

 

 

    

 

 

 

Class B Common Stock

   $ 1.74       $ 1.08       $ 3.46       $ 2.73   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

NOTES TO TABLE

 

(1) For purposes of the diluted net income per share computation for Common Stock, all shares of Class B Common Stock are assumed to be converted; therefore, 100% of undistributed earnings is allocated to Common Stock.
(2) For purposes of the diluted net income per share computation for Class B Common Stock, weighted average shares of Class B Common Stock are assumed to be outstanding for the entire period and not converted.
(3) Denominator for diluted net income per share for Common Stock and Class B Common Stock includes the dilutive effect of shares relative to the Performance Unit Award.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

22. Risks and Uncertainties

Approximately 88% of the Company’s YTD 2013 bottle/can volume to retail customers are products of The Coca-Cola Company, which is the sole supplier of these products or of the concentrates or syrups required to manufacture these products. The remaining 12% of the Company’s YTD 2013 bottle/can volume to retail customers are products of other beverage companies or those owned by the Company. The Company has beverage agreements under which it has various requirements to meet. Failure to meet the requirements of these beverage agreements could result in the loss of distribution rights for the respective product.

The Company’s products are sold and distributed directly by its employees to retail stores and other outlets. During both YTD 2013 and YTD 2012, approximately 68% of the Company’s bottle/can volume to retail customers was sold for future consumption, while the remaining bottle/can volume to retail customers of approximately 32% was sold for immediate consumption. The Company’s largest customers, Wal-Mart Stores, Inc. and Food Lion, LLC, accounted for approximately 21% and 8%, respectively, of the Company’s total bottle/can volume to retail customers in YTD 2013; and accounted for approximately 22% and 8%, respectively, of the Company’s total bottle/can volume to retail customers in YTD 2012. Wal-Mart Stores, Inc. accounted for approximately 14% and 15% of the Company’s total net sales during YTD 2013 and YTD 2012, respectively. No other customer represented greater than 10% of the Company’s total net sales for YTD 2013 or YTD 2012.

The Company obtains all of its aluminum cans from two domestic suppliers. The Company currently obtains a majority of its plastic bottles from two domestic entities. See Note 14 and Note 19 to the consolidated financial statements for additional information.

The Company is exposed to price risk on such commodities as aluminum, corn and resin which affects the cost of raw materials used in the production of finished products. The Company both produces and procures these finished products. Examples of the raw materials affected are aluminum cans and plastic bottles used for packaging and high fructose corn syrup used as a product ingredient. Further, the Company is exposed to commodity price risk on crude oil which impacts the Company’s cost of fuel used in the movement and delivery of the Company’s products. The Company participates in commodity hedging and risk mitigation programs administered both by CCBSS and by the Company. In addition, there is no limit on the price The Coca-Cola Company and other beverage companies can charge for concentrate.

Certain liabilities of the Company are subject to risk due to changes in both long-term and short-term interest rates. These liabilities include floating rate debt, retirement benefit obligations and the Company’s pension liability.

Approximately 7% of the Company’s labor force is covered by collective bargaining agreements. One collective bargaining agreement covering approximately .4% of the Company’s employees expired during 2012 and the Company entered into a new agreement during 2012. One collective bargaining agreement covering approximately .3% of the Company’s employees expired during Q1 2013 and the Company entered into a new agreement in Q1 2013. One collective bargaining agreement covering approximately .4% of the Company’s employees will expire in Q4 2013.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

23. Supplemental Disclosures of Cash Flow Information

Changes in current assets and current liabilities affecting cash flows were as follows:

 

     First Nine Months  

In Thousands

   2013     2012  

Accounts receivable, trade, net

   $ (10,544   $ (5,638

Accounts receivable from The Coca-Cola Company

     (9,028     (11,137

Accounts receivable, other

     (1,650     2,291   

Inventories

     (4,331     (8,334

Prepaid expenses and other current assets

     802        1,405   

Accounts payable, trade

     7,085        7,120   

Accounts payable to The Coca-Cola Company

     15,533        7,881   

Other accrued liabilities

     (1,255     8,723   

Accrued compensation

     (6,298     (4,885

Accrued interest payable

     5,320        6,673   
  

 

 

   

 

 

 

(Increase) decrease in current assets less current liabilities

   $ (4,366   $ 4,099   
  

 

 

   

 

 

 

Non-cash activity

Additions to property, plant and equipment of $2.0 million and $2.2 million have been accrued but not paid and are recorded in accounts payable, trade as of September 29, 2013 and September 30, 2012, respectively.

24. New Accounting Pronouncements

Recently Adopted Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance that is intended to enhance current disclosures on offsetting financial assets and liabilities. The new guidance requires an entity to disclose both gross and net information about financial instruments eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new guidance are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued new guidance which establishes new requirements for disclosing reclassifications of items out of accumulated other comprehensive income. The new guidance requires a company to report the effect of significant reclassifications from accumulated other comprehensive income to the respective line items in net income or cross-reference to other disclosures for items not reclassified entirely to net income. The new guidance was effective for annual and interim periods beginning after December 15, 2012. The new guidance expands disclosure of other comprehensive income but does not change the manner in which items of other comprehensive income are accounted or the way in which net income or other comprehensive income is reported in the financial statements. The Company elected to report this information within the notes to the consolidated financial statements.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

24. New Accounting Pronouncements

 

Recently Issued Pronouncements

In July 2013, the FASB issued new guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The provisions of the new guidance are effective for fiscal years beginning after December 15, 2013 with early adoption permitted. The Company does not expect the requirements of this new guidance to have a material impact on the Company’s consolidated financial statements.

 

 

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

Revision of Prior Period Financial Statements

During the fourth quarter of 2012, Coca-Cola Bottling Co. Consolidated (“the Company”) identified an error in the treatment of a certain prior year deferred tax asset in the Consolidated Balance Sheets. This resulted in an understatement of the net noncurrent deferred income tax liability and an overstatement of retained earnings, and therefore equity, for each of the impacted periods. This error affected the Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity as presented in each of the quarters of 2012. The Company has revised prior period financial statements to correct this immaterial error. Refer to Note 1 Significant Accounting Policies – Revision of Prior Financial Statements for further details. This revision did not affect the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows for any of these periods. The discussion and analysis included herein is based on the financial results (and revised Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity) for the periods ended September 29, 2013, December 30, 2012 and September 30, 2012.

Introduction

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“M,D&A”) of Coca-Cola Bottling Co. Consolidated (the “Company”) should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to the consolidated financial statements. M,D&A includes the following sections:

 

   

Our Business and the Nonalcoholic Beverage Industry – a general description of the Company’s business and the nonalcoholic beverage industry.

 

   

Areas of Emphasis – a summary of the Company’s key priorities.

 

   

Overview of Operations and Financial Condition – a summary of key information and trends concerning the financial results for the third quarter of 2013 (“Q3 2013”) and the first nine months of 2013 (“YTD 2013”) and changes from the third quarter of 2012 (“Q3 2012”) and the first nine months of 2012 (“YTD 2012”).

 

   

Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements – a discussion of accounting policies that are most important to the portrayal of the Company’s financial condition and results of operations and that require critical judgments and estimates and the expected impact of new accounting pronouncements.

 

   

Results of Operations – an analysis of the Company’s results of operations for Q3 2013 and YTD 2013 compared to Q3 2012 and YTD 2012, respectively.

 

   

Financial Condition – an analysis of the Company’s financial condition as of the end of Q3 2013 compared to year-end 2012 and the end of Q3 2012 as presented in the consolidated financial statements.

 

   

Liquidity and Capital Resources – an analysis of capital resources, cash sources and uses, operating activities, investing activities, financing activities, off-balance sheet arrangements, aggregate contractual obligations and hedging activities.

 

   

Cautionary Information Regarding Forward-Looking Statements.

The consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries including Piedmont Coca-Cola Bottling Partnership (“Piedmont”). The noncontrolling interest primarily consists of The Coca-Cola Company’s interest in Piedmont, which was 22.7% for all periods presented.

 

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In Q3 2013, the Company recorded an out-of-period adjustment of $1.3 million for reimbursements received in the third quarter from brand companies for net price reductions to certain of our customers on their products that occurred in the previous two quarters. This out-of-period item did not have a material impact on the current or either of the previously reported periods.

In Q3 2013, the Company announced a limited Lump Sum Window distribution of present valued pension benefits to certain terminated plan participants meeting certain criteria. The benefit election window was open during Q3 2013 and benefit distributions will be made during the fourth quarter of 2013 (“Q4 2013”). Based upon the number of plan participants electing to take a distribution, and the total amount of such distributions, the Company will incur a non-cash charge of approximately $12 million in Q4 2013 when the distributions are made in accordance with the relevant accounting standards. The reduction in the number of plan participants and the reduction of plan assets will reduce the cost of administering the pension plan in the future. On September 4, 2013, the Company entered into an amendment to its $200 million five-year unsecured revolving credit facility (“$200 million facility”). The amendment clarified that the non-cash charge to be incurred by the Company in Q4 2013 will be excluded from the calculation of the financial covenants of the $200 million facility to the extent that the non-cash charge is recognized on or before December 31, 2013 and does not exceed $12.0 million.

Proposed Expansion of Company’s Franchised Territory

The Company announced on April 16, 2013 that it had signed a non-binding letter of intent with The Coca-Cola Company to expand the Company's franchise territory to include distribution rights in parts of Tennessee and Kentucky that include such major markets as Knoxville, Tennessee and Lexington and Louisville, Kentucky. The parties have subsequently agreed to include Evansville, Indiana in the proposed expanded franchise territory. Coca-Cola Refreshments USA, Inc. ("CCR"), a wholly owned subsidiary of The Coca-Cola Company, currently serves all of the proposed expanded territory.

The Company would acquire distribution rights in the expanded territory for brands owned by The Coca-Cola Company by entering into a sub-bottling arrangement with CCR requiring the Company to make ongoing payments to CCR. CCR would also transfer to the Company its rights to distribute the brands currently distributed by CCR in the proposed expanded territory that are not owned by The Coca-Cola Company. In addition to distribution rights, the Company would also acquire from CCR certain distribution assets and certain working capital associated with CCR’s operations in the expanded territory. The Company would not acquire any production assets from CCR and would not have production rights in the proposed expanded territory, but would enter into a product supply and such other agreements as may be necessary for the Company to serve the expanded territory. The consideration for the proposed transaction also involves the Company exchanging with CCR certain franchised territories the Company currently serves in western Tennessee for portions of the expanded territory.

This proposed transaction with The Coca-Cola Company remains subject to the parties reaching definitive agreements by the end of 2013 with the transaction currently expected to close in more than one closing occurring between May and December 2014 involving different parts of the expanded territory. The parties are continuing to negotiate the terms and conditions of definitive agreements and related documentation, however, and there is no assurance that the parties will enter into such agreements or that any of the anticipated closings will occur.

 

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Our Business and the Nonalcoholic Beverage Industry

The Company produces, markets and distributes nonalcoholic beverages, primarily products of The Coca-Cola Company, which include some of the most recognized and popular beverage brands in the world. The Company is the largest independent bottler of products of The Coca-Cola Company in the United States, distributing these products in eleven states primarily in the Southeast. The Company also distributes several other beverage brands. These product offerings include both sparkling and still beverages. Sparkling beverages are carbonated beverages, including energy products. Still beverages are noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks. The Company had full year net sales of $1.6 billion in 2012.

The nonalcoholic beverage market is highly competitive. The Company’s competitors include bottlers and distributors of nationally and regionally advertised and marketed products and private label products. In each region in which the Company operates, between 85% and 95% of sparkling beverage sales in bottles, cans and other containers are accounted for by the Company and its principal competitors, which in each region includes the local bottler of Pepsi-Cola and, in some regions, the local bottler of Dr Pepper, Royal Crown and/or 7-Up products. The sparkling beverage category (including energy products) represents approximately 80% of the Company’s YTD 2013 bottle/can net sales.

The principal methods of competition in the nonalcoholic beverage industry are point-of-sale merchandising, new product introductions, new vending and dispensing equipment, packaging changes, pricing, price promotions, product quality, retail space management, customer service, frequency of distribution and advertising. The Company believes it is competitive in its territories with respect to each of these methods.

Historically, operating results for the third quarter and first nine months of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters versus the first and fourth quarters of the fiscal year. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During YTD 2013, the Company did not experience any triggering events or changes in circumstances that indicated the carrying amounts of the Company’s franchise rights or goodwill exceeded fair values. As such, the Company has not recognized any impairments of franchise rights or goodwill.

Net sales by product category were as follows:

 

     Third Quarter      First Nine Months  

In Thousands

   2013      2012      2013      2012  

Bottle/can sales:

           

Sparkling beverages (including energy products)

   $ 273,905       $ 271,279       $ 798,271       $ 809,640   

Still beverages

     73,336         68,256         196,352         186,067   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bottle/can sales

     347,241         339,535         994,623         995,707   

Other sales:

           

Sales to other Coca-Cola bottlers

     42,030         39,160         126,621         111,855   

Post-mix and other

     45,193         41,160         125,750         120,171   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other sales

     87,223         80,320         252,371         232,026   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 434,464       $ 419,855       $ 1,246,994       $ 1,227,733   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Areas of Emphasis

Key priorities for the Company include revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity.

Revenue Management

Revenue management requires a strategy which reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based decision-making. Revenue management has been and continues to be a key performance driver which has significant impact on the Company’s results of operations.

Product Innovation and Beverage Portfolio Expansion

Innovation of both new brands and packages has been and is expected to continue to be important to the Company’s overall revenue. New packaging introductions over the last several years include the 1.25-liter bottle, the 7.5-ounce sleek can and the 2-liter contour bottle for Coca-Cola products.

The Company has invested in its own brand portfolio with products such as Tum-E Yummies, a vitamin C enhanced flavored drink, and Fuel in a Bottle power shots. These brands enable the Company to participate in strong growth categories and capitalize on distribution channels that may include the Company’s traditional Coca-Cola franchise territory as well as third party distributors outside the Company’s traditional Coca-Cola franchise territory. While the growth prospects of Company-owned or exclusively licensed brands appear promising, the cost of developing, marketing and distributing these brands is anticipated to be significant as well.

Distribution Cost Management

Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs amounted to $151.0 million and $150.9 million in YTD 2013 and YTD 2012, respectively. Over the past several years, the Company has focused on converting its distribution system from a conventional routing system to a predictive system. This conversion to a predictive system has allowed the Company to more efficiently handle an increasing number of products. In addition, the Company has closed a number of smaller sales distribution centers over the past several years, reducing its fixed warehouse-related costs.

The Company has three primary delivery systems for its current business:

 

   

bulk delivery for large supermarkets, mass merchandisers and club stores;

 

   

advanced sales delivery for convenience stores, drug stores, small supermarkets and certain on-premise accounts; and

 

   

full service delivery for its full service vending customers.

Distribution cost management will continue to be a key area of emphasis for the Company.

Productivity

A key driver in the Company’s selling, delivery and administrative (“S,D&A”) expense management relates to ongoing improvements in labor productivity and asset productivity.

 

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Overview of Operations and Financial Condition

The following items affect the comparability of the financial results presented below:

Q3 2013 and YTD 2013

 

   

a $0.5 million pre-tax unfavorable mark-to-market adjustment to cost of sales related to the Company’s 2013 commodity hedging program in YTD 2013;

 

   

a $1.2 million gain on the sale of a distribution facility that was no longer used in the first quarter of 2013 (“Q1 2013”);

 

   

a $0.4 million decrease to income tax expense related to the American Taxpayer Relief Act in Q1 2013;

 

   

a $3.1 million pre-tax favorable adjustment to net sales in Q3 2013 related to a refund of 2012 cooperative trade marketing funds paid by the Company to The Coca-Cola Company that were not spent in 2012;

 

   

a $2.3 million decrease to income tax expense related to state tax legislation enacted during Q3 2013; and

 

   

a $0.9 million decrease to income tax expense related to the reduction of the liability for uncertain tax positions in Q3 2013 primarily due to the lapse of the applicable statute of limitations.

Q3 2012 and YTD 2012

 

   

a $1.0 million pre-tax favorable mark-to-market adjustment to cost of sales related to the Company’s 2013 aluminum hedging program in Q3 2012 and YTD 2012;

 

   

a $0.4 million and a $1.2 million additional income tax expense to increase the valuation allowance for certain deferred tax assets of the Company in Q3 2012 and YTD 2012, respectively; and

 

   

a $0.2 million decrease to income tax expense related to the reduction of the liability for uncertain tax positions in Q3 2012 primarily due to the lapse of applicable statute of limitations.

 

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The following overview provides a summary of key information concerning the Company’s financial results for Q3 2013 and YTD 2013 compared to Q3 2012 and YTD 2012.

 

      Third Quarter            %  

In Thousands (Except Per Share Data)

   2013      2012      Change     Change  

Net sales

   $ 434,464       $ 419,855       $ 14,609        3.5   

Cost of sales

     258,352         248,927         9,425        3.8   

Gross margin

     176,112         170,928         5,184        3.0   

S,D&A expenses

     145,912         143,490         2,422        1.7   

Income from operations

     30,200         27,438         2,762        10.1   

Interest expense, net

     7,361         9,033         (1,672     (18.5

Income before taxes

     22,839         18,405         4,434        24.1   

Income tax expense

     4,756         7,191         (2,435     (33.9

Net income

     18,083         11,214         6,869        61.3   

Net income attributable to the Company

     16,169         10,079         6,090        60.4   

Basic net income per share:

          

Common Stock

   $ 1.75       $ 1.09       $ .66        60.6   

Class B Common Stock

   $ 1.75       $ 1.09       $ .66        60.6   

Diluted net income per share:

          

Common Stock

   $ 1.74       $ 1.09       $ .65        59.6   

Class B Common Stock

   $ 1.74       $ 1.08       $ .66        61.1   
      First Nine Months            %  

In Thousands (Except Per Share Data)

   2013      2012      Change     Change  

Net sales

   $ 1,246,994       $ 1,227,733       $ 19,261        1.6   

Cost of sales

     746,868         727,798         19,070        2.6   

Gross margin

     500,126         499,935         191        0.0   

S,D&A expenses

     427,539         425,315         2,224        0.5   

Income from operations

     72,587         74,620         (2,033     (2.7

Interest expense, net

     22,149         27,183         (5,034     (18.5

Income before taxes

     50,438         47,437         3,001        6.3   

Income tax expense

     14,550         19,228         (4,678     (24.3

Net income

     35,888         28,209         7,679        27.2   

Net income attributable to the Company

     32,260         25,391         6,869        27.1   

Basic net income per share:

          

Common Stock

   $ 3.49       $ 2.75       $ .74        26.9   

Class B Common Stock

   $ 3.49       $ 2.75       $ .74        26.9   

Diluted net income per share:

          

Common Stock

   $ 3.47       $ 2.74       $ .73        26.6   

Class B Common Stock

   $ 3.46       $ 2.73       $ .73        26.7   

The Company’s net sales increased 3.5% in Q3 2013 compared to Q3 2012. The Company’s net sales increased 1.6% in YTD 2013 compared to YTD 2012. The increase in net sales in Q3 2013 compared to Q3 2012 was primarily due to a .8% increase in bottle/can sales to retail customers price per unit, a 6.4% increase in sales volume to other Coca-Cola bottlers and a ..6% increase in bottle/can volume to retail customers. The increase in net sales YTD 2013 compared to YTD 2012 was primarily due to a 15.3% increase in sales volume to other Coca-Cola bottlers and a .7% increase in bottle/can sales to retail customers price per unit partially offset by 1.2%

 

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decrease in bottle/can volume to retail customers. The decrease in bottle/can volume to retail customers in YTD 2013 compared to YTD 2012 was primarily due to volume decrease in sparkling beverages. The increase in bottle/can volume to retail customers in Q3 2013 compared to Q3 2012 was primarily due to a volume increase in still beverages. The Company’s bottle/can volume to retail customers was impacted by cooler and wetter than normal weather in most of the Company’s territories during the first and second quarters of 2013. The increases in sales volume to other Coca-Cola bottlers in YTD 2013 compared to YTD 2012 was primarily due to an increase in sparkling can beverages. The Company’s sales volume increases to other Coca-Cola bottlers in YTD 2013 compared to YTD 2012 were primarily due to the closing of a can production facility by another Coca-Cola bottler; the Company replaced part of the closed facility’s production.

Gross margin dollars increased 3.0% in Q3 2013 compared to Q3 2012. The Company’s gross margin percentage decreased to 40.5% in Q3 2013 from 40.7% in Q3 2012. Gross margin dollars were materially unchanged in YTD 2013 compared to YTD 2012. The Company’s gross margin percentage decreased to 40.1% in YTD 2013 from 40.7% in YTD 2012. The decreases in gross margin percentages were primarily due to higher sales volume to other Coca-Cola bottlers which has lower gross margin than bottle/can retail sales, an increase in raw material costs and increased purchases of finished product partially offset by higher sales price per unit for sales to retail customers and the refund of the 2012 cooperative trade marketing funds.

S,D&A expenses increased 1.7% in Q3 2013 from Q3 2012. The increase in S,D&A expenses in Q3 2013 from Q3 2012 was attributable primarily to increased employee salaries and wages, increased professional fees and increased bonus and incentive expenses, offset by decreased property and casualty insurance expense. S,D&A expenses increased .5% in YTD 2013 from YTD 2012. Similar to the quarter, the increase in S,D&A expenses in YTD 2013 from YTD 2012 was attributable primarily to increased employee salaries and wages, increased professional fees, increased bonus and incentive expense, offset by decreased depreciation and amortization expense of property, plant and equipment, decreased marketing expense, decreased property and casualty insurance expense and a gain on the sale of a distribution facility that was no longer used.

Net interest expense decreased 18.5% in YTD 2013 compared to YTD 2012. The decrease was primarily due to the repayment at maturity of $150 million of Senior Notes in November 2012. The Company’s overall weighted average interest rate on its debt and capital lease obligations decreased to 5.8% during YTD 2013 from 6.1% during YTD 2012.

Income tax expense decreased 24.3% in YTD 2013 as compared to YTD 2012. The decrease to income tax expense was primarily due to a reduction of $0.4 million associated with the American Taxpayer Relief Act enacted on January 2, 2013, a reduction of $2.3 million associated with state tax legislation that reduced the corporate tax rate and a reduction of $0.9 million related to a decrease to the liability for uncertain tax positions.

 

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Net debt and capital lease obligations were summarized as follows:

 

In Thousands

   Sept. 29,
2013
     Dec. 30,
2012
     Sept. 30,
2012
 

Debt

   $ 413,520       $ 423,386       $ 523,344   

Capital lease obligations

     66,110         69,581         70,802   
  

 

 

    

 

 

    

 

 

 

Total debt and capital lease obligations

     479,630         492,967         594,146   

Less: Cash and cash equivalents

     25,283         10,399         112,661   
  

 

 

    

 

 

    

 

 

 

Total net debt and capital lease obligations (1)

   $ 454,347       $ 482,568       $ 481,485   
  

 

 

    

 

 

    

 

 

 

 

(1) The non-GAAP measure “Total net debt and capital lease obligations” is used to provide investors with additional information which management believes is helpful in the evaluation of the Company’s capital structure and financial leverage. This non-GAAP financial information is not presented elsewhere in this report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements

Critical Accounting Policies and Estimates

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for the year ended December 30, 2012 a discussion of the Company’s most critical accounting policies, which are those most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The Company did not make changes in any critical accounting policies during YTD 2013. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is made.

New Accounting Pronouncements

Recently Adopted Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance that is intended to enhance current disclosures on offsetting financial assets and liabilities. The new guidance requires an entity to disclose both gross and net information about financial instruments eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new guidance are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The new guidance did not have a material impact on the Company’s consolidated financial statements.

 

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In February 2013, the FASB issued new guidance which establishes new requirements for disclosing reclassifications of items out of accumulated other comprehensive income. The new guidance requires a company to report the effect of significant reclassifications from accumulated other comprehensive income to the respective line items in net income or cross-reference to other disclosures for items not reclassified entirely to net income. The new guidance was effective for annual and interim periods beginning after December 15, 2012. The new guidance expands disclosure of other comprehensive income but does not change the manner in which items of other comprehensive income are accounted or the way in which net income or other comprehensive income is reported in the financial statements. The Company elected to report this information within the notes to the consolidated financial statements.

Recently Issued Pronouncements

In July 2013, the FASB issued new guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The provisions of the new guidance are effective for fiscal years beginning after December 15, 2013 with early adoption permitted. The Company does not expect the requirements of this new guidance to have a material impact on the Company’s consolidated financial statements.

Results of Operations

Q3 2013 Compared to Q3 2012 and YTD 2013 Compared to YTD 2012

Net Sales

Net sales increased $14.6 million, or 3.5%, to $434.5 million in Q3 2013 compared to $419.9 million in Q3 2012. Net sales increased $19.3 million, or 1.6%, to $1,247.0 million in YTD 2013 compared to $1,227.7 million in YTD 2012.

The increase in net sales for Q3 2013 compared to Q3 2012 was principally attributable to the following:

 

Q3 2013

   

Attributable to:

(In Millions)      
$ 3.1     

Refund of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the current quarter. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate.

  2.5     

.8% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products

  2.5     

6.4% increase in sales volume to other Coca-Cola bottlers primarily due to volume increases in sparkling beverages

  2.1     

.6% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages

  1.9     

Increase in freight revenue

  (0.6  

2.7% decrease in post-mix sales volume

  0.6     

2.5% increase in post-mix sales price per unit

  2.5     

Other

 

 

   
$ 14.6     

Total increase in net sales

 

 

   

 

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The increase in net sales for YTD 2013 compared to YTD 2012 was principally attributable to the following:

 

YTD 2013

   

Attributable to:

(In Millions)      
$ 17.2     

15.3% increase in sales volume to other Coca-Cola bottlers primarily due to volume increases in sparkling can beverages

  (11.5  

1.2% decrease in bottle/can volume to retail customers primarily due to a volume decrease in sparkling beverages except energy products

  7.3     

.7% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products

  3.2     

Increase in freight revenue

  3.1     

Refund of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the current quarter. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate.

  (2.4  

1.8% decrease in sales price per unit of sales to other Coca-Cola bottlers primarily due to an increase in sparkling beverage sales volume which has lower sales price per unit

  (2.4  

3.6% decrease in post-mix sales volume

  1.2     

1.9% increase in post-mix sales price per unit

  3.6     

Other

 

 

   
$ 19.3     

Total increase in net sales

 

 

   

The Company’s bottle/can volume was impacted by cooler and wetter than normal weather in most of the Company’s territories during the first and second quarters of 2013. The Company’s sales volume increases to other Coca-Cola bottlers were primarily due to the closing of a can production facility by another bottler; the Company replaced part of the closed facility’s production.

In YTD 2013, the Company’s bottle/can sales to retail customers accounted for approximately 80% of the Company’s total net sales. Bottle/can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the volume generated in each package and the channels in which those packages are sold.

Product category sales volume in Q3 2013 and Q3 2012 and YTD 2013 and YTD 2012 as a percentage of total bottle/can sales volume and the percentage change by product category was as follows:

 

     Bottle/Can Sales Volume     Bottle/Can Sales Volume

Product Category

   Q3 2013     Q3 2012     % Increase (Decrease)

Sparkling beverages (including energy products)

     78.7     80.3   (1.4)

Still beverages

     21.3     19.7   9.0
  

 

 

   

 

 

   

Total bottle/can sales volume

     100.0     100.0   0.6
  

 

 

   

 

 

   

 

     Bottle/Can Sales Volume     Bottle/Can Sales Volume

Product Category

   YTD 2013     YTD 2012     % Increase (Decrease)

Sparkling beverages (including energy products)

     80.5     82.1   (3.1)

Still beverages

     19.5     17.9   7.6
  

 

 

   

 

 

   

Total bottle/can sales volume

     100.0     100.0   (1.2)
  

 

 

   

 

 

   

 

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The Company’s products are sold and distributed through various channels. They include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During both YTD 2013 and YTD 2012, approximately 68% of the Company’s bottle/can volume was sold for future consumption, while the remaining bottle/can volume of approximately 32% was sold for immediate consumption. The Company’s largest customer, Wal-Mart Stores, Inc., accounted for approximately 21% and 22% of the Company’s total bottle/can volume during YTD 2013 and YTD 2012, respectively. The Company’s second largest customer, Food Lion, LLC, accounted for approximately 8% of the Company’s total bottle/can volume during both YTD 2013 and YTD 2012. All of the Company’s beverage sales are to customers in the United States.

The Company recorded delivery fees in net sales of $4.8 million and $5.3 million in YTD 2013 and YTD 2012, respectively. These fees are used to offset a portion of the Company’s delivery and handling costs.

Cost of Sales

Cost of sales includes the following: raw material costs, manufacturing labor, manufacturing overhead including depreciation expense, manufacturing warehousing costs and shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers.

Cost of sales increased 3.8%, or $9.4 million, to $258.4 million in Q3 2013 compared to $248.9 million in Q3 2012. Cost of sales increased 2.6%, or $19.1 million, to $746.9 million in YTD 2013 compared to $727.8 million in YTD 2012.

The increase in cost of sales for Q3 2013 compared to Q3 2012 was principally attributable to the following:

 

Q3 2013

   

Attributable to:

(In Millions)      
$ 2.4     

6.4% increase in sales volume to other Coca-Cola bottlers primarily due to volume increases in sparkling beverages

  1.8     

Increase in raw material costs and increased purchases of finished products

  1.5     

Increase in freight cost of sales

  1.3     

.6% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages

  1.0     

Increase in cost due to the Company’s commodity hedging program

  0.7     

Decrease in marketing funding support received primarily from The Coca-Cola Company

  (0.4  

2.7% decrease in post-mix sales volume

  1.1     

Other

 

 

   
$ 9.4     

Total increase in cost of sales

 

 

   

 

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The increase in cost of sales for YTD 2013 compared to YTD 2012 was principally attributable to the following:

 

YTD 2013

   

Attributable to:

(In Millions)      
$ 16.5     

15.3% increase in sales volume to other Coca-Cola bottlers primarily due to volume increases in sparkling can beverages

  (6.8  

1.2% decrease in bottle/can volume to retail customers primarily due to a volume decrease in sparkling beverages except energy products

  5.0     

Increase in raw material costs and increased purchases of finished products

  (2.2  

Decrease in per unit cost of sales to other Coca-Cola bottlers primarily due to an increase in sparkling can sales volume which has a lower cost per unit than other products

  2.1     

Increase in freight cost of sales

  2.0     

Increase in cost due to the Company’s commodity hedging program

  1.7     

Decrease in marketing funding support received primarily from The Coca-Cola Company

  (1.6  

3.6% decrease in post-mix sales volume

  2.4     

Other

 

 

   
$ 19.1     

Total increase in cost of sales

 

 

   

The following inputs represent a substantial portion of the Company’s total cost of sales: (1) sweeteners, (2) packaging materials, including plastic bottles and aluminum cans, and (3) finished products purchased from other vendors. The Company anticipates that the costs of some of the underlying commodities related to these inputs will have a smaller increase in 2013 compared to 2012.

The Company entered into an agreement (the “Incidence Pricing Agreement”) in 2008 with The Coca-Cola Company to test an incidence-based concentrate pricing model for 2008 for all Coca-Cola Trademark Beverages and Allied Beverages for which the Company purchases concentrate from The Coca-Cola Company. During the term of the Incidence Pricing Agreement, the pricing of the concentrates for the Coca-Cola Trademark Beverages and Allied Beverages is governed by the Incidence Pricing Agreement rather than the Cola and Allied Beverage Agreements. The concentrate price under the Incidence Pricing Agreement is impacted by a number of factors including the Company’s pricing of finished products, the channels in which the finished products are sold and package mix. The Coca-Cola Company must give the Company at least 90 days written notice before changing the price the Company pays for the concentrate. The Incidence Pricing Agreement has been extended twice and will remain in effect for the purchase of concentrate through December 31, 2013. The Company plans to extend the Incidence Pricing Agreement again after December 31, 2013.

The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca-Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the local territories served by the Company. The Company also benefits from national advertising programs conducted by The Coca-Cola Company and other beverage companies. Certain marketing expenditures by The Coca-Cola Company and other beverage companies are made pursuant to annual arrangements. Although The Coca-Cola Company has advised the Company that it intends to continue to provide marketing funding support, it is not obligated to do so under the Company’s Beverage Agreements. Significant decreases in marketing funding support from The Coca-Cola Company or other beverage companies could adversely impact operating results of the Company in the future.

 

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Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company in 2013 and includes direct payments to the Company and payments to customers for marketing programs in 2012, was $13.4 million for Q3 2013 compared to $14.1 million for Q3 2012 and $38.7 million for YTD 2013 compared to $40.4 million for YTD 2012.

Gross Margin

Gross margin dollars increased 3.0%, or $5.2 million, to $176.1 million in Q3 2013 compared to $170.9 million in Q3 2012. Gross margin as a percentage of net sales decreased to 40.5% for Q3 2013 from 40.7% for Q3 2012. Gross margin dollars increased slightly by $.2 million, to $500.1 million in YTD 2013 compared to $499.9 million in YTD 2012. Gross margin as a percentage of net sales decreased to 40.1% for YTD 2013 from 40.7% for YTD 2012.

The increase in gross margin dollars for Q3 2013 compared to Q3 2012 was principally attributable to the following:

 

Q3 2013

   

Attributable to:

(In Millions)      
$ 3.1     

Refund of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the current quarter. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate.

  2.5     

.8% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products

  (1.8  

Increase in raw material costs and increased purchases of finished products

  (1.0  

Increase in cost due to the Company’s commodity hedging program

  0.8     

.6% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages

  (0.7  

Decrease in marketing funding support received primarily from The Coca-Cola Company

  0.6     

2.5% increase in post-mix sales price per unit

  0.4     

Increase in freight gross margin

  (0.2  

2.7% decrease in post-mix sales volume

  0.1     

6.4% increase in sales volume to other Coca-Cola bottlers primarily due to volume increases in sparkling beverages

  1.4     

Other

 

 

   
$ 5.2     

Total increase in gross margin

 

 

   

 

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The increase in gross margin dollars for YTD 2013 compared to YTD 2012 was principally attributable to the following:

 

YTD 2013

   

Attributable to:

(In Millions)      
$ 7.3     

.7% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products

  (5.0  

Increase in raw material costs and increased purchases of finished products

  (4.7  

1.2% decrease in bottle/can volume to retail customers primarily due to a volume decrease in sparkling beverages except energy products

  3.1     

Refund of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the current quarter. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate.

  (2.4  

1.8% decrease in sales price per unit of sales to other Coca-Cola bottlers primarily due to an increase in sparkling beverage sales volume which has lower sales price per unit

  2.2     

Decrease in per unit cost of sales to other Coca-Cola bottlers primarily due to an increase in sparkling can sales volume which has a lower cost per unit than other products

  (2.0  

Increase in cost due to the Company’s commodity hedging program

  (1.7  

Decrease in marketing funding support received primarily from The Coca-Cola Company

  1.2     

1.9% increase in post-mix sales price per unit

  1.1     

Increase in freight gross margin

  (0.8  

3.6% decrease in post-mix sales volume

  0.7     

15.3% increase in sales volume to other Coca-Cola bottlers primarily due to volume increases in sparkling can beverages

  1.2     

Other

 

 

   
$ 0.2     

Total increase in gross margin

 

 

   

The decreases in gross margin percentages were primarily due to higher sales volume to other Coca-Cola bottlers which has lower gross margin than bottle/can retail sales, an increase in raw material costs and increased purchases of finished products partially offset by higher sales price per unit for sales to retail customers and the refund of the 2012 cooperative trade marketing funds.

The Company’s gross margins may not be comparable to other peer companies, since some of them include all costs related to their distribution network in cost of sales. The Company includes a portion of these costs in S,D&A expenses.

S,D&A Expenses

S,D&A expenses include the following: sales management labor costs, distribution costs from sales distribution centers to customer locations, sales distribution center warehouse costs, depreciation expense related to sales centers, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangibles and administrative support labor and operating costs such as treasury, legal, information services, accounting, internal control services, human resources and executive management costs.

S,D&A expenses increased by $2.4 million, or 1.7%, to $145.9 million in Q3 2013 from $143.5 million in Q3 2012. S,D&A expenses as a percentage of net sales decreased to 33.6% in Q3 2013 from 34.2% in Q2 2012. S,D&A expenses increased by $2.2 million, or .5%, to $427.5 million in YTD 2013 from $425.3 million in YTD 2012. S,D&A expenses as a percentage of net sales decreased to 34.3% in YTD 2013 from 34.6% in YTD 2012.

 

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The increase in S,D&A expenses for Q3 2013 compared to Q3 2012 was principally attributable to the following:

 

Q3 2013

   

Attributable to:

(In Millions)      
$ 1.4     

Increase in employee salaries due to normal salary increases and additional personnel

  1.4     

Increase in professional fees primarily related to due diligence for possible territory expansion

  (1.0  

Decrease in property and casualty insurance expense primarily due to a decrease in auto and workers’ compensation expense

  0.6     

Increase in bonus expense, incentive expense and other performance pay initiatives due to the Company’s financial performance

  0.4     

Change in (gain)/loss on sale of property, plant and equipment primarily from the sale of a distribution facility no longer utilized

  (0.4  

Other

 

 

   
$ 2.4     

Total increase in S,D&A expenses

 

 

   

The increase in S,D&A expenses for YTD 2013 compared to YTD 2012 was principally attributable to the following:

 

YTD 2013

   

Attributable to:

(In Millions)      
$ 3.1     

Increase in employee salaries due to normal salary increases and additional personnel

  (1.6  

Decrease in depreciation and amortization expense of property, plant and equipment primarily due to the change in the useful lives of certain vending equipment

  1.2     

Increase in professional fees primarily related to due diligence for possible territory expansion

  (1.1  

Decrease in marketing expense primarily due to spending changes for various marketing programs

  (1.1  

Decrease in property and casualty insurance expense primarily due to a decrease in auto and workers’ compensation insurance claims

  0.7     

Increase in bonus expense, incentive expense and other performance pay initiatives due to the Company’s financial performance

  (0.7  

Change in (gain)/loss on sale of property, plant and equipment primarily from the sale of distribution facilities no longer utilized

  0.6     

Increase in software amortization (continued investment in technology)

  0.5     

Increase in employee benefit costs primarily due to increased medical insurance expense offset by decreased pension expense and 401(k) match expense

  0.6     

Other

 

 

   
$ 2.2     

Total increase in S,D&A expenses

 

 

   

Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations are included in S,D&A expenses and totaled $151.0 million and $150.9 million in YTD 2013 and YTD 2012, respectively.

The Company’s expense recorded in S,D&A expenses related to the two Company-sponsored pension plans decreased by $0.4 million to $0.4 million in Q3 2013 from $0.8 million in Q3 2012 and by $1.2 million to $1.1 million in YTD 2013 from $2.3 million in YTD 2012.

 

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The Company provides a 401(k) Savings Plan for substantially all of the Company’s full-time employees who are not part of collective bargaining agreements. During the first quarter of 2012, the Company changed the Company’s 401(k) Savings Plan matching contribution from fixed to discretionary, maintaining the option to make matching contributions for eligible participants of up to 5% based on the Company’s financial results for 2012 and future years. The 5% matching contribution was accrued during 2012. Based on the Company’s financial results, the Company decided to match 5% of eligible participants’ contributions for the entire year of 2012. The Company made this contribution for 2012 in the first quarter of 2013. The total costs recorded in S,D&A expenses for this benefit in YTD 2013 and YTD 2012 were $5.1 million and $5.6 million, respectively. The Company used its best estimate of the Company’s probable obligation for these periods.

Interest Expense

Net interest expense decreased 18.5% in both Q3 2013 compared to Q3 2012 and YTD 2013 compared to YTD 2012. The decreases were primarily due to the repayment at maturity of $150 million of Senior Notes in November 2012. The Company’s overall weighted average interest rate on its debt and capital lease obligations decreased to 5.8% during YTD 2013 from 6.1% during YTD 2012.

Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for YTD 2013 and YTD 2012 was 28.8% and 40.5%, respectively. The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, for YTD 2013 and YTD 2012 was 31.1% and 43.1%, respectively. The decrease in the effective tax rate for YTD 2013 resulted primarily from certain favorable tax provisions associated with the American Taxpayer Relief Act enacted on January 2, 2013, state tax legislation enacted in Q3 2013 that reduced the corporate tax rate and a reduction to the liability for uncertain tax positions.

In YTD 2012, the Company increased its valuation allowance by $1.2 million. The net effect of this adjustment was an increase to income tax expense due primarily to the Company’s assessment of its ability to use certain net operating loss carryforwards.

On September 13, 2013, the Internal Revenue Service and the United States Treasury Department issued final tax regulations that provide guidance regarding the deduction and capitalization of expenditures related to tangible property. The Company does not expect the final tax regulations to have a material impact on the consolidated financial statements.

The Company’s effective tax rate for the remainder of 2013 is dependent upon the results of operations and may change if the results in 2013 are different from current expectations.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $3.6 million and $2.8 million in YTD 2013 and YTD 2012, respectively, related to the portion of Piedmont owned by The Coca-Cola Company.

 

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Financial Condition

Total assets increased to $1.32 billion at September 29, 2013, from $1.28 billion at December 30, 2012 primarily due to increases in cash and cash equivalents, accounts receivables, inventories and other assets, offset by a decrease in property, plant and equipment, net.

Net working capital, defined as current assets less current liabilities, increased by $30.5 million to $55.5 million at September 29, 2013 from December 30, 2012 and increased by $19.7 million at September 29, 2013 from September 30, 2012.

Significant changes in net working capital from December 30, 2012 were as follows:

 

   

An increase in cash and cash equivalents of $14.9 million primarily due to borrowings from the Company’s $200 million facility.

 

   

An increase in accounts receivable, trade of $10.5 million primarily due to normal seasonal increase in sales.

 

   

An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $9.0 million and $15.5 million, respectively, primarily due to the timing of payments.

 

   

An increase in inventories of $4.3 million primarily due to normal seasonal increase in sales.

 

   

A decrease in accrued compensation of $5.7 million primarily due to the payment of bonuses in March 2013.

 

   

A decrease in accounts payable trade of $5.4 million primarily due to timing of payments.

 

   

An increase in accrued interest payable of $5.3 million primarily due to timing of payments.

Significant changes in net working capital from September 30, 2012 were as follows:

 

   

A decrease in cash and cash equivalents of $87.4 million primarily due to the repayment of senior notes in November 2012 offset by subsequent borrowings.

 

   

A decrease in current portion of long-term debt of $100.0 million due to the repayment of $150 million of senior notes that matured in November 2012. At September 30, 2012, $120 million of the $150 million Senior Notes due 2012 was classified as current as this was the expected amount to be paid from available cash plus amounts borrowed from an uncommitted line of credit. The remaining $30 million of senior notes due in 2012 was expected to be paid from amounts to be borrowed on the Company’s $200 million facility.

 

   

A decrease in other accrued liabilities of $3.0 million primarily due to a decrease in accrued income taxes.

Debt and capital lease obligations were $479.6 million as of September 29, 2013 compared to $493.0 million as of December 30, 2012 and $594.1 million as of September 30, 2012. Debt and capital lease obligations as of September 29, 2013 included $66.1 million of capital lease obligations related primarily to Company facilities.

 

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Liquidity and Capital Resources

Capital Resources

The Company’s sources of capital include cash flows from operations, available credit facility balances and the issuance of debt and equity securities. Management believes the Company has sufficient resources available to finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared in the future.

As of September 29, 2013, the Company had $180 million available under the $200 million facility to meet its cash requirements. The $200 million facility has a scheduled maturity date of September 21, 2016 and up to $25 million is available for the issuance of letters of credit. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an interest rate spread, dependent on the Company’s credit rating at the time of borrowing. The Company must pay an annual facility fee of .175% of the lenders’ aggregate commitments under the facility. The $200 million facility contains two financial covenants: a cash flow/fixed charges ratio (“fixed charges coverage ratio”) and a funded indebtedness/cash flow ratio (“operating cash flow ratio”), each as defined in the credit agreement. The fixed charges coverage ratio requires the Company to maintain a consolidated cash flow to fixed charges ratio of 1.5 to 1.0 or higher. The operating cash flow ratio requires the Company to maintain a debt to operating cash flow ratio of 6.0 to 1.0 or lower. The Company is currently in compliance with these covenants. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources. On September 4, 2013, the Company entered into an amendment to its $200 million facility. The amendment clarified that the non-cash charge to be incurred by the Company in Q4 2013 as a result of the Company’s limited-time offer of a lump sum distribution of pension benefits to certain pension plan participants will be excluded from the calculation of the financial covenants described above to the extent that the non-cash charge is recognized on or before December 31, 2013 and does not exceed $12.0 million. See Note 18 to the consolidated financial statements for additional information on the limited-time pension distribution. The Company currently believes that all of the banks participating in the $200 million facility have the ability to and will meet any funding requests from the Company.

On February 10, 2010, the Company entered into an agreement for an uncommitted line of credit. Under this agreement, which is still in place, the Company may borrow up to a total of $20 million for periods of 7 days, 30 days, 60 days or 90 days at the discretion of the participating bank.

In November 2012, the Company used a combination of available cash on hand, borrowings on the uncommitted line of credit and borrowings under the $200 million facility to repay $150 million of senior notes. The Company classified $30 million of these senior notes as long-term at September 30, 2012 which represented the portion of the series of maturing senior notes that the Company expected at such time to repay from borrowings under the $200 million facility.

The Company has obtained the majority of its long-term financing, other than capital leases, from public markets. As of September 29, 2013, $373.5 million of the Company’s total outstanding balance of debt and capital lease obligations of $479.6 million was financed through publicly offered debt. The Company had capital lease obligations of $66.1 million as of September 29, 2013. As of September 29, 2013, the Company had $20.0 million outstanding under the $200 million facility and $20.0 million outstanding under the Company’s uncommitted line of credit.

 

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Cash Sources and Uses

The primary sources of cash for the Company have been cash provided by operating activities and available credit facilities. The primary uses of cash have been for capital expenditures, the payment of debt and capital lease obligations, dividend payments and income tax payments.

A summary of activity for YTD 2013 and YTD 2012 follows:

 

     First Nine Months  

In Millions

   2013      2012  

Cash Sources

     

Cash provided by operating activities (excluding income tax and pension payments)

   $ 88.7       $ 91.7   

Proceeds from $200 million facility

     55.0         —     

Proceeds from the reduction of restricted cash

     —           3.0   

Proceeds from the sale of property, plant and equipment

     6.0         .5   
  

 

 

    

 

 

 

Total cash sources

   $ 149.7       $ 95.2   
  

 

 

    

 

 

 

Cash Uses

     

Capital expenditures

   $ 45.2       $ 35.5   

Payment on $200 million facility

     65.0         —     

Payment on capital lease obligations

     3.9         3.5   

Dividends

     6.9         6.9   

Income tax payments

     13.6         9.1   

Contributions to pension plans

     .1         18.2   

Other

     .1         .1   
  

 

 

    

 

 

 

Total cash uses

   $ 134.8       $ 73.3   
  

 

 

    

 

 

 

Increase in cash

   $ 14.9       $ 21.9   
  

 

 

    

 

 

 

Based on current projections, the Company anticipates its cash requirements for income taxes will be in the range of $2 million to $7 million for the remainder of 2013.

Operating Activities

During YTD 2013, cash flow provided by operating activities increased by $10.6 million compared to YTD 2012. The increase in cash flow provided by operating activities was primarily due to $18.2 million in pension payments made in YTD 2012 compared to $0.1 million pension payments in YTD 2013. These increases in cash flow provided by operating activities were offset by a $4.5 million increase in income tax payments.

Investing Activities

Additions to property, plant and equipment during YTD 2013 were $32.7 million of which $2.0 million were accrued in accounts payable, trade as unpaid. This compared to $32.6 million in total additions to property, plant and equipment during YTD 2012 of which $2.2 million were accrued in accounts payable, trade as unpaid. Capital expenditures during YTD 2013 were funded with cash flows from operations and available credit facilities. The Company anticipates total additions to property, plant and equipment in fiscal year 2013 will be in the range of $60 million to $70 million. Leasing is used for certain capital additions when considered cost effective relative to other sources of capital. The Company currently leases its corporate headquarters, two production facilities and several sales distribution facilities and administrative facilities.

 

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Financing Activities

As of September 29, 2013, the Company had $180 million available under the $200 million facility to meet its short-term borrowing requirements. The $200 million facility has a scheduled maturity date of September 21, 2016 and up to $25 million is available for the issuance of letters of credit. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an interest rate spread, dependent on the Company’s credit rating at the time of borrowing. The Company must pay an annual facility fee of .175% of the lenders’ aggregate commitments under the facility. The $200 million facility contains two financial covenants: a cash flow/fixed charges ratio (“fixed charges coverage ratio”) and a funded indebtedness/cash flow ratio (“operating cash flow ratio”), each as defined in the credit agreement. The fixed charges coverage ratio requires the Company to maintain a consolidated cash flow to fixed charges ratio of 1.5 to 1.0 or higher. The operating cash flow ratio requires the Company to maintain a debt to operating cash flow ratio of 6.0 to 1.0 or lower. The Company is currently in compliance with these covenants. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

On September 4, 2013, the Company entered into an amendment to its $200 million facility. The amendment clarified that the non-cash charge to be incurred by the Company in Q4 2013 as a result of the Company’s limited-time offer of a lump sum distribution of pension benefits to certain pension plan participants will be excluded from the calculation of the financial covenants described above to the extent that the non-cash charge is recognized on or before December 31, 2013 and does not exceed $12.0 million. See Note 18 to the consolidated financial statements for additional information on the limited-time pension distribution.

The Company currently believes that all of the banks participating in the Company’s $200 million facility have the ability to and will meet any funding requests from the Company. On September 29, 2013 and December 30, 2012, the Company had $20.0 million and $30.0 million, respectively, of outstanding borrowings on the $200 million facility. On September 30, 2012, the Company had no outstanding borrowings on the $200 million facility.

During YTD 2013, the Company’s net borrowings under its $200 million facility decreased $10.0 million due to increased cash available for repayments as a result of seasonally lower working capital requirements. During YTD 2012, the Company used cash on hand to fund working capital requirements and capital expenditures.

On February 10, 2010, the Company entered into an agreement for an uncommitted line of credit. Under this agreement, which is still in place, the Company may borrow up to a total of $20 million for periods of 7 days, 30 days, 60 days or 90 days at the discretion of the participating bank. On both September 29, 2013 and December 30, 2012, the Company had $20.0 million outstanding under the uncommitted line of credit. On September 30, 2012, the Company had no outstanding borrowings under the uncommitted line of credit.

As of September 29, 2013, December 30, 2012 and September 30, 2012, the weighted average interest rate of the Company’s debt and capital lease obligations was 6.1%, 5.9% and 6.1%, respectively, for its outstanding debt and capital lease obligations. The Company’s overall weighted average interest rate on its debt and capital lease obligations decreased to 5.8% in YTD 2013 from 6.1% in YTD 2012. As of September 29, 2013, $40.0 million of the Company’s debt and capital lease obligations of $479.6 million was maintained on a floating rate basis or was subject to changes in short-term interest rates.

 

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In November 2012, the Company used a combination of available cash on hand, borrowings on the $20 million uncommitted line of credit and borrowings under the $200 million facility to repay $150 million of maturing senior notes. The Company classified $30 million of these senior notes at September 30, 2012 as long-term, which amount represented the portion of the maturing senior notes that the Company expected at such time to repay from borrowings under the $200 million facility. The Company’s next maturity of outstanding long-term debt is the $100 million Senior Notes due April 2015.

All of the outstanding debt on the Company’s balance sheet has been issued by the Company with none having been issued by any of the Company’s subsidiaries. There are no guarantees of the Company’s debt. The Company or its subsidiaries have entered into eight capital leases.

At September 29, 2013, the Company’s credit ratings were as follows:

 

     Long-Term Debt

Standard & Poor’s

   BBB

Moody’s

   Baa2

The Company’s credit ratings, which the Company is disclosing to enhance understanding of the Company’s sources of liquidity and the effect of the Company’s rating on the Company’s cost of funds, are reviewed periodically by the respective rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material impact on the Company’s financial position or results of operations. There were no changes in these credit ratings from the prior year and the credit ratings are currently stable.

The indentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts.

Off-Balance Sheet Arrangements

The Company is a member of two manufacturing cooperatives and has guaranteed $33.5 million of debt for these entities as of September 29, 2013. In addition, the Company has an equity ownership in each of the entities. The members of both cooperatives consist solely of Coca-Cola bottlers. The Company does not anticipate either of these cooperatives will fail to fulfill their commitments. The Company further believes each of these cooperatives has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss from the Company’s guarantees. As of September 29, 2013, the Company’s maximum exposure, if the entities borrowed up to their borrowing capacity, would have been $74.1 million including the Company’s equity interests. See Note 14 and Note 19 to the consolidated financial statements for additional information about these entities.

 

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Aggregate Contractual Obligations

The following table summarizes the Company’s contractual obligations and commercial commitments as of September 29, 2013:

 

     Payments Due by Period  

In Thousands

  Total     Oct. 2013-
Sept. 2014
    Oct. 2014-
Sept. 2016
    Oct. 2016-
Sept. 2018
    After
Sept. 2018
 

Contractual obligations:

         

Total debt, net of interest

  $ 413,520      $ 20,000      $ 284,757      $ —        $ 108,763   

Capital lease obligations, net of interest

    66,110        5,732        12,990        15,068        32,320   

Estimated interest on long-term debt and capital lease obligations (1)

    95,366        25,986        39,525        20,872        8,983   

Purchase obligations (2)

    62,617        62,617        —          —          —     

Other long-term liabilities (3)

    131,565        10,542        16,871        12,378        91,774   

Operating leases

    37,391        6,120        9,062        5,953        16,256   

Long-term contractual arrangements (4)

    40,723        10,447        15,176        8,257        6,843   

Postretirement obligations (5)

    71,102        4,573        6,046        7,210        53,273   

Purchase orders (6)

    45,571        45,571        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual obligations

  $ 963,965      $ 191,588      $ 384,427      $ 69,738      $ 318,212   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes interest payments based on contractual terms.
(2) Represents an estimate of the Company’s obligation to purchase 17.5 million cases of finished product on an annual basis through May 2014 from South Atlantic Canners, a manufacturing cooperative.
(3) Includes obligations under executive benefit plans, the liability to exit from a multi-employer pension plan and other long-term liabilities.
(4) Includes contractual arrangements with certain prestige properties, athletics venues and other locations, and other long-term marketing commitments.
(5) Includes the liability for postretirement benefit obligations only. The unfunded portion of the Company’s pension plans is excluded as the timing and/or the amount of any cash payment is uncertain.
(6) Purchase orders include commitments in which a written purchase order has been issued to a vendor, but the goods have not been received or the services have not been performed.

The Company has $2.8 million of uncertain tax positions including accrued interest, as of September 29, 2013 (excluded from other long-term liabilities in the table above because the Company is uncertain as to if or when such amounts will be recognized) all of which would affect the Company’s effective tax rate if recognized. While it is expected that the amount of uncertain tax positions may change in the next 12 months, the Company does not expect any change to have a significant impact on the consolidated financial statements. See Note 15 to the consolidated financial statements for additional information.

The Company is a member of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative, from which the Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. This obligation is not included in the Company’s table of contractual obligations and commercial commitments since there are no minimum purchase requirements. See Note 14 and Note 19 to the consolidated financial statements for additional information related to Southeastern.

As of September 29, 2013, the Company has $23.1 million of standby letters of credit, primarily related to its property and casualty insurance programs. See Note 14 to the consolidated financial statements for additional information related to commercial commitments, guarantees, legal and tax matters.

 

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The Company contributed $0.1 million to the Company-sponsored pension plans in YTD 2013. Based on information currently available, the Company anticipates cash contributions during the remainder of 2013 will be between approximately $2 million and $3 million. Postretirement medical care payments are expected to be approximately $3 million in 2013. See Note 18 to the consolidated financial statements for additional information related to pension and postretirement obligations.

Hedging Activities

Interest Rate Hedging

The Company uses derivatives from time to time to partially manage the Company’s exposure to changes in interest rates on outstanding debt instruments. However, there were no outstanding interest rate hedging agreements as of September 29, 2013.

Commodity Hedging

The Company entered into derivative instruments to hedge certain commodity purchases for 2013. The Company paid fees for these instruments which were amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment of cost of sales or S,D&A expenses.

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions.

The net impact of the commodity hedges was to increase the cost of sales by $0.9 million in YTD 2013.

There were no outstanding commodity agreements as of September 29, 2013.

 

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Cautionary Information Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as information included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, news releases and oral statements issued by or on behalf of the Company, contains, or may contain, forward-looking management comments and other statements that reflect management’s current outlook for future periods. These statements include, among others, statements relating to:

 

   

the Company’s proposed expansion of the Company’s franchise territory;

 

   

the Company’s belief that the covenants on its $200 million facility will not restrict its liquidity or capital resources;

 

   

the Company’s belief that other parties to certain contractual arrangements will perform their obligations;

 

   

the Company’s potential marketing funding support from The Coca-Cola Company and other beverage companies;

 

   

the Company’s belief that disposition of certain claims and legal proceedings will not have a material adverse effect on its financial condition, cash flows or results of operations and that no material amount of loss in excess of recorded amounts is reasonably possible as a result of these claims and legal proceedings;

 

   

the Company’s belief that the Company has adequately provided for any ultimate amounts that are likely to result from tax audits;

 

   

the Company’s belief that the Company has sufficient resources available to finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending;

 

   

the Company’s belief that the cooperatives whose debt the Company guarantees have sufficient assets and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss and that the cooperatives will perform their obligations under their debt commitments;

 

   

the Company’s key priorities which are revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity;

 

   

the Company’s belief that cash contributions to the two Company-sponsored pension plans will be in the range of $2 million to $3 million for the remainder of 2013;

 

   

the Company’s belief that postretirement medical care payments are expected to be approximately $3 million in 2013;

 

   

the Company’s belief that cash requirements for in