Form 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 28, 2014

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, 2014

Common Stock, $1.00 Par Value

  7,141,447

Class B Common Stock, $1.00 Par Value

  2,129,862


Table of Contents

COCA-COLA BOTTLING CO. CONSOLIDATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2014

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      38   

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  
     2014      2013      2014      2013  

Net sales

   $ 457,676       $ 434,464       $ 1,305,731       $ 1,246,994   

Cost of sales

     272,734         258,352         778,936         746,868   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     184,942         176,112         526,795         500,126   

Selling, delivery and administrative expenses

     156,496         145,912         454,969         427,539   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     28,446         30,200         71,826         72,587   

Interest expense, net

     7,333         7,361         21,899         22,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     21,113         22,839         49,927         50,438   

Income tax expense

     7,408         4,756         17,789         14,550   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     13,705         18,083         32,138         35,888   

Less: Net income attributable to noncontrolling interest

     1,573         1,914         3,774         3,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Coca-Cola Bottling Co. Consolidated

   $ 12,132       $ 16,169       $ 28,364       $ 32,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Common Stock

   $ 1.31       $ 1.75       $ 3.06       $ 3.49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding

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

Class B Common Stock

   $ 1.31       $ 1.75       $ 3.06       $ 3.49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Class B Common Stock shares outstanding

     2,130         2,109         2,125         2,104   

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

           

Common Stock

   $ 1.30       $ 1.74       $ 3.05       $ 3.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding – assuming dilution

     9,311         9,290         9,306         9,285   

Class B Common Stock

   $ 1.30       $ 1.74       $ 3.04       $ 3.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     2,170         2,149         2,165         2,144   

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  
     2014     2013     2014     2013  

Net income

   $ 13,705      $ 18,083      $ 32,138      $ 35,888   

Other comprehensive income, net of tax:

        

Foreign currency translation adjustment

     (4     (1     (4     0   

Defined benefit plans reclassification included in pension costs:

        

Actuarial loss

     277        514        795        1,533   

Prior service costs

     5        2        16        7   

Postretirement benefits reclassification included in benefits costs:

        

Actuarial loss

     344        430        1,035        1,281   

Prior service costs

     (231     (231     (696     (691
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     391        714        1,146        2,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     14,096        18,797        33,284        38,018   

Less: Comprehensive income attributable to noncontrolling interest

     1,573        1,914        3,774        3,628   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Coca-Cola Bottling Co. Consolidated

   $ 12,523      $ 16,883      $ 29,510      $ 34,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

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. 28,
2014
     Dec. 29,
2013
     Sept. 29,
2013
 

ASSETS

        

Current Assets:

        

Cash and cash equivalents

   $ 23,067       $ 11,761       $ 25,283   

Accounts receivable, trade, less allowance for doubtful accounts of $1,490, $1,401 and $1,553, respectively

     121,466         105,610         114,068   

Accounts receivable from The Coca-Cola Company

     33,074         17,849         24,549   

Accounts receivable, other

     15,660         15,136         14,526   

Inventories

     80,123         61,987         70,255   

Prepaid expenses and other current assets

     30,460         26,872         32,209   
  

 

 

    

 

 

    

 

 

 

Total current assets

     303,850         239,215         280,890   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, net

     327,238         302,998         295,147   

Leased property under capital leases, net

     44,470         48,981         50,212   

Other assets

     60,497         58,560         62,621   

Franchise rights

     520,672         520,672         520,672   

Goodwill

     103,294         102,049         102,049   

Other identifiable intangible assets, net

     17,104         3,681         3,764   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,377,125       $ 1,276,156       $ 1,315,355   
  

 

 

    

 

 

    

 

 

 

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. 28,
2014
    Dec. 29,
2013
    Sept. 29,
2013
 

LIABILITIES AND EQUITY

      

Current Liabilities:

      

Current portion of debt

   $ 0      $ 20,000      $ 20,000   

Current portion of obligations under capital leases

     6,325        5,939        5,732   

Accounts payable, trade

     49,477        43,579        46,279   

Accounts payable to The Coca-Cola Company

     47,093        25,869        43,363   

Other accrued liabilities

     73,856        77,622        73,858   

Accrued compensation

     31,953        31,753        26,733   

Accrued interest payable

     9,107        4,054        9,380   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     217,811        208,816        225,345   

Deferred income taxes

     150,543        153,408        142,795   

Pension and postretirement benefit obligations

     80,993        90,599        138,288   

Other liabilities

     141,625        125,791        123,208   

Obligations under capital leases

     54,243        59,050        60,378   

Long-term debt

     443,709        378,566        393,520   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,088,924        1,016,230        1,083,534   
  

 

 

   

 

 

   

 

 

 

Commitments and Contingencies (Note 15)

      

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 – 2,757,976, 2,737,076 and 2,737,076 shares, respectively

     2,756        2,735        2,735   

Capital in excess of par value

     110,860        108,942        108,959   

Retained earnings

     210,285        188,869        195,766   

Accumulated other comprehensive loss

     (57,030     (58,176     (92,396
  

 

 

   

 

 

   

 

 

 
     277,075        252,574        225,268   

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

     215,821        191,320        164,014   

Noncontrolling interest

     72,380        68,606        67,807   
  

 

 

   

 

 

   

 

 

 

Total equity

     288,201        259,926        231,821   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,377,125      $ 1,276,156      $ 1,315,355   
  

 

 

   

 

 

   

 

 

 

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 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   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance on Dec. 29, 2013

   $ 10,204       $ 2,735       $ 108,942       $ 188,869      $ (58,176   $ (61,254   $ 191,320      $ 68,606       $ 259,926   

Net income

              28,364            28,364        3,774         32,138   

Other comprehensive income, net of tax

                1,146          1,146           1,146   

Cash dividends paid Common ($.75 per share)

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

Class B Common ($.75 per share)

              (1,592         (1,592        (1,592

Issuance of 20,900 shares of Class B Common Stock

        21         1,742               1,763           1,763   

Stock compensation adjustment

           176               176           176   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance on Sept. 28, 2014

   $ 10,204       $ 2,756       $ 110,860       $ 210,285      $ (57,030   $ (61,254   $ 215,821      $ 72,380       $ 288,201   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In Thousands

 

     First Nine Months  
     2014     2013  

Cash Flows from Operating Activities

    

Net income

   $ 32,138      $ 35,888   

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

    

Depreciation expense

     44,358        43,655   

Amortization of intangibles

     377        250   

Deferred income taxes

     655        (1,376

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

     231        (264

Amortization of debt costs

     1,438        1,453   

Amortization of deferred gain related to terminated interest rate agreements

     (420     (411

Stock compensation expense

     2,272        1,901   

Increase in current assets less current liabilities (exclusive of acquisition)

     (20,370     (4,366

Increase in other noncurrent assets (exclusive of acquisition)

     (3,362     (6,656

Increase (decrease) in other noncurrent liabilities (exclusive of acquisition)

     (7,343     4,887   

Other

     (6     12   
  

 

 

   

 

 

 

Total adjustments

     17,830        39,085   
  

 

 

   

 

 

 

Net cash provided by operating activities

     49,968        74,973   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Additions to property, plant and equipment

     (61,357     (45,197

Proceeds from the sale of property, plant and equipment

     1,212        6,056   

Acquisition of new territories, net of cash acquired

     (12,163     0   
  

 

 

   

 

 

 

Net cash used in investing activities

     (72,308     (39,141
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Borrowings under revolving credit facility

     85,000        55,000   

Payment on revolving credit facility

     (40,000     (65,000

Cash dividends paid

     (6,948     (6,933

Excess tax expense from stock-based compensation

     176        0   

Principal payments on capital lease obligations

     (4,420     (3,926

Other

     (162     (89
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     33,646        (20,948
  

 

 

   

 

 

 

Net increase in cash

     11,306        14,884   

Cash at beginning of period

     11,761        10,399   
  

 

 

   

 

 

 

Cash at end of period

   $ 23,067      $ 25,283   
  

 

 

   

 

 

 

Significant non-cash investing and financing activities:

    

Issuance of Class B Common Stock in connection with stock award

   $ 1,763      $ 1,298   

Capital lease obligations incurred

     0        455   

Additions to property, plant and equipment accrued and recorded in accounts payable, trade

     2,854        1,976   

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

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 29, 2013 filed with the United States Securities and Exchange Commission.

2. Seasonality of Business

Historically, operating results for the third quarter and the 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.

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 28, 2014, December 29, 2013 and September 29, 2013 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. Acquisitions

In April 2013, the Company announced 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 served by Coca-Cola Refreshments USA, Inc. (“CCR”), a wholly owned subsidiary of The Coca-Cola Company. On May 7, 2014, the Company and CCR entered into an asset purchase agreement (the “Asset Purchase Agreement”) relating to the territory served by CCR through CCR’s facilities and equipment located in Johnson City and Morristown, Tennessee (the “Territory”). The closing of this transaction occurred on May 23, 2014 for a cash purchase price of $12.2 million, which will remain subject to adjustment until July 2, 2015, as specified in the Asset Purchase Agreement. The financial results of the Territory have been included in the Company’s consolidated financial statements from the acquisition date and did not significantly impact the Company’s consolidated financial results for the three and nine month periods ended September 28, 2014.

The Company has preliminarily allocated the purchase price to the individual acquired assets and assumed liabilities. The valuations are subject to adjustment as additional information is obtained, but any adjustments are not expected to be material.

The fair values of acquired assets and assumed liabilities as of the acquisition date are summarized as follows:

 

In Thousands

   Fair Value  

Cash

   $ 46   

Inventories

     1,361   

Prepaid expense and other current assets

     252   

Property, plant and equipment

     8,495   

Other assets

     10   

Goodwill

     1,245   

Other identifiable intangible assets

     13,800   
  

 

 

 

Total acquired assets

   $ 25,209   
  

 

 

 

Current liabilities (acquisition related contingent consideration)

   $ 1,005   

Other liabilities (acquisition related contingent consideration)

     11,995   
  

 

 

 

Total assumed liabilities

   $ 13,000   
  

 

 

 

The fair value of the preliminary purchase price allocation to the identifiable intangible assets is as follows:

 

In Thousands

   Fair Value      Estimated
Useful Life
 

Distribution agreements

   $ 13,200         40 years   

Customer lists

     600         12 years   
  

 

 

    

Total

   $ 13,800      
  

 

 

    

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

4. Acquisitions

 

The goodwill of $1.25 million is primarily attributed to the workforce of the acquired business. None of the goodwill recorded is expected to be deductible for tax purposes.

As part of the Asset Purchase Agreement, the Company signed a Comprehensive Beverage Agreement which has a term of ten years and is renewable by the Company indefinitely for successive additional terms of ten years each unless the Comprehensive Beverage Agreement is earlier terminated as provided therein. Under the Comprehensive Beverage Agreement, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell the Covered Beverages and Related Products in the Territory. The quarterly sub-bottling payment will be based on sales of certain beverages and beverage products that are sold under the same trademarks that identify a Covered Beverage, Related Product or certain cross-licensed brands (as defined in the Comprehensive Beverage Agreement). The anticipated range of undiscounted amounts the Company could pay annually under the contingent consideration arrangement are between $1.0 million and $1.8 million. As of September 28, 2014, the Company has recorded a liability of $13.0 million to reflect the estimated fair value of the contingent consideration related to the future sub-bottling payments. The contingent consideration was valued using a probability weighted discounted cash flow model based on internal forecasts and the weighted average cost of capital derived from market data. The contingent consideration will be reassessed and marked to market each quarter through other income or expense. There was no significant change in this liability from the date of acquisition through September 28, 2014. The first payment is scheduled for November 2014.

5. Inventories

Inventories were summarized as follows:

 

In Thousands

   Sept. 28,
2014
     Dec. 29,
2013
     Sept. 29,
2013
 

Finished products

   $ 50,732       $ 35,360       $ 42,695   

Manufacturing materials

     9,796         9,127         8,594   

Plastic shells, plastic pallets and other inventories

     19,595         17,500         18,966   
  

 

 

    

 

 

    

 

 

 

Total inventories

   $ 80,123       $ 61,987       $ 70,255   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

6. Property, Plant and Equipment

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

 

     Sept. 28,      Dec. 29,      Sept. 29,      Estimated  

In Thousands

   2014      2013      2013      Useful Lives  

Land

   $ 14,161       $ 12,307       $ 12,307      

Buildings

     115,844         113,864         113,032         8-50 years   

Machinery and equipment

     153,538         144,662         143,518         5-20 years   

Transportation equipment

     177,759         164,403         159,012         4-20 years   

Furniture and fixtures

     43,969         42,605         42,403         3-10 years   

Cold drink dispensing equipment

     333,984         317,143         319,767         5-17 years   

Leasehold and land improvements

     74,176         73,742         72,632         5-20 years   

Software for internal use

     86,646         81,718         80,310         3-10 years   

Construction in progress

     5,686         7,204         3,266      
  

 

 

    

 

 

    

 

 

    

Total property, plant and equipment, at cost

     1,005,763         957,648         946,247      

Less: Accumulated depreciation and amortization

     678,525         654,650         651,100      
  

 

 

    

 

 

    

 

 

    

Property, plant and equipment, net

   $ 327,238       $ 302,998       $ 295,147      
  

 

 

    

 

 

    

 

 

    

Depreciation and amortization expense was $15.1 million and $14.8 million in the third quarter of 2014 (“Q3 2014”) and in the third quarter of 2013 (“Q3 2013”), respectively. Depreciation and amortization expense was $44.4 million and $43.7 million in the first nine months of 2014 (“YTD 2014”) and in the first nine months of 2013 (“YTD 2013”), respectively. These amounts included amortization expense for leased property under capital leases.

7. Leased Property Under Capital Leases

Leased property under capital leases was summarized as follows:

 

     Sept. 28,      Dec. 29,      Sept. 29,      Estimated  

In Thousands

   2014      2013      2013      Useful Lives  

Leased property under capital leases

   $ 94,793       $ 94,889       $ 94,629         3-20 years   

Less: Accumulated amortization

     50,323         45,908         44,417      
  

 

 

    

 

 

    

 

 

    

Leased property under capital leases, net

   $ 44,470       $ 48,981       $ 50,212      
  

 

 

    

 

 

    

 

 

    

As of September 28, 2014, real estate represented $43.9 million of the leased property under capital leases, net and $29.1 million of this real estate is leased from related parties as described in Note 20 to the consolidated financial statements.

The Company’s outstanding obligations for capital leases were $60.6 million, $65.0 million and $66.1 million as of September 28, 2014, December 29, 2013 and September 29, 2013, respectively.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

8. Franchise Rights and Goodwill

Franchise rights and goodwill were summarized as follows:

 

In Thousands

   Sept. 28,
2014
     Dec. 29,
2013
     Sept. 29,
2013
 

Franchise rights

   $ 520,672       $ 520,672       $ 520,672   

Goodwill

     103,294         102,049         102,049   
  

 

 

    

 

 

    

 

 

 

Total franchise rights and goodwill

   $ 623,966       $ 622,721       $ 622,721   
  

 

 

    

 

 

    

 

 

 

In the second quarter of 2014 (“Q2 2014”), the Company added $1.2 million to goodwill due to the acquisition of territory in Morristown, Tennessee. There were no additions to franchise rights due to the acquisition of new territories.

The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During YTD 2014, 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.

9. Other Identifiable Intangible Assets

Other identifiable intangible assets were summarized as follows:

 

     Sept. 28,      Dec. 29,      Sept. 29,      Estimated  

In Thousands

   2014      2013      2013      Useful Lives  

Distribution agreements

   $ 15,509       $ 2,309       $ 2,309         20-40 years   

Customer lists and other identifiable intangible assets

     6,838         6,238         6,238         12-20 years   
  

 

 

    

 

 

    

 

 

    

Total other identifiable intangible assets

     22,347         8,547         8,547      

Less: Accumulated amortization

     5,243         4,866         4,783      
  

 

 

    

 

 

    

 

 

    

Other identifiable intangible assets, net

   $ 17,104       $ 3,681       $ 3,764      
  

 

 

    

 

 

    

 

 

    

In Q2 2014, the Company added $0.6 million to customer lists and $13.2 million to distribution agreements due to the acquisition of territories in Johnson City and Morristown, Tennessee.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

10. Other Accrued Liabilities

Other accrued liabilities were summarized as follows:

 

     Sept. 28,      Dec. 29,      Sept. 29,  

In Thousands

   2014      2013      2013  

Accrued marketing costs

   $ 14,122       $ 13,613       $ 12,463   

Accrued insurance costs

     21,603         21,132         21,571   

Accrued taxes (other than income taxes)

     3,228         1,207         4,192   

Accrued income taxes

     0         2,515         0   

Employee benefit plan accruals

     12,991         17,643         16,754   

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

     10,472         11,237         9,999   

All other accrued liabilities

     11,440         10,275         8,879   
  

 

 

    

 

 

    

 

 

 

Total other accrued liabilities

   $ 73,856       $ 77,622       $ 73,858   
  

 

 

    

 

 

    

 

 

 

11. Debt

Debt was summarized as follows:

 

            Interest     Interest      Sept. 28,     Dec. 29,     Sept. 29,  

In Thousands

   Maturity      Rate     Paid      2014     2013     2013  

Revolving credit facility

     2016         Variable        Varies       $ 50,000      $ 5,000      $ 20,000   

Line of credit

     2014         Variable        Varies         20,000        20,000        20,000   

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              (1,048     (1,191     (1,237
          

 

 

   

 

 

   

 

 

 

Debt

             443,709        398,566        413,520   

Less: Current portion of debt

             0        20,000        20,000   
          

 

 

   

 

 

   

 

 

 

Long-term debt

           $ 443,709      $ 378,566      $ 393,520   
          

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Debt

 

On October 16, 2014, the Company entered into a $350 million five-year unsecured revolving credit facility (“$350 million facility”) which amended and restated the Company’s existing $200 million five-year unsecured revolving credit agreement dated as of September 21, 2011 (“$200 million facility”). The $350 million facility has a scheduled maturity date of October 16, 2019 and up to $50 million is available for the issuance of letters of credit. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement, the Company may increase the aggregate availability under the facility to $450 million. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, dependent on the Company’s credit rating at the time of borrowing. At the Company’s current credit ratings, the Company must pay an annual facility fee of .15% of the lenders’ aggregate commitments under the facility. The $350 million facility includes, and the $200 million facility included, 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 respective credit agreements. The Company was in compliance with these covenants under the $200 million facility at September 28, 2014 and is currently in compliance with these covenants under the $350 million facility. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

On September 28, 2014, the Company had $50.0 million of outstanding borrowings on the $200 million facility and had $150.0 million available to meet its cash requirements. On December 29, 2013, the Company had $5.0 million of outstanding borrowings on the $200 million facility. On September 29, 2013, the Company had $20.0 million of outstanding borrowings on the $200 million facility.

The Company has $100 million of senior notes which mature in April 2015. The Company currently expects to use borrowings under the $350 million facility to repay the notes when due and, accordingly, has classified all the $100 million Senior Notes due April 2015 as long-term.

On September 28, 2014, December 29, 2013 and September 29, 2013, the Company had $20.0 million outstanding on an uncommitted line of credit at a weighted average interest rate of 0.90%, 0.88% and 0.93%, respectively. On October 31, 2014, the Company terminated its uncommitted line of credit and refinanced the outstanding balance with additional borrowings under the $350 million facility and, accordingly, has classified the outstanding balance on the uncommitted line of credit at September 28, 2014 as long-term.

As of September 28, 2014, December 29, 2013 and September 29, 2013, the Company had a weighted average interest rate of 5.8%, 6.2% 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 both YTD 2014 and YTD 2013. As of September 28, 2014, $70.0 million of the Company’s debt and capital lease obligations of $504.3 million were subject to changes in short-term interest rates.

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 the incurrence of indebtedness by the Company’s subsidiaries in excess of certain amounts.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Debt

 

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.

12. Derivative Financial Instruments

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 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 September 28, 2014. Accordingly, the gross amounts of derivative assets are recognized in prepaid expenses and other current assets in the consolidated balance sheet at September 28, 2014. The Company did not have any outstanding derivative transactions at December 29, 2013 or September 29, 2013.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

12. Derivative Financial Instruments

 

The following summarizes Q3 2014 and Q3 2013 pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification of such changes in the consolidated statements of operations.

 

          Third Quarter  

In Thousands

   Classification of Gain (Loss)    2014     2013  

Commodity hedges

   Cost of sales    $ (319   $ 0   
     

 

 

   

 

 

 

Total

      $ (319   $ 0   
     

 

 

   

 

 

 

The following summarizes YTD 2014 and YTD 2013 pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification of such changes in the consolidated statements of operations.

 

          First Nine Months  

In Thousands

   Classification of Gain (Loss)    2014      2013  

Commodity hedges

   Cost of sales    $ 552       $ (500
     

 

 

    

 

 

 

Total

      $  552       $ (500
     

 

 

    

 

 

 

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. 28,
2014
     Dec. 29,
2013
     Sept. 29,
2013
 

Commodity hedges at fair market value

     Prepaid expenses and other current assets       $ 552       $ 0       $ 0   
     

 

 

    

 

 

    

 

 

 

Total

      $ 552       $ 0       $ 0   
     

 

 

    

 

 

    

 

 

 

The following table summarizes the Company’s outstanding commodity derivative agreements as of September 28, 2014:

 

     Notional      Latest  

In Millions

   Amount      Maturity  

Commodity hedging agreements

   $ 10.2         Dec. 2014   

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

13. 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.

Acquisition Related Contingent Consideration

The fair values of acquisition related contingent consideration are based on internal forecasts and the weighted average cost of capital derived from market data.

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 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.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

13. Fair Value of Financial Instruments

 

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

 

     Sept. 28, 2014     Dec. 29, 2013     Sept. 29, 2013  
     Carrying     Fair     Carrying     Fair     Carrying     Fair  

In Thousands

   Amount     Value     Amount     Value     Amount     Value  

Public debt securities

   $ (373,709   $ (406,800   $ (373,566   $ (409,434   $ (373,520   $ (411,197

Deferred compensation plan assets

     18,015        18,015        17,098        17,098        15,875        15,875   

Deferred compensation plan liabilities

     (18,015     (18,015     (17,098     (17,098     (15,875     (15,875

Commodity hedging agreements

     552        552        0        0        0        0   

Non-public variable rate debt

     (70,000     (70,000     (25,000     (25,000     (40,000     (40,000

Acquisition related contingent consideration

     (13,000     (13,000     0        0        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 following table summarizes, by assets and liabilities, the valuation of the Company’s deferred compensation plan, commodity hedging agreements and acquisition related contingent consideration:

 

     Sept. 28, 2014      Dec. 29, 2013      Sept. 29, 2013  

In Thousands

   Level 1      Level 2      Level 3      Level 1      Level 2      Level 3      Level 1      Level 2      Level 3  

Assets

                          

Deferred compensation plan assets

   $ 18,015             $ 17,098             $ 15,875         

Commodity hedging agreements

      $ 552             $ 0             $ 0      

Liabilities

                          

Deferred compensation plan liabilities

     18,015               17,098               15,875         

Acquisition related contingent consideration

         $ 13,000             $ 0             $ 0   

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)

 

13. Fair Value of Financial Instruments

 

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.

As part of the Johnson City and Morristown, Tennessee territory acquisition in Q2 2014, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell the Covered Beverages and Related Products in the Territory. This contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the weighted average cost of capital derived from market data, which are considered Level 3 inputs. Significant changes in any Level 3 input or assumption in isolation would result in increases or decreases to the fair value measurement for the acquisition related contingent consideration.

There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 for YTD 2014 and YTD 2013. Additionally, there was no change to Level 3 instruments which had an effect on net income or other comprehensive income in Q3 2014 or YTD 2014.

14. Other Liabilities

Other liabilities were summarized as follows:

 

     Sept. 28,      Dec. 29,      Sept. 29,  

In Thousands

   2014      2013      2013  

Accruals for executive benefit plans

   $ 113,839       $ 109,386       $ 106,370   

Acquisition related contingent consideration

     11,995         0         0   

Other

     15,791         16,405         16,838   
  

 

 

    

 

 

    

 

 

 

Total other liabilities

   $ 141,625       $ 125,791       $ 123,208   
  

 

 

    

 

 

    

 

 

 

15. 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 June 2024 based on a new agreement signed in the first quarter of 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 20 to the consolidated financial statements for additional information concerning SAC and Southeastern.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

15. Commitments and Contingencies

 

The Company guarantees a portion of SAC’s and Southeastern’s debt. The amounts guaranteed were $32.7 million, $29.3 million and $33.5 million as of September 28, 2014, December 29, 2013 and September 29, 2013, 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 28, 2014 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 $43.7 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 28, 2014, SAC had total assets of approximately $41 million and total debt of approximately $21 million. SAC had total revenues for YTD 2014 of approximately $138 million. As of September 28, 2014, Southeastern had total assets of approximately $321 million and total debt of approximately $134 million. Southeastern had total revenue for YTD 2014 of approximately $502 million.

The Company has standby letters of credit, primarily related to its property and casualty insurance programs. On September 28, 2014, these letters of credit totaled $23.4 million.

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 28, 2014 amounted to $40.0 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 flow 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

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

15. Commitments and Contingencies

 

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.

16. Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for YTD 2014 and YTD 2013 was 35.6% and 28.8%, 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 2014 and YTD 2013 was 38.5% and 31.1%, 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

   2014     2013  

Statutory expense

   $ 17,474      $ 17,653   

State income taxes, net of federal benefit

     1,915        2,093   

Valuation allowance change

     63        (1

Noncontrolling interest – Piedmont

     (1,465     (1,348

Manufacturing deduction benefit

     (1,893     (1,678

Meals and entertainment

     918        1,070   

Adjustment for uncertain tax positions

     (76     (223

Adjustment for state tax legislation

     0        (2,261

Other, net

     853        (755
  

 

 

   

 

 

 

Income tax expense

   $ 17,789      $ 14,550   
  

 

 

   

 

 

 

As of September 28, 2014, December 29, 2013 and 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. Total accrued interest related to uncertain tax positions is immaterial in all periods presented. 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 2014, the Company reduced its liability for uncertain tax positions by $0.6 million, all of which was a decrease to income tax expense. 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. The reduction to the liability for uncertain tax positions was primarily due to the lapse of the applicable statute of limitations.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

16. Income Taxes

 

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 2013, state tax legislation was enacted that reduced the corporate tax rate in that state from 6.9% to 6.0% effective January 1, 2014. This state corporate tax rate will be further reduced from 6.0% to 5.0% effective January 1, 2015. This reduction in the corporate tax rate decreased 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.

Prior tax years beginning in year 2011 remain open to examination by the Internal Revenue Service, and various tax years beginning in year 1997 remain open to examination by certain state tax jurisdictions due to loss carryforwards.

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.

17. 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 2014 and Q3 2013 is as follows:

 

     June 29,     Pre-tax     Tax     Sept. 28,  

In Thousands

   2014     Activity     Effect     2014  

Net pension activity:

        

Actuarial loss

   $ (42,510   $ 450      $ (173   $ (42,233

Prior service costs

     (110     9        (4     (105

Net postretirement benefits activity:

        

Actuarial loss

     (17,750     562        (218     (17,406

Prior service costs

     2,945        (377     146        2,714   

Foreign currency translation adjustment

     4        (6     2        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (57,421   $ 638      $ (247   $ (57,030
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

17. Accumulated Other Comprehensive Loss

 

     June 30,     Pre-tax     Tax     Sept. 29,  

In Thousands

   2013     Activity     Effect     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
  

 

 

   

 

 

   

 

 

   

 

 

 

A summary of accumulated other comprehensive loss for YTD 2014 and YTD 2013 is as follows:

 

     Dec. 29,     Pre-tax     Tax     Sept. 28,  

In Thousands

   2013     Activity     Effect     2014  

Net pension activity:

        

Actuarial loss

   $ (43,028   $ 1,294      $ (499   $ (42,233

Prior service costs

     (121     27        (11     (105

Net postretirement benefits activity:

        

Actuarial loss

     (18,441     1,688        (653     (17,406

Prior service costs

     3,410        (1,133     437        2,714   

Foreign currency translation adjustment

     4        (6     2        0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (58,176   $ 1,870      $ (724   $ (57,030
  

 

 

   

 

 

   

 

 

   

 

 

 
     Dec. 30,     Pre-tax     Tax     Sept. 29,  

In Thousands

   2012     Activity     Effect     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
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

17. Accumulated Other Comprehensive Loss

 

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

 

     Net
Pension
     Net Postretirement         

In Thousands

   Activity      Benefits Activity      Total  

Q3 2014

        

Cost of sales

   $ 83       $ 24       $ 107   

Selling, delivery and administrative (“S,D&A”) expenses

     376         161         537   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     459         185         644   

Income tax expense

     177         72         249   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 282       $ 113       $ 395   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

 

YTD 2014

        

Cost of sales

   $ 238       $ 72       $ 310   

S,D&A expenses

     1,083         483         1,566   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     1,321         555         1,876   

Income tax expense

     510         216         726   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 811       $ 339       $ 1,150   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

 

18. 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)

 

18. 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 2014 and YTD 2013, 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.

Compensation expense for the Performance Unit Award Agreement recognized in YTD 2014 was $2.3 million, which was based upon a common stock share price of $75.74 on September 26, 2014. 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.

On March 4, 2014 and March 5, 2013, 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 2013 and 2012, 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, 19,100 and 19,880 of such shares were settled in cash in 2014 and 2013, 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)

 

18. Capital Transactions

 

The increase in the total number of shares outstanding in YTD 2014 and YTD 2013 was due to the issuance of the 20,900 and 20,120 shares, respectively, of Class B Common Stock related to the Performance Unit Award Agreement in each year.

19. 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.

In Q3 2013, the Company offered a limited Lump Sum Window distribution of present valued pension benefits to terminated plan participants meeting certain criteria. Benefit distributions were made during the fourth quarter of 2013 (“Q4 2013”). The Company incurred a noncash charge of $12.0 million in Q4 2013 when the distributions were 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.

The components of net periodic pension cost (benefit) were as follows:

 

     Third Quarter     First Nine Months  

In Thousands

   2014     2013     2014     2013  

Service cost

   $ 26      $ 32      $ 84      $ 96   

Interest cost

     2,904        3,086        8,696        9,258   

Expected return on plan assets

     (3,430     (3,546     (10,343     (10,640

Amortization of prior service cost

     9        4        27        12   

Recognized net actuarial loss

     450        837        1,294        2,513   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost (benefit)

   $ (41   $ 413      $ (242   $ 1,239   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $7.5 million to the Company-sponsored pension plans during YTD 2014. Anticipated contributions for the two Company-sponsored pension plans will be in the range of $1 million to $3 million during the remainder of 2014.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

19. 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

   2014     2013     2014     2013  

Service cost

   $ 382      $ 412      $ 1,148      $ 1,238   

Interest cost

     825        715        2,475        2,145   

Recognized net actuarial loss

     562        700        1,688        2,100   

Amortization of prior service cost

     (377     (377     (1,133     (1,133
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement benefit cost

   $ 1,392      $ 1,450      $ 4,178      $ 4,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 2013, the Company’s 401(k) Savings Plan matching contribution was discretionary with the Company having the option to make matching contributions for eligible participants of up to 5% of eligible participants’ contributions. The 5% matching contribution was accrued during 2013 and paid in the first quarter of 2014. During 2014, the Company has matched the first 3.5% of participants’ contributions, or $5.1 million, while maintaining the option to increase the matching contributions an additional 1.5%, for a total of 5%, for the Company’s employees based on the financial results for 2014. The total expense for this benefit was $6.2 million and $5.8 million in YTD 2014 and YTD 2013, 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 28, 2014, the Company had a liability of $9.0 million recorded. The Company is required to make payments of approximately $1 million each year through 2028 to this multi-employer pension plan.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

19. Benefit Plans

 

Certain employees of the Company participate in a multi-employer pension plan, the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund (“the Plan”), to which the Company makes monthly contributions on behalf of such employees. The Plan was certified by the Plan’s actuary as being in “critical” status for the plan year beginning January 1, 2013. As a result, the Plan adopted a “Rehabilitation Plan” effective January 1, 2015. The Company agreed and incorporated such agreement in the renewal of the collective bargaining agreement with the union, effective April 28, 2014, to participate in the Rehabilitation Plan. The Company will increase its contribution rates to the Plan effective January 2015 with additional increases occurring annually to support the Rehabilitation Plan.

There would likely be a withdrawal liability in the event the Company withdraws from its participation in the Plan. The Company’s withdrawal liability was reported by the Plan’s actuary as of April 2014 to be approximately $4.5 million. The Company does not currently anticipate withdrawing from the Plan.

20. 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 28, 2014, 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. As long as The Coca-Cola Company holds the number of shares of Common Stock that it currently owns, it has the right to have its designee proposed by the Company for the nomination to the Company’s Board of Directors, and J. Frank Harrison III, the Chairman of the Board and the Chief Executive Officer of the Company, and trustees of certain trusts established for the benefit of certain relatives of J. Frank Harrison, Jr., have agreed to vote their shares of the Company’s Class B Common Stock which they control in favor of such designee. 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

   2014      2013  

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

   $ 329.1       $ 309.9   

Marketing funding support payments to the Company

     35.0         32.6   
  

 

 

    

 

 

 

Payments by the Company net of marketing funding support

   $ 294.1       $ 277.3   

Payments by the Company for customer marketing programs

   $ 43.2       $ 43.2   

Payments by the Company for cold drink equipment parts

     7.7         6.9   

Fountain delivery and equipment repair fees paid to the Company

     9.9         9.4   

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

     4.4         4.0   

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

     2.8         3.0   

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

20. Related Party Transactions

 

The Company has a production arrangement with CCR to buy and sell finished products at cost. Sales to CCR under this arrangement were $45.3 million and $45.4 million in YTD 2014 and YTD 2013, respectively. Purchases from CCR under this arrangement were $44.0 million and $34.9 million in YTD 2014 and YTD 2013, respectively. In addition, CCR distributes one of the Company’s own brands (Tum-E Yummies). Total sales to CCR for this brand were $17.4 million and $19.3 million in YTD 2014 and YTD 2013, respectively.

On May 7, 2014, the Company and CCR entered into an asset purchase agreement relating to the Territory served by CCR through CCR’s facilities and equipment located in Johnson City and Morristown, Tennessee. At closing, which occurred on May 23, 2014, the Company signed a Comprehensive Beverage Agreement that has a term of ten years and is renewable by the Company indefinitely for successive additional terms of ten years each unless the Comprehensive Beverage Agreement is earlier terminated as provided therein. Under the Comprehensive Beverage Agreement, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell the Covered Beverages and Related Products (as defined in the Comprehensive Beverage Agreement) in the Territory. The quarterly sub-bottling payment will be based on sales of certain beverages and beverage products that are sold under the same trademarks that identify a Covered Beverage, Related Product or certain cross-licensed brands. As of September 28, 2014, the Company has recorded a liability of $13.0 million to reflect the estimated fair value of the contingent consideration related to the future sub-bottling payments. At closing, the Company also entered into a finished goods supply agreement with CCR for the Territory.

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 2014 and YTD 2013. Amounts due from CCBSS for rebates on raw materials were $6.3 million, $5.1 million and $5.0 million as of September 28, 2014, December 29, 2013 and September 29, 2013, respectively. CCR is also a member of CCBSS.

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 $101.4 million and $104.7 million in YTD 2014 and YTD 2013, respectively. The Company also manages the operations of SAC pursuant to a management agreement. Management fees earned from SAC were $1.3 million and $1.2 million in YTD 2014 and YTD 2013, respectively. The Company has also guaranteed a portion of debt for SAC. Such guarantee amounted to $21.5 million as of September 28, 2014. The Company’s equity investment in SAC was $4.1 million as of September 28, 2014, December 29, 2013 and September 29, 2013 and was recorded in other assets on the Company’s consolidated balance sheets.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

20. Related Party Transactions

 

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 $59.9 million in YTD 2014 and $60.4 million in YTD 2013. 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 $11.2 million as of September 28, 2014. The Company’s equity investment in Southeastern was $18.4 million, $17.6 million and $20.8 million as of September 28, 2014, December 29, 2013 and September 29, 2013, respectively, and was recorded in other assets on the Company’s consolidated balance sheets.

The Company holds no assets as collateral against the SAC or Southeastern guarantees, the fair value of which is immaterial to the Company’s consolidated financial statements.

The Company monitors its investments in SAC and Southeastern 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 SAC or Southeastern has been identified as of September 28, 2014 nor was there any impairment in 2013.

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 28, 2014, December 29, 2013 and September 29, 2013 was $20.5 million, $22.2 million and $22.7 million, respectively. Rental payments related to this lease were $2.8 million and $2.7 million in YTD 2014 and YTD 2013, 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 majority shareholder is J. Frank Harrison, III and Morgan H. Everett is a minority shareholder. The principal balance outstanding under this capital lease as of September 28, 2014, December 29, 2013 and September 29, 2013 was $21.2 million, $22.9 million and $23.5 million, respectively. Rental payments related to this lease were $3.1 million in both YTD 2014 and YTD 2013.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

21. Net Sales by Product Category

Net sales by product category were as follows:

 

     Third Quarter      First Nine Months  

In Thousands

   2014      2013      2014      2013  

Bottle/can sales:

           

Sparkling beverages (including energy products)

   $ 286,830       $ 273,905       $ 829,622       $ 798,271   

Still beverages

     81,540         73,336         217,878         196,352   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bottle/can sales

     368,370         347,241         1,047,500         994,623   

Other sales:

           

Sales to other Coca-Cola bottlers

     41,291         42,030         123,680         126,621   

Post-mix and other

     48,015         45,193         134,551         125,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other sales

     89,306         87,223         258,231         252,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 457,676       $ 434,464       $ 1,305,731       $ 1,246,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sparkling beverages are carbonated beverages and energy products while still beverages are noncarbonated beverages.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

22. 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)

   2014      2013      2014      2013  

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

   $ 12,132       $ 16,169       $ 28,364       $ 32,260   

Less dividends:

           

Common Stock

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

Class B Common Stock

     532         527         1,592         1,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total undistributed earnings

   $ 9,815       $ 13,857       $ 21,416       $ 25,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common Stock undistributed earnings – basic

   $ 7,560       $ 10,698       $ 16,505       $ 19,563   

Class B Common Stock undistributed earnings – basic

     2,255         3,159         4,911         5,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total undistributed earnings – basic

   $ 9,815       $ 13,857       $ 21,416       $ 25,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common Stock undistributed earnings – diluted

   $ 7,528       $ 10,652       $ 16,434       $ 19,479   

Class B Common Stock undistributed earnings – diluted

     2,287         3,205         4,982         5,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total undistributed earnings – diluted

   $ 9,815       $ 13,857       $ 21,416       $ 25,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     7,560         10,698         16,505         19,563   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for basic net income per Common Stock share

   $ 9,345       $ 12,483       $ 21,861       $ 24,919   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Dividends on Class B Common Stock

   $ 532       $ 527       $ 1,592       $ 1,577   

Class B Common Stock undistributed earnings – basic

     2,255         3,159         4,911         5,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for basic net income per Class B Common Stock share

   $ 2,787       $ 3,686       $ 6,503       $ 7,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

22. Net Income Per Share

 

     Third Quarter      First Nine Months  

In Thousands (Except Per Share Data)

   2014      2013      2014      2013  

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

     532         527         1,592         1,577   

Common Stock undistributed earnings – diluted

     9,815         13,857         21,416         25,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for diluted net income per Common Stock share

   $ 12,132       $ 16,169       $ 28,364       $ 32,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Dividends on Class B Common Stock

   $ 532       $ 527       $ 1,592       $ 1,577   

Class B Common Stock undistributed earnings – diluted

     2,287         3,205         4,982         5,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Numerator for diluted net income per Class B Common Stock share

   $ 2,819       $ 3,732       $ 6,574       $ 7,425   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

22. Net Income Per Share

 

     Third Quarter      First Nine Months  

In Thousands (Except Per Share Data)

   2014      2013      2014      2013  

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

     2,130         2,109         2,125         2,104   

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)

     9,311         9,290         9,306         9,285   

Class B Common Stock weighted average shares outstanding – diluted

     2,170         2,149         2,165         2,144   

Basic net income per share:

           

Common Stock

   $ 1.31       $ 1.75       $ 3.06       $ 3.49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Class B Common Stock

   $ 1.31       $ 1.75       $ 3.06       $ 3.49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per share:

           

Common Stock

   $ 1.30       $ 1.74       $ 3.05       $ 3.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Class B Common Stock

   $ 1.30       $ 1.74       $ 3.04       $ 3.46   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

23. Risks and Uncertainties

Approximately 89% of the Company’s YTD 2014 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 by the Company to manufacture these products. The remaining 11% of the Company’s YTD 2014 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 2014 and YTD 2013, 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 22% and 9%, respectively, of the Company’s total bottle/can volume to retail customers in YTD 2014; and accounted for approximately 21% and 8%, respectively, of the Company’s total bottle/can volume to retail customers in YTD 2013. Wal-Mart Stores, Inc. accounted for approximately 15% and 14% of the Company’s total net sales during YTD 2014 and YTD 2013, respectively. No other customer represented greater than 10% of the Company’s total net sales for YTD 2014 or YTD 2013.

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 15 and Note 20 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.

The Company’s acquisition related contingent consideration liability is subject to risk due to changes in the Company’s probability weighted discounted cash flow model which is based on internal forecasts and changes in weighted average cost of capital which is derived from market data.

Approximately 6% of the Company’s labor force is covered by collective bargaining agreements. Two collective bargaining agreements covering approximately .7% of the Company’s employees expired during 2013 and the Company entered into new agreements in 2013. One collective bargaining agreement covering approximately 1% of the Company’s employees expired in Q2 2014 and the Company entered into a new

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

23. Risks and Uncertainties

 

collective bargaining agreement at that time. One collective bargaining agreement covering approximately 4% of the Company’s employees expired in Q3 2014 and the Company entered into a new collective bargaining agreement at that time.

24. Supplemental Disclosures of Cash Flow Information

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

 

     First Nine Months  

In Thousands

   2014     2013  

Accounts receivable, trade, net

   $ (15,856   $ (10,544

Accounts receivable from The Coca-Cola Company

     (15,225     (9,028

Accounts receivable, other

     (524     (1,650

Inventories

     (16,775     (4,331

Prepaid expenses and other current assets

     (3,325     802   

Accounts payable, trade

     10,219        7,085   

Accounts payable to The Coca-Cola Company

     21,224        15,533   

Other accrued liabilities

     (4,852     (1,255

Accrued compensation

     (309     (6,298

Accrued interest payable

     5,053        5,320   
  

 

 

   

 

 

 

Increase in current assets less current liabilities (exclusive of acquisition)

   $ (20,370   $ (4,366
  

 

 

   

 

 

 

Non-cash activity

Additions to property, plant and equipment of $2.9 million and $2.0 million have been accrued but not paid and are recorded in accounts payable, trade as of September 28, 2014 and September 29, 2013, respectively.

25. New Accounting Pronouncements

Recently Adopted Pronouncements

In July 2013, the Financial Accounting Standards Board (“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 were effective for fiscal years beginning after December 15, 2013. The requirements of this new guidance did not have a material impact on the Company’s consolidated financial statements.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

25. New Accounting Pronouncements

 

Recently Issued Pronouncements

In April 2014, the FASB issued new guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The new guidance is effective for annual and interim periods beginning after December 15, 2014. The impact on the Company of adopting the new guidance will depend on the nature, terms and size of business disposals completed after the effective date.

In May 2014, the FASB issued new guidance on accounting for revenue from contracts with customers. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated financial statements.

In August 2014, the FASB issued new guidance that specifies the responsibility that an entity’s management has to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The requirements of this new guidance are not expected to have an impact on the Company’s consolidated financial statements.

26. Subsequent Events

On August 28, 2014, the Company signed an asset purchase agreement with CCR relating to the territory currently served by CCR through CCR’s facilities and equipment located in Knoxville, Tennessee (the “Knoxville Territory”). The asset purchase agreement, together with the comprehensive beverage agreement the Company entered into at the closing of this transaction, which occurred on October 24, 2014, with CCR, grant the Company certain exclusive rights in the Knoxville Territory and obligate the Company to make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of such rights are described in a Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on August 29, 2014. The aggregate purchase price paid by the Company in cash at the closing for the transferred assets, after deducting the value of certain retained assets and retained liabilities, was approximately $29.5 million. The amount paid remains subject to adjustment post-closing. The Knoxville Territory expansion transaction will be accounted for as a business combination under FASB Accounting Standards Codification 805. A preliminary purchase price allocation is not yet available for this transaction because the valuation of identifiable intangible assets is not complete.

On October 17, 2014, the Company and CCR entered into an agreement (the “Asset Exchange Agreement”) pursuant to which CCR has agreed to exchange certain assets of CCR relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory currently served by CCR’s facilities and equipment located in Lexington, Kentucky, including the rights to produce such beverages in the Lexington, Kentucky territory in exchange for certain assets of the Company relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory currently served by the Company’s facilities and equipment located in Jackson, Tennessee, including the rights to produce such beverages in the Jackson, Tennessee territory. The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission (“SEC”) on October 20, 2014, which includes a summary description of the Asset Exchange Agreement. The Company anticipates the closing of the transactions contemplated by the Asset Exchange Agreement will occur in the first half of 2015.

 

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

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 2014 (“Q3 2014”) and the first nine months of 2014 (“YTD 2014”) and changes from the third quarter of 2013 (“Q3 2013”) and the first nine months of 2013 (“YTD 2013”).

 

   

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 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 2014 and YTD 2014 compared to Q3 2013 and YTD 2013, respectively.

 

   

Financial Condition – an analysis of the Company’s financial condition as of the end of Q3 2014 compared to year-end 2013 and the end of Q3 2013 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.

Expansion of Company’s Franchise Territory

In April 2013, the Company announced that it had signed a non-binding letter of intent (the “LOI”) with The Coca-Cola Company to expand the Company’s franchise territory to include distribution rights in parts of Tennessee, Kentucky and Indiana that are served by Coca-Cola Refreshments USA, Inc. (“CCR”), a wholly owned subsidiary of The Coca-Cola Company. On May 23, 2014, the Company closed the transaction involving the first phase of this territory expansion, covering the Morristown and Johnson City, Tennessee territories served by CCR for a cash purchase price of $12.2 million. The financial results of the Morristown and Johnson City, Tennessee territories have been included in the Company’s consolidated financial statements from the acquisition date and did not have a material impact on the Company’s consolidated financial results for the three and nine month periods ended September 28, 2014. On October 24, 2014, the Company closed the transaction involving the second completed phase of territory expansion, covering the Knoxville, Tennessee territory previously served by CCR. The transaction is described in a subsequent events note to the Company’s unaudited financial statements included in this quarterly report on Form 10-Q.

 

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On October 17, 2014, the Company and CCR entered into an agreement (the “Asset Exchange Agreement”) pursuant to which CCR has agreed to exchange certain assets of CCR relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory currently served by CCR’s facilities and equipment located in Lexington, Kentucky, including the rights to produce such beverages in the Lexington, Kentucky territory in exchange for certain assets of the Company relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory currently served by the Company’s facilities and equipment located in Jackson, Tennessee, including the rights to produce such beverages in the Jackson, Tennessee territory. The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission (“SEC”) on October 20, 2014, which includes a summary description of the Asset Exchange Agreement. The Company anticipates the closing of the transactions contemplated by the Asset Exchange Agreement will occur in the first half of 2015.

While the Company is preparing to close the transactions contemplated by the Asset Exchange Agreement, the Company is continuing to work towards a definitive agreement or agreements with The Coca-Cola Company for the remainder of the proposed franchise territory expansion described in the LOI, including Cleveland and Cookeville, Tennessee, Louisville, Paducah and Pikeville, Kentucky, and Evansville, Indiana. There is no assurance, however, that the parties will enter into such an agreement or agreements, or that any of the additional proposed territory expansion transactions contemplated by the LOI will occur or the timing of any such transactions.

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 2013.

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 79% of the Company’s YTD 2014 bottle/can net sales to retail customers.

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.

 

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The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During YTD 2014, 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

   2014      2013      2014      2013  

Bottle/can sales:

           

Sparkling beverages (including energy products)

   $ 286,830       $ 273,905       $ 829,622       $ 798,271   

Still beverages

     81,540         73,336         217,878         196,352   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bottle/can sales

     368,370         347,241         1,047,500         994,623   

Other sales:

           

Sales to other Coca-Cola bottlers

     41,291         42,030         123,680         126,621   

Post-mix and other

     48,015         45,193         134,551         125,750   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other sales

     89,306         87,223         258,231         252,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 457,676       $ 434,464       $ 1,305,731       $ 1,246,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Distribution Cost Management

Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs amounted to $156.7 million and $151.0 million in YTD 2014 and YTD 2013, 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 focused on reducing fixed warehouse-related costs by consolidating warehouse space throughout the Company’s territory.

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.

Overview of Operations and Financial Condition

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

Q3 2014 and YTD 2014

 

   

a $0.3 million pre-tax unfavorable and a $0.6 million pre-tax favorable mark-to-market adjustment to cost of sales related to the Company’s 2014 commodity hedging program in Q3 2014 and YTD 2014, respectively;

 

   

$2.6 million and $7.6 million recorded in S,D&A expenses (pre-tax) related to the Company’s franchise territory expansion in Q3 2014 and YTD 2014, respectively; and

 

   

a $0.6 million decrease to income tax expense related to the reduction of the liability of uncertain tax positions in Q3 2014 primarily due to the lapse of the applicable statute of limitations.

Q3 2013 and YTD 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 $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;

 

   

$1.6 million and $3.3 million recorded in S,D&A expenses (pre-tax) related to the Company’s franchise territory expansion in Q3 2013 and YTD 2013, respectively;

 

   

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

 

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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.

The following overview provides a summary of key information concerning the Company’s financial results for Q3 2014 and YTD 2014 compared to Q3 2013 and YTD 2013.

 

     Third Quarter            %
Change
 

In Thousands (Except Per Share Data)

   2014      2013      Change    

Net sales

   $ 457,676       $ 434,464       $ 23,212        5.3   

Cost of sales

     272,734         258,352         14,382        5.6   

Gross margin

     184,942         176,112         8,830        5.0   

S,D&A expenses

     156,496         145,912         10,584        7.3   

Income from operations

     28,446         30,200         (1,754     (5.8

Interest expense, net

     7,333         7,361         (28     (0.4

Income before taxes

     21,113         22,839         (1,726     (7.6

Income tax expense

     7,408         4,756         2,652        55.8   

Net income

     13,705         18,083         (4,378     (24.2

Net income attributable to the Company

     12,132         16,169         (4,037     (25.0

Basic net income per share:

          

Common Stock

   $ 1.31       $ 1.75       $ (.44     (25.1

Class B Common Stock

   $ 1.31       $ 1.75       $ (.44     (25.1

Diluted net income per share:

          

Common Stock

   $ 1.30       $ 1.74       $ (.44     (25.3

Class B Common Stock

   $ 1.30       $ 1.74       $ (.44     (25.3
     First Nine Months            %
Change
 

In Thousands (Except Per Share Data)

   2014      2013      Change    

Net sales

   $ 1,305,731       $ 1,246,994       $ 58,737        4.7   

Cost of sales

     778,936         746,868         32,068        4.3   

Gross margin

     526,795         500,126         26,669        5.3   

S,D&A expenses

     454,969         427,539         27,430        6.4   

Income from operations

     71,826         72,587         (761     (1.0

Interest expense, net

     21,899         22,149         (250     (1.1

Income before taxes

     49,927         50,438         (511     (1.0

Income tax expense

     17,789         14,550         3,239        22.3   

Net income

     32,138         35,888         (3,750     (10.4

Net income attributable to the Company

     28,364         32,260         (3,896     (12.1

Basic net income per share:

          

Common Stock

   $ 3.06       $ 3.49       $ (.43     (12.3

Class B Common Stock

   $ 3.06       $ 3.49       $ (.43     (12.3

Diluted net income per share:

          

Common Stock

   $ 3.05       $ 3.47       $ (.42     (12.1

Class B Common Stock

   $ 3.04       $ 3.46       $ (.42     (12.1

 

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The Company’s net sales increased 5.3% in Q3 2014 compared to Q3 2013. The increase in net sales in Q3 2014 compared to Q3 2013 was primarily due to a 5.4% increase in bottle/can volume to retail customers and a 1.4% increase in bottle/can sales price per unit to retail customers. The Company’s net sales increased 4.7% in YTD 2014 compared to YTD 2013. The increase in net sales in YTD 2014 compared to YTD 2013 was primarily due to a 4.3% increase in bottle/can volume to retail customers and a 1.4% increase in bottle/can sales price per unit to retail customers. The increases in bottle/can volume to retail customers were primarily due to increases in the still beverage category and the incremental volume resulting from the acquisition of the Johnson City and Morristown, Tennessee territories in May 2014. Bottle/can sales to retail customers price per unit increases were primarily due to a sales price increase in sparkling beverages. Bottle/can volume to retail customers increases in Q3 2014 and YTD 2014 compared to Q3 2013 and YTD 2013 due to the Morristown and Johnson City, Tennessee territories acquisition were 3.1% and 1.5%, respectively. 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.

Gross margin dollars increased 5.0% in Q3 2014 compared to Q3 2013. The Company’s gross margin percentage decreased to 40.4% in Q3 2014 compared to 40.5% in Q3 2013. Gross margin dollars increased 5.3% in YTD 2014 compared to YTD 2013. The Company’s gross margin percentage increased to 40.3% in YTD 2014 compared to 40.1% in YTD 2013. The increase in gross margin percentage in YTD 2014 compared to YTD 2013 was primarily due to higher sales price per unit to retail customers.

S,D&A expenses increased 7.3% in Q3 2014 from Q3 2013. The increase in S,D&A expenses in Q3 2014 from Q3 2013 was primarily attributable to increased employee salaries and wages including bonuses and incentives, increased marketing expense and increased expenses related to the Company’s franchise territory expansion. S,D&A expenses increased 6.4% in YTD 2014 from YTD 2013. The increase in S,D&A expenses in YTD 2014 from YTD 2013 was primarily attributable to increased employee salaries and wages including bonuses and incentives, increased expenses related to the Company’s franchise territory expansion, increased marketing expenses and increased property and casualty insurance expense.

Net interest expense decreased 1.1% in YTD 2014 compared to YTD 2013. The decrease in interest expense was due to lower average borrowings on the Company’s $200 million five-year unsecured revolving credit facility (“$200 million facility”) and lower interest expense on capital leases. The Company’s overall weighted average interest rate on its debt and capital lease obligations was 5.8% during both YTD 2014 and YTD 2013.

Income tax expense increased 22.3% in YTD 2014 as compared to YTD 2013. The increase to income tax expense was primarily due to a reduction of $0.4 million in YTD 2013 associated with the American Taxpayer Relief Act enacted on January 2, 2013 and a reduction of $2.3 million in YTD 2013 due to the impact on the Company’s net deferred tax liabilities associated with a reduction in a state corporate tax rate.

Net debt and capital lease obligations were summarized as follows:

 

     Sept. 28,      Dec. 29,      Sept. 29,  

In Thousands

   2014      2013      2013  

Debt

   $ 443,709       $ 398,566       $ 413,520   

Capital lease obligations

     60,568         64,989         66,110   
  

 

 

    

 

 

    

 

 

 

Total debt and capital lease obligations

     504,277         463,555         479,630   

Less: Cash and cash equivalents

     23,067         11,761         25,283   
  

 

 

    

 

 

    

 

 

 

Total net debt and capital lease obligations (1)

   $ 481,210       $ 451,794       $ 454,347   
  

 

 

    

 

 

    

 

 

 

 

(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.

 

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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 29, 2013 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 2014. 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 July 2013, the Financial Accounting Standards Board (“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 were effective for fiscal years beginning after December 15, 2013. The requirements of this new guidance did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Pronouncements

In April 2014, the FASB issued new guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The new guidance is effective for annual and interim periods beginning after December 15, 2014. The impact on the Company of adopting the new guidance will depend on the nature, terms and size of business disposals completed after the effective date.

In May 2014, the FASB issued new guidance on accounting for revenue from contracts with customers. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated financial statements.

In August 2014, the FASB issued new guidance that specifies the responsibility that an entity’s management has to evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The requirements of this new guidance are not expected to have an impact on the Company’s consolidated financial statements.

 

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Results of Operations

Q3 2014 Compared to Q3 2013 and YTD 2014 Compared to YTD 2013

Net Sales

Net sales increased $23.2 million, or 5.3%, to $457.7 million in Q3 2014 compared to $434.5 million in Q3 2013. Net sales increased $58.7 million, or 4.7% to $1,305.7 million in YTD 2014 compared to $1,247.0 million in YTD 2013.

The increase in net sales for Q3 2014 compared to Q3 2013 was principally attributable to the following:

 

Q3 2014

   

Attributable to:

(In Millions)      
$ 18.7     

5.4% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (3.1% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories)

  5.0     

1.4% increase in bottle/can sales price per unit to retail customers primarily due to an increase in sparkling beverages sales price per unit

  3.2     

Increase in freight revenue

  (3.1  

Refund in 2013 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 third quarter of 2013. 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.

  (1.2  

2.7% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products

  (0.8  

Decrease in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)

  0.7     

2.8% increase in post-mix sales price per unit

  0.7      Other

 

 

   
$ 23.2     

Total increase in net sales

 

 

   

 

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The increase in net sales for YTD 2014 compared to YTD 2013 was principally attributable to the following:

 

YTD 2014

   

Attributable to:

(In Millions)      
$ 42.2     

4.3% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (1.5% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories)

  14.1     

1.4% increase in bottle/can sales price per unit to retail customers primarily due to an increase in sparkling beverages sales price per unit

  7.8     

Increase in freight revenue

  (5.5  

4.4% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products

  (3.1  

Refund in 2013 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 third quarter of 2013. 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.

  2.6     

2.1% increase in sales price per unit of sales to other Coca-Cola bottlers primarily due to a higher percentage of energy products and still beverages which have a higher sales price per unit than sparkling beverages (excluding energy products)

  2.0     

3.1% increase in post-mix sales price per unit

  (1.6  

Decrease in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)

  0.2     

Other

 

 

   
$ 58.7     

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. Bottle/can volume to retail customers increased in Q3 2014 and YTD 2014 compared to Q3 2013 and YTD 2013 due to the acquisition of the Morristown and Johnson City, Tennessee territories were 3.1% and 1.5%, respectively.

In YTD 2014, the Company’s bottle/can sales to retail customers accounted for 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 2014 and Q3 2013 and YTD 2014 and YTD 2013 as a percentage of total bottle/can sales volume to retail customers and the percentage change by product category was as follows:

 

     Bottle/Can Sales Volume     Bottle/Can Sales Volume

Product Category

   Q3 2014     Q3 2013     % Increase

Sparkling beverages (including energy products)

     77.4     78.7   3.7

Still beverages

     22.6     21.3   11.7
  

 

 

   

 

 

   

Total bottle/can sales volume

     100.0     100.0   5.4
  

 

 

   

 

 

   

 

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     Bottle/Can Sales Volume     Bottle/Can Sales Volume

Product Category

   YTD 2014     YTD 2013     % Increase

Sparkling beverages (including energy products)

     78.8     80.5   2.2

Still beverages

     21.2     19.5   12.9
  

 

 

   

 

 

   

Total bottle/can sales volume

     100.0     100.0   4.3
  

 

 

   

 

 

   

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 2014 and YTD 2013, 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 customer, Wal-Mart Stores, Inc., accounted for approximately 22% and 21% of the Company’s total bottle/can volume to retail customers during YTD 2014 and YTD 2013, respectively. The Company’s second largest customer, Food Lion, LLC, accounted for approximately 9% and 8% of the Company’s total bottle/can volume to retail customers during YTD 2014 and YTD 2013, respectively. All of the Company’s beverage sales are to customers in the United States.

The Company recorded delivery fees in net sales of $4.7 million and $4.8 million in YTD 2014 and YTD 2013, 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 5.6%, or $14.4 million, to $272.8 million in Q3 2014 compared to $258.4 million in Q3 2013. Cost of sales increased 4.3%, or $32.0 million, to $778.9 million in YTD 2014 compared to $746.9 million in YTD 2013.

The increase in cost of sales for Q3 2014 compared to Q3 2013 was principally attributable to the following:

 

Q3 2014

   

Attributable to:

(In Millions)      
$ 11.1     

5.4% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (3.1% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories)

  2.7     

Increase in freight cost of sales

  2.5     

Increase in raw material costs and increased purchases of finished products

  (1.2  

Increase in marketing funding support received (primarily from The Coca-Cola Company)

  (1.1  

2.7% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products

  (0.8  

Decrease in cost of sales of the Company’s own brand portfolio (primarily Tum-E Yummies)

  1.2     

Other

 

 

   
$ 14.4     

Total increase in cost of sales

 

 

   

 

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The increase in cost of sales for YTD 2014 compared to YTD 2013 was principally attributable to the following:

 

YTD 2014

   

Attributable to:

(In Millions)      
$ 24.9     

4.3% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (1.5% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories)

  7.0     

Increase in freight cost of sales

  6.8     

Increase in raw material costs and increased purchases of finished products

  (5.3  

4.4% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products

  (2.8  

Increase in marketing funding support received (primarily from The Coca-Cola Company)

  2.3     

Increase in cost of sales to other Coca-Cola bottlers (primarily due to a higher percentage of energy products and still beverages which have higher costs per unit than sparkling beverages (excluding energy products)

  (1.9  

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

  (1.8  

Decrease in cost of sales of the Company’s own brand portfolio (primarily Tum-E Yummies)

  1.6     

Increase in manufacturing labor costs

  1.2     

Other

 

 

   
$ 32.0     

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 2014 compared to 2013.

Since 2008, the Company has been purchasing concentrate from The Coca-Cola Company for all sparkling beverages for which the Company purchases concentrate from The Coca-Cola Company under an incidence-based pricing arrangement and has not purchased concentrates at standard concentrate prices as was the Company’s practice in prior years. During the two-year term of a new incidence-based pricing agreement that the Company entered into with The Coca-Cola Company in December 2013 that began January 1, 2014 and will end on December 31, 2015, the pricing of such concentrate will continue to be governed by the incidence-based pricing model rather than the other agreements that the Company has with The Coca-Cola Company. Under the incidence-based pricing model, the concentrate price The Coca-Cola Company charges is impacted by a number of factors, including the incidence rate in effect, the Company’s pricing and sales of finished products, the channels in which the finished products are sold and package mix.

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 and payments to customers for marketing programs, was $14.6 million for Q3 2014 compared to $13.4 million for Q3 2013. Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to customers for marketing programs, was $41.4 million for YTD 2014 compared to $38.7 million for YTD 2013.

Gross Margin

Gross margin dollars increased 5.0%, or $8.8 million, to $184.9 million in Q3 2014 compared to $176.1 million in Q3 2013. Gross margin as a percentage of net sales decreased to 40.4% for Q3 2014 from 40.5% for Q3 2013. Gross margin dollars increased 5.3%, or $26.7 million, to $526.8 million in YTD 2014 compared to $500.1 million in YTD 2013. Gross margin as a percentage of net sales increased to 40.3% for YTD 2014 from 40.1% for YTD 2013.

The increase in gross margin dollars for Q3 2014 compared to Q3 2013 was principally attributable to the following:

 

Q3 2014

   

Attributable to:

(In Millions)      
$ 7.6     

5.4% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (3.1% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories)

  5.0     

1.4% increase in bottle/can sales price per unit to retail customers primarily due to an increase in sparkling beverages sales price per unit

  (3.1  

Refund in 2013 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 third quarter of 2013. 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  

Increase in raw material costs and increased purchases of finished products

  1.2     

Increase in marketing funding support received (primarily from The Coca-Cola Company)

  0.7     

2.8% increase in post-mix sales price per unit

  (0.1  

Other

 

 

   
$ 8.8     

Total increase in gross margin

 

 

   

 

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The increase in gross margin dollars for YTD 2014 compared to YTD 2013 was principally attributable to the following:

 

YTD 2014

   

Attributable to:

(In Millions)      
$ 17.3     

4.3% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (1.5% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories)

  14.1     

1.4% increase in bottle/can sales price to retail customers primarily due to an increase in sparkling beverages sales price per unit

  (6.8  

Increase in raw material costs and increased purchases of finished products

  (3.1  

Refund in 2013 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 third quarter of 2013. 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.

  2.8     

Increase in marketing funding support received (primarily from The Coca-Cola Company)

  2.6     

2.1% increase in sales price per unit of sales to other Coca-Cola bottlers primarily due to a higher percentage of energy products and still beverages which have a higher sales price per unit than sparkling beverages (excluding energy products)

  (2.3  

Increase in cost of sales to other Coca-Cola bottlers primarily due to a higher percentage of energy products and still beverages which have higher costs per unit than sparkling beverages (excluding energy products)

  2.0     

3.1% increase in post-mix sales price per unit

  1.9     

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

  (1.6  

Increase in manufacturing labor costs

  0.8     

Increase in freight gross margin

  (1.0  

Other

 

 

   
$ 26.7     

Total increase in gross margin

 

 

   

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 and the Company does not. 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.

 

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S,D&A expenses increased by $10.6 million, or 7.3%, to $156.5 million in Q3 2014 from $145.9 million in Q3 2013. S,D&A expenses as a percentage of net sales increased to 34.2% in Q3 2014 from 33.6% in Q3 2013. S,D&A expenses increased by $27.4 million, or 6.4%, to $454.9 million in YTD 2014 from $427.5 million in YTD 2013. S,D&A expenses as a percentage of net sales increased to 34.8% in YTD 2014 from 34.3% in YTD 2013.

The increase in S,D&A expenses for Q3 2014 compared to Q3 2013 was principally attributable to the following:

 

Q3 2014

    

Attributable to:

(In Millions)       
$ 3.6      

Increase in employee salaries due to normal salary increases and additional personnel related to the acquisition of the Johnson City and Morristown, Tennessee territories

  2.5      

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

  1.0      

Increase in marketing expense primarily due to increased spending for promotional items and various marketing programs

  1.0      

Increase in expenses related to the Company’s franchise territory expansion, primarily professional fees related to due diligence and consulting fees related to infrastructure

  2.5      

Other

 

 

    
$ 10.6      

Total increase in S,D&A expenses

 

 

    

The increase in S,D&A expenses for YTD 2014 compared to YTD 2013 was principally attributable to the following:

 

YTD 2014

    

Attributable to:

(In Millions)       
$ 6.7      

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

  5.7      

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

  4.3      

Increase in expenses related to the Company’s franchise territory expansion, primarily professional fees related to due diligence and consulting fees related to infrastructure

  2.5      

Increase in marketing expense primarily due to increased spending for promotional items and various marketing programs

  0.8      

Increase in employer payroll taxes and an increase in employee benefit costs primarily due to increased medical insurance expense partially offset by a pension benefit

  0.7      

Increase in property and casualty insurance expense primarily due to an increase in auto insurance claims

  6.7      

Other

 

 

    
$ 27.4      

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 $156.7 million and $151.0 million in YTD 2014 and YTD 2013, respectively.

The Company’s expense recorded in S,D&A expenses related to the two Company-sponsored pension plans decreased by $1.3 million to a benefit of $0.2 million in YTD 2014 from an expense of $1.1 million in YTD 2013.

 

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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 2013, the Company’s 401(k) Savings Plan matching contribution was discretionary with the Company having the option to make matching contributions for eligible participants of up to 5% of eligible participants’ contributions. The 5% matching contribution was accrued during 2013 and paid in the first quarter of 2014. During 2014, the Company has matched the first 3.5% of participants’ contributions while maintaining the option to increase the matching contributions an additional 1.5%, for a total of 5%, for the Company’s employees based on the financial results for 2014. The total expense for this benefit recorded in S,D&A expenses was $5.4 million and $5.1 million in YTD 2014 and YTD 2013, respectively.

Certain employees of the Company participate in a multi-employer pension plan, the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund (“the Plan”), to which the Company makes monthly contributions on behalf of such employees. The Plan was certified by the Plan’s actuary as being in “critical” status for the plan year beginning January 1, 2013. As a result, the Plan adopted a “Rehabilitation Plan” effective January 1, 2015. The Company agreed and incorporated such agreement in the renewal of the collective bargaining agreement with the union, effective April 28, 2014, to participate in the Rehabilitation Plan. The Company will increase its contribution rates to the Plan effective January 2015 with additional increases occurring annually to support the Rehabilitation Plan.

There would likely be a withdrawal liability in the event the Company withdraws from its participation in the Plan. The Company’s withdrawal liability was reported by the Plan’s actuary as of April 2014 to be approximately $4.5 million. The Company does not currently anticipate withdrawing from the Plan.

Interest Expense

Net interest expense was flat in Q3 2014 compared to Q3 2013. Net interest expense decreased 1.1% in YTD 2014 compared to YTD 2013. The decrease in YTD 2014 compared to YTD 2013 was primarily due to lower average borrowings on the Company’s $200 million facility and lower interest expense on capital leases. The Company’s overall weighted average interest rate on its debt and capital lease obligations was 5.8% during both YTD 2014 and YTD 2013.

Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for YTD 2014 and YTD 2013 was 35.6% and 28.8%, 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 2014 and YTD 2013 was 38.5% and 31.1%, respectively. The increase in the effective tax rate for YTD 2014 resulted primarily from certain favorable tax provisions in YTD 2013 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 liabilities for uncertain tax positions.

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.

 

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Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $3.8 million and $3.6 million in YTD 2014 and YTD 2013, respectively, related to the portion of Piedmont owned by The Coca-Cola Company.

Financial Condition

Total assets increased to $1.38 billion at September 28, 2014, from $1.28 billion at December 29, 2013 primarily due to increases in cash and cash equivalents; accounts receivables; inventories; property, plant and equipment, net and other identifiable intangible assets, including acquired assets from the acquisition of the Johnson City and Morristown, Tennessee territories.

Net working capital, defined as current assets less current liabilities, increased by $55.6 million to $86.0 million at September 28, 2014 from December 29, 2013 and increased by $30.5 million at September 28, 2014 from September 29, 2013.

Significant changes in net working capital from December 29, 2013 were as follows:

 

   

An increase in cash and cash equivalents of $11.3 million primarily due to borrowings from the Company’s $200 million facility.

 

   

An increase in accounts receivable, trade of $15.9 million primarily due to normal seasonal increase in sales and accounts receivable sales from acquired franchise territories.

 

   

An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $15.2 million and $21.2 million, respectively, primarily due to the timing of payments.

 

   

An increase in inventories of $18.1 million primarily due to normal seasonal increase in sales and acquired inventories from new territories.

 

   

A decrease of $20.0 million in the current portion of debt due to the refinance of the Company’s uncommitted line of credit with borrowings under the Company’s $350 million five-year unsecured amended and restated revolving credit facility on October 31, 2014 and, accordingly, the $20.0 million outstanding balance was classified as long-term as of September 28, 2014.

 

   

An increase in accounts payable trade of $5.9 million primarily due to normal seasonal increases in purchases and timing of payments.

 

   

An increase in accrued interest payable of $5.1 million due to timing of payments.

Significant changes in net working capital from September 29, 2013 were as follows:

 

   

An increase in accounts receivable, trade of $7.4 million primarily due to the timing of payments and accounts receivable sales from acquired franchise territories.

 

   

An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $8.5 million and $3.7 million, respectively, primarily due to the timing of payments.

 

   

An increase in inventories of $9.9 million primarily due to acquired inventories from new territories and inventory required for future marketing strategy.

 

   

A decrease of $20.0 million in the current portion of debt due to the refinance of the Company’s uncommitted line of credit with borrowings under the Company’s $350 million five-year unsecured amended and restated revolving credit facility on October 31, 2014 and, accordingly, the $20.0 million outstanding balance was classified as long-term as of September 28, 2014.

 

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An increase in accrued compensation of $5.2 million primarily due to increased bonus accrual due to the Company’s financial performance.

Debt and capital lease obligations were $504.3 million as of September 28, 2014 compared to $463.6 million as of December 29, 2013 and $479.6 million as of September 29, 2013. Debt and capital lease obligations as of September 28, 2014 included $60.6 million of capital lease obligations related primarily to Company facilities.

Liquidity and Capital Resources

Capital Resources

The Company’s available sources of capital include cash flows from operations, available credit facility balances and the issuance of debt and equity securities. Historically, operating results for the third quarter and the 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 quarter versus the first and fourth quarters of the fiscal year. 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.

On October 16, 2014, the Company entered into a $350 million five-year unsecured revolving credit facility (“$350 million facility”) which amended and restated the Company’s existing $200 million five-year unsecured revolving credit agreement dated as of September 21, 2011 (“$200 million facility”). The $350 million facility has a scheduled maturity date of October 16, 2019 and up to $50 million is available for the issuance of letters of credit. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement, the Company may increase the aggregate availability under the facility to $450 million. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, dependent on the Company’s credit rating at the time of borrowing. At the Company’s current credit ratings, the Company must pay an annual facility fee of .15% of the lenders’ aggregate commitments under the facility. The $350 million facility includes, and the $200 million facility included, 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 respective credit agreements. The Company was in compliance with these covenants under the $200 million facility at September 28, 2014 and is currently in compliance with these covenants under the $350 million facility. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

The Company has $100 million of senior notes which mature in April 2015. The Company currently expects to use borrowings under the $350 million facility to repay the notes when due and, accordingly, has classified all the $100 million Senior Notes due April 2015 as long-term.

On September 28, 2014, December 29, 2013 and September 29, 2013, the Company had $20.0 million outstanding on an uncommitted line of credit. On October 31, 2014, the Company terminated the uncommitted line of credit and refinanced the outstanding balance with borrowings under the $350 million facility and, accordingly, has classified the outstanding balance on the uncommitted line of credit as of September 28, 2014 as long-term.

 

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The Company has obtained the majority of its long-term financing, other than capital leases, from public markets. As of September 28, 2014, $373.7 million of the Company’s total outstanding balance of debt and capital lease obligations of $504.3 million was financed through publicly offered debt. The Company had capital lease obligations of $60.6 million as of September 28, 2014. As of September 28, 2014, the Company had $50.0 million and $20.0 million outstanding on the $200 million facility and the Company’s uncommitted line of credit, respectively.

Cash Sources and Uses

The primary sources of cash for the Company in YTD 2014 and YTD 2013 have been provided by operating activities and available credit facilities. The primary uses of cash in YTD 2014 were for capital expenditures, the payment of debt and capital lease obligations, dividend payments, income tax payments, pension plan contributions, acquisition of new territories and funding working capital. The primary uses of cash in YTD 2013 were for capital expenditures, the payment of debt and capital lease obligations, dividend payments, income tax payments and funding working capital.

A summary of activity for YTD 2014 and YTD 2013 follows:

 

     First Nine Months  

In Millions

   2014      2013  

Cash Sources

     

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

   $ 81.7       $ 88.7   

Proceeds from $200 million facility

     85.0         55.0   

Proceeds from the sale of property, plant and equipment

     1.2         6.0   
  

 

 

    

 

 

 

Total cash sources

   $ 167.9       $ 149.7   
  

 

 

    

 

 

 

Cash Uses

     

Capital expenditures

   $ 61.4       $ 45.2   

Acquisition of new territories

     12.2         —     

Payment on $200 million facility

     40.0         65.0   

Payment on capital lease obligations

     4.4         3.9   

Dividends

     6.9         6.9   

Income tax payments

     24.2         13.6   

Contributions to pension plans

     7.5         .1   

Other

     —           .1   
  

 

 

    

 

 

 

Total cash uses

   $ 156.6       $ 134.8   
  

 

 

    

 

 

 

Increase in cash

   $ 11.3       $ 14.9   
  

 

 

    

 

 

 

Based on current projections, which include a number of assumptions such as the Company’s pre-tax earnings, the Company anticipates its cash requirements for income taxes will be between $3 million and $8 million for the remainder of 2014.

Operating Activities

During YTD 2014, cash flow from operating activities decreased $25.0 million compared to YTD 2013. The decrease was primarily due to $10.6 million in additional income tax payments and $7.4 million in additional pension payments during YTD 2014 compared to YTD 2013 and $12.4 million additional increase in inventories for YTD 2014 compared to YTD 2013. These decreases to operating activities YTD 2014 compared to YTD 2013 were offset by a $6.0 million decrease in accrued compensation.

 

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Investing Activities

On May 7, 2014, the Company and CCR entered into an asset purchase agreement relating to the territory served by CCR through CCR’s facilities and equipment located in Johnson City and Morristown, Tennessee. The closing of this transaction occurred on May 23, 2014 for a cash purchase price of $12.2 million, which amount remains subject to adjustment until July 2, 2015, as specified in the asset purchase agreement. See Note 4 to the consolidated financial statements for additional information related to the Johnson City and Morristown, Tennessee territory acquisition.

Additions to property, plant and equipment during YTD 2014 were $57.0 million of which $2.9 million were accrued in accounts payable, trade as unpaid. This amount does not include $8.5 million in property, plant and equipment acquired at the date of acquisition for the Johnson City and Morristown, Tennessee territories. This compared to $32.7 million in total additions to property, plant and equipment during YTD 2013 of which $2.0 million were accrued in accounts payable, trade as unpaid. Capital expenditures during YTD 2014 were funded with cash flows from operations and available credit facilities. The Company anticipates total additions to property, plant and equipment in fiscal year 2014 will be in the range of $80 million to $90 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.

Financing Activities

On October 16, 2014, the Company entered into a $350 million facility which amended and restated the Company’s existing $200 million facility. The $350 million facility has a scheduled maturity date of October 16, 2019 and up to $50 million is available for the issuance of letters of credit. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement, the Company may increase the aggregate availability under the facility to $450 million. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, dependent on the Company’s credit rating at the time of borrowing. At the Company’s current credit ratings, the Company must pay an annual facility fee of .15% of the lenders’ aggregate commitments under the facility. The $350 million facility includes, and the $200 million facility included, 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 respective credit agreements. The Company was in compliance with these covenants under the $200 million facility at September 28, 2014 and is currently in compliance with these covenants under the $350 million facility. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources. The Company currently believes that all of the banks participating in the Company’s $350 million facility have the ability to and will meet any funding requests from the Company. On September 28, 2014, December 29, 2013 and September 29, 2013, the Company had $50.0 million, $5.0 million and $20.0 million, respectively, of outstanding borrowings on the $200 million facility.

During YTD 2014, the Company’s net borrowings under the $200 million facility increased $45.0 million primarily to fund working capital requirements, capital expenditures and the acquisition of the Johnson City and Morristown, Tennessee territories. During YTD 2013, the Company’s net borrowings under the $200 million facility decreased $10.0 million primarily due to increased cash available for repayments as a result of seasonally lower working capital requirements.

 

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The Company has $100 million of senior notes which mature in April 2015. The Company currently expects to use borrowings under the $350 million facility to repay the notes when due and, accordingly, has classified all the $100 million Senior Notes due April 2015 as long-term.

On September 28, 2014, December 29, 2013 and September 29, 2013, the Company had $20.0 million outstanding on an uncommitted line of credit. On October 31, 2014, the Company terminated the uncommitted line of credit and refinanced the outstanding balance with borrowings under the $350 million facility and, accordingly, has classified the outstanding balance on the uncommitted line of credit as of September 28, 2014 as long-term.

As of September 28, 2014, December 29, 2013 and September 29, 2013, the weighted average interest rate of the Company’s debt and capital lease obligations was 5.8%, 6.2% 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% in both YTD 2014 and YTD 2013. As of September 28, 2014, $70.0 million of the Company’s debt and capital lease obligations of $504.3 million were subject to changes in short-term interest rates.

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 28, 2014, 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. Changes in the credit ratings of The Coca-Cola Company could adversely affect the Company’s credit ratings as well.

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 $32.7 million of debt for these entities as of September 28, 2014. 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 28, 2014, the Company’s maximum exposure, if the entities borrowed up to their borrowing capacity, would have been $71.7 million including the Company’s equity interests. See Note 15 and Note 20 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 28, 2014:

 

      Payments Due by Period  
            Oct. 2014-      Oct. 2015-      Oct. 2017-      After  

In Thousands

   Total      Sept. 2015      Sept. 2017      Sept. 2019      Sept. 2019  

Contractual obligati