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 March 29, 2015

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 April 30, 2015

Common Stock, $1.00 Par Value

  7,141,447

Class B Common Stock, $1.00 Par Value

  2,150,782


Table of Contents

COCA-COLA BOTTLING CO. CONSOLIDATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2015

INDEX

 

         Page  
  PART I – FINANCIAL INFORMATION   

Item 1.

  Financial Statements (Unaudited)   
  Consolidated Statements of Operations      2   
  Consolidated Statements of Comprehensive Income      3   
  Consolidated Balance Sheets      4   
  Consolidated Statements of Changes in Equity      6   
  Consolidated Statements of Cash Flows      7   
  Notes to Consolidated Financial Statements      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      37   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      53   

Item 4.

  Controls and Procedures      54   
  PART II – OTHER INFORMATION   

Item 1A.

  Risk Factors      55   

Item 2.

  Unregistered Sales of Equity Securities And Use of Proceeds      55   

Item 6.

  Exhibits      56   
  Signatures      57   


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)

 

     First Quarter  
     2015     2014  

Net sales

   $ 453,253      $ 388,582   

Cost of sales

     268,880        232,249   
  

 

 

   

 

 

 

Gross margin

     184,373        156,333   

Selling, delivery and administrative expenses

     167,471        144,217   
  

 

 

   

 

 

 

Income from operations

     16,902        12,116   

Interest expense, net

     7,347        7,223   

Other income (expense)

     (5,089     0   
  

 

 

   

 

 

 

Income before income taxes

     4,466        4,893   

Income tax expense

     1,513        1,792   
  

 

 

   

 

 

 

Net income

     2,953        3,101   

Less: Net income attributable to noncontrolling interest

     729        652   
  

 

 

   

 

 

 

Net income attributable to Coca-Cola Bottling Co. Consolidated

   $ 2,224      $ 2,449   
  

 

 

   

 

 

 

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

    

Common Stock

   $ .24      $ .26   
  

 

 

   

 

 

 

Weighted average number of Common Stock shares outstanding

     7,141        7,141   

Class B Common Stock

   $ .24      $ .26   
  

 

 

   

 

 

 

Weighted average number of Class B Common Stock shares outstanding

     2,136        2,115   

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

    

Common Stock

   $ .24      $ .26   
  

 

 

   

 

 

 

Weighted average number of Common Stock shares outstanding – assuming dilution

     9,317        9,296   

Class B Common Stock

   $ .23      $ .26   
  

 

 

   

 

 

 

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

     2,176        2,155   

Cash dividends per share

    

Common Stock

   $ .25      $ .25   

Class B Common Stock

   $ .25      $ .25   

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

In Thousands

 

      First Quarter  
     2015     2014  

Net income

   $ 2,953      $ 3,101   

Other comprehensive income, net of tax:

    

Foreign currency translation adjustment

     (4     0   

Defined benefit plans reclassification included in pension costs:

    

Actuarial loss

     489        259   

Prior service costs

     5        5   

Postretirement benefits reclassification included in benefits costs:

    

Actuarial loss

     440        346   

Prior service costs

     (516     (232
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     414        378   
  

 

 

   

 

 

 

Comprehensive income

     3,367        3,479   

Less: Comprehensive income attributable to noncontrolling interest

     729        652   
  

 

 

   

 

 

 

Comprehensive income attributable to Coca-Cola Bottling Co. Consolidated

   $ 2,638      $ 2,827   
  

 

 

   

 

 

 

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)

 

     Mar. 29,
2015
     Dec. 28,
2014
     Mar. 30,
2014
 

ASSETS

        

Current Assets:

        

Cash and cash equivalents

   $ 21,163       $ 9,095       $ 18,774   

Accounts receivable, trade, less allowance for doubtful accounts of $1,514, $1,330 and $1,461, respectively

     144,356         125,726         118,205   

Accounts receivable from The Coca-Cola Company

     30,639         22,741         25,816   

Accounts receivable, other

     12,308         14,531         11,969   

Inventories

     91,129         70,740         76,113   

Prepaid expenses and other current assets

     41,141         44,168         29,563   
  

 

 

    

 

 

    

 

 

 

Total current assets

     340,736         287,001         280,440   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, net

     391,838         358,232         306,073   

Leased property under capital leases, net

     41,587         42,971         47,474   

Other assets

     64,014         60,832         59,959   

Franchise rights

     520,672         520,672         520,672   

Goodwill

     109,984         106,220         102,049   

Other identifiable intangible assets, net

     103,906         57,148         3,597   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 1,572,737       $ 1,433,076       $ 1,320,264   
  

 

 

    

 

 

    

 

 

 

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)

 

     Mar. 29,
2015
    Dec. 28,
2014
    Mar. 30,
2014
 

LIABILITIES AND EQUITY

      

Current Liabilities:

      

Current portion of debt

   $ 0      $ 0      $ 20,000   

Current portion of obligations under capital leases

     6,679        6,446        6,062   

Accounts payable, trade

     58,458        58,640        52,309   

Accounts payable to The Coca-Cola Company

     60,211        51,227        39,049   

Other accrued liabilities

     80,446        68,775        78,106   

Accrued compensation

     24,650        38,677        17,422   

Accrued interest payable

     8,768        3,655        9,389   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     239,212        227,420        222,337   

Deferred income taxes

     131,895        140,000        146,181   

Pension and postretirement benefit obligations

     133,809        134,100        89,825   

Other liabilities

     229,889        177,250        127,975   

Obligations under capital leases

     50,905        52,604        57,477   

Long-term debt

     526,809        444,759        413,613   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,312,519        1,176,133        1,057,408   
  

 

 

   

 

 

   

 

 

 

Commitments and Contingencies (Note 12)

      

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 – 2,778,896, 2,757,976 and 2,757,976 shares, respectively

     2,777        2,756        2,756   

Capital in excess of par value

     113,064        110,860        110,684   

Retained earnings

     210,864        210,957        189,006   

Accumulated other comprehensive loss

     (89,500     (89,914     (57,798
  

 

 

   

 

 

   

 

 

 
     247,409        244,863        254,852   

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

     186,155        183,609        193,598   

Noncontrolling interest

     74,063        73,334        69,258   
  

 

 

   

 

 

   

 

 

 

Total equity

     260,218        256,943        262,856   
  

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,572,737      $ 1,433,076      $ 1,320,264   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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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. 29, 2013

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

Net income

              2,449            2,449        652         3,101   

Other comprehensive income, net of tax

                378          378           378   

Cash dividends paid Common ($.25 per share)

              (1,785         (1,785        (1,785

Class B Common ($.25 per share)

              (527         (527        (527

Issuance of 20,900 shares of Class B Common Stock

        21         1,742               1,763           1,763   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance on Mar. 30, 2014

   $ 10,204       $ 2,756       $ 110,684       $ 189,006      $ (57,798   $ (61,254   $ 193,598      $ 69,258       $ 262,856   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance on Dec. 28, 2014

   $ 10,204       $ 2,756       $ 110,860       $ 210,957      $ (89,914   $ (61,254   $ 183,609      $ 73,334       $ 256,943   

Net income

              2,224            2,224        729         2,953   

Other comprehensive income, net of tax

                414          414           414   

Cash dividends paid Common ($.25 per share)

              (1,785         (1,785        (1,785

Class B Common ($.25 per share)

              (532         (532        (532

Issuance of 20,920 shares of Class B Common Stock

        21         2,204               2,225           2,225   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance on Mar. 29, 2015

   $ 10,204       $ 2,777       $ 113,064       $ 210,864      $ (89,500   $ (61,254   $ 186,155      $ 74,063       $ 260,218   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In Thousands

 

     First Quarter  
     2015     2014  

Cash Flows from Operating Activities

    

Net income

   $ 2,953      $ 3,101   

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation expense

     17,065        14,486   

Amortization of intangibles

     592        83   

Deferred income taxes

     42        222   

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

     282        (179

Impairment of property, plant and equipment

     148        0   

Amortization of debt costs

     504        478   

Amortization of deferred gain related to terminated interest rate agreements

     (142     (139

Stock compensation expense

     1,116        853   

Fair value adjustment of acquisition-related contingent consideration

     5,089        0   

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

     (23,898     (18,909

Increase in other noncurrent assets (exclusive of acquisition)

     (3,310     (1,819

Decrease in other noncurrent liabilities (exclusive of acquisition)

     (2,229     (5,485

Other

     (7     0   
  

 

 

   

 

 

 

Total adjustments

     (4,748     (10,409
  

 

 

   

 

 

 

Net cash used in operating activities

     (1,795     (7,308
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Additions to property, plant and equipment (exclusive of acquisition)

     (30,842     (17,814

Proceeds from the sale of property, plant and equipment

     118        958   

Acquisition of new territories, net of cash acquired

     (33,389     0   
  

 

 

   

 

 

 

Net cash used in investing activities

     (64,113     (16,856
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Borrowings under revolving credit facility

     82,000        35,000   

Cash dividends paid

     (2,317     (2,312

Principal payments on capital lease obligations

     (1,619     (1,449

Other

     (88     (62
  

 

 

   

 

 

 

Net cash provided by financing activities

     77,976        31,177   
  

 

 

   

 

 

 

Net increase in cash

     12,068        7,013   

Cash at beginning of period

     9,095        11,761   
  

 

 

   

 

 

 

Cash at end of period

   $ 21,163      $ 18,774   
  

 

 

   

 

 

 

Significant noncash investing and financing activities:

    

Issuance of Class B Common Stock in connection with stock award

   $ 2,225      $ 1,763   

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

     4,734        6,194   

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

1. Significant Accounting Policies

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

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

The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 28, 2014 filed with the United States Securities and Exchange Commission.

2. 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, Kentucky and Indiana served by Coca-Cola Refreshments USA, Inc. (“CCR”), a wholly owned subsidiary of The Coca-Cola Company.

Cleveland and Cookeville, Tennessee Territory Acquisitions

On December 5, 2014, the Company and CCR entered into an asset purchase agreement (the “January Asset Purchase Agreement”) relating to the territory served by CCR through CCR’s facilities and equipment located in Cleveland and Cookeville, Tennessee (the “January Expansion Territory”). The closing of this transaction occurred on January 30, 2015 for a cash purchase price of $13.8 million, which will remain subject to adjustment until March 13, 2016 in accordance with the terms and conditions of the January Asset Purchase Agreement.

The Company has preliminarily allocated the purchase price for the January Expansion Territory 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.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

2. Acquisitions

 

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

 

In Thousands

   Fair Value  

Cash

   $ 59   

Inventories

     1,237   

Prepaid expenses and other current assets

     675   

Property, plant and equipment

     6,717   

Other assets (including deferred taxes)

     759   

Goodwill

     1,134   

Other identifiable intangible assets

     17,750   
  

 

 

 

Total acquired assets

   $ 28,331   
  

 

 

 

Current liabilities (acquisition related contingent consideration)

   $ 843   

Other liabilities (acquisition related contingent consideration)

     13,729   
  

 

 

 

Total assumed liabilities

   $ 14,572   
  

 

 

 

The fair value of the acquired identifiable intangible assets is as follows:

 

In Thousands

   Fair Value      Estimated
Useful Life
 

Distribution agreements

   $ 17,200         40 years   

Customer lists

     550         12 years   
  

 

 

    

Total

   $ 17,750      
  

 

 

    

The goodwill of $1.1 million is primarily attributable to the workforce of the January Expansion Territory. Goodwill of $0.1 million is expected to be deductible for tax purposes.

Louisville, Kentucky and Evansville, Indiana Territory Acquisitions

On December 17, 2014, the Company and CCR entered into an asset purchase agreement (the “February Asset Purchase Agreement”) related to the territory served by CCR through CCR’s facilities and equipment located in Louisville, Kentucky and Evansville, Indiana (the “February Expansion Territory”). The closing of this transaction occurred on February 27, 2015, for a cash purchase price of $19.8 million, which will remain subject to adjustment until April 7, 2016 in accordance with the terms and conditions of the February Asset Purchase Agreement.

The Company has preliminarily allocated the purchase price of the February Expansion Territory 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.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

2. Acquisitions

 

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

 

In Thousands

   Fair Value  

Cash

   $ 105   

Inventories

     1,269   

Prepaid expenses and other current assets

     1,084   

Property, plant and equipment

     16,574   

Other assets (including deferred taxes)

     1,573   

Goodwill

     2,670   

Other identifiable intangible assets

     29,600   
  

 

 

 

Total acquired assets

   $ 52,875   
  

 

 

 

Current liabilities (acquisition related contingent consideration)

   $ 1,659   

Other current liabilities

     370   

Other liabilities (acquisition related contingent consideration)

     31,052   
  

 

 

 

Total assumed liabilities

   $ 33,081   
  

 

 

 

The fair value of acquired identifiable intangible assets is as follows:

 

In Thousands

   Fair Value      Estimated
Useful Life
 

Distribution agreements

   $ 28,400         40 years   

Customer lists

     1,200         12 years   
  

 

 

    

Total

   $ 29,600      
  

 

 

    

The goodwill of $2.7 million is primarily attributed to the workforce of the February Expansion Territory. Goodwill of $0.8 million is expected to be deductible for tax purposes.

The financial results of the January and February Expansion Territories have been included in the Company’s consolidated financial statements from their respective acquisition dates. These territories contributed $18.1 million in net sales and $1.8 million in operating income during the first quarter of 2015 (“Q1 2015”).

At the closings of both the January and the February Asset Purchase Agreements, the Company signed a Comprehensive Beverage Agreement (“CBA”) for each of the January and February Expansion Territories which has a term of ten years and is renewable by the Company indefinitely for successive additional terms of ten years each unless earlier terminated as provided therein. Under the CBAs, 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 specified covered beverages and related products, as defined in the agreements, in the January and February Expansion Territories. The quarterly sub-bottling payment, which is accounted for as contingent consideration, is 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 CBAs). The CBA imposes certain obligations on the Company with respect to serving the January and February Expansion Territories that failure to meet could result in termination of a CBA if the Company fails to take corrective measures within a specified time frame.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

2. Acquisitions

 

On May 23, 2014, the Company acquired the Johnson City and Morristown, Tennessee territory, and on October 24, 2014, the Company acquired the Knoxville, Tennessee territory (“2014 Expansion Territories”) from CCR under substantially similar asset purchase agreements and CBAs as used in the Q1 2015 acquisitions discussed above. The 2014 Expansion Territories and the January and February Expansion Territories contributed $53.3 million in net sales and $2.9 million in operating income during Q1 2015.

The anticipated range of amounts the Company could pay annually under the acquisition related contingent consideration arrangements for the 2014 Expansion Territories and the January and February Expansion Territories is between $6 million and $11 million. As of March 29, 2015, the Company has recorded a liability of $98.5 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 is reassessed and adjusted to fair value each quarter through other income (expense). During Q1 2015, the Company recorded an unfavorable fair value adjustment to the contingent consideration liability of $5.1 million primarily due to a change in the discount rate.

3. Inventories

 

In Thousands

   Mar. 29,
2015
     Dec. 28,
2014
     Mar. 30,
2014
 

Finished products

   $ 60,670       $ 42,526       $ 47,864   

Manufacturing materials

     10,466         10,133         10,572   

Plastic shells, plastic pallets and other inventories

     19,993         18,081         17,677   
  

 

 

    

 

 

    

 

 

 

Total inventories

   $ 91,129       $ 70,740       $ 76,113   
  

 

 

    

 

 

    

 

 

 

4. Property, Plant and Equipment

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

 

     Mar. 29,      Dec. 28,      Mar. 30,      Estimated  

In Thousands

   2015      2014      2014      Useful Lives  

Land

   $ 15,342       $ 14,762       $ 13,484      

Buildings

     122,521         120,533         112,460         8-50 years   

Machinery and equipment

     154,977         154,897         149,406         5-20 years   

Transportation equipment

     200,472         190,216         165,469         4-20 years   

Furniture and fixtures

     47,929         45,623         44,166         3-10 years   

Cold drink dispensing equipment

     366,200         345,391         320,807         5-17 years   

Leasehold and land improvements

     77,983         75,104         73,655         5-20 years   

Software for internal use

     92,289         91,156         82,455         3-10 years   

Construction in progress

     10,680         6,528         6,801      
  

 

 

    

 

 

    

 

 

    

Total property, plant and equipment, at cost

     1,088,393         1,044,210         968,703      

Less: Accumulated depreciation and amortization

     696,555         685,978         662,630      
  

 

 

    

 

 

    

 

 

    

Property, plant and equipment, net

   $ 391,838       $ 358,232       $ 306,073      
  

 

 

    

 

 

    

 

 

    

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

4. Property, Plant and Equipment

 

Depreciation and amortization expense was $17.1 million and $14.5 million in Q1 2015 and in the first quarter of 2014 (“Q1 2014”), respectively. These amounts included amortization expense for leased property under capital leases.

5. Franchise Rights and Goodwill

 

In Thousands

   Mar. 29,
2015
     Dec. 28,
2014
     Mar. 30,
2014
 

Franchise rights

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

Goodwill

     109,984         106,220         102,049   
  

 

 

    

 

 

    

 

 

 

Total franchise rights and goodwill

   $ 630,656       $ 626,892       $ 622,721   
  

 

 

    

 

 

    

 

 

 

During Q1 2015, the Company added $3.8 million of goodwill related to the January and February Expansion Territories. There were no additions to franchise rights due to the acquisition of new territories.

The Company’s goodwill resides entirely within the nonalcoholic beverage segment. The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During Q1 2015, 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.

6. Other Identifiable Intangible Assets

 

     Mar. 29,      Dec. 28,      Mar. 30,      Estimated  

In Thousands

   2015      2014      2014      Useful Lives  

Distribution agreements

   $ 100,509       $ 54,909       $ 2,309         20-40 years   

Customer lists and other identifiable intangible assets

     9,188         7,438         6,238         12-20 years   
  

 

 

    

 

 

    

 

 

    

Total other identifiable intangible assets

     109,697         62,347         8,547      

Less: Accumulated amortization

     5,791         5,199         4,950      
  

 

 

    

 

 

    

 

 

    

Other identifiable intangible assets, net

   $ 103,906       $ 57,148       $ 3,597      
  

 

 

    

 

 

    

 

 

    

During Q1 2015, the Company acquired $45.6 million of distribution agreement intangible assets and $1.8 million of customer lists intangible assets related to the January and February Expansion Territories.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

7. Other Accrued Liabilities

 

In Thousands

   Mar. 29,
2015
     Dec. 28,
2014
     Mar. 30,
2014
 

Accrued marketing costs

   $ 14,161       $ 16,141       $ 11,098   

Accrued insurance costs

     21,831         21,055         21,937   

Accrued taxes (other than income taxes)

     4,308         2,430         2,415   

Accrued income taxes

     567         0         8,270   

Employee benefit plan accruals

     13,000         12,517         10,369   

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

     8,692         2,324         13,370   

All other accrued liabilities

     17,887         14,308         10,647   
  

 

 

    

 

 

    

 

 

 

Total other accrued liabilities

   $ 80,446       $ 68,775       $ 78,106   
  

 

 

    

 

 

    

 

 

 

8. Debt

 

            Interest     Interest      Mar. 29,     Dec. 28,     Mar. 30,  

In Thousands

   Maturity      Rate     Paid      2015     2014     2014  

Revolving credit facility

     2019         Variable        Varies       $ 153,000      $ 71,000      $ 40,000   

Line of credit

     2014         Variable        Varies         0        0        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              (948     (998     (1,144
          

 

 

   

 

 

   

 

 

 

Debt

             526,809        444,759        433,613   

Less: Current portion of debt

             0        0        20,000   
          

 

 

   

 

 

   

 

 

 

Long-term debt

           $ 526,809      $ 444,759      $ 413,613   
          

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

8. Debt

 

The Company has obtained the majority of its long-term debt financing, other than capital leases, from the public markets. As of March 29, 2015, the Company’s total outstanding balance of debt and capital lease obligations was $584.4 million of which $373.8 million was financed through publicly offered debt. The Company had capital lease obligations of $57.6 million as of March 29, 2015. The Company mitigates its financing risk by using multiple financial institutions and enters into credit arrangements only with institutions with investment grade credit ratings. The Company monitors counterparty credit ratings on an ongoing basis.

On October 16, 2014, the Company entered into a $350 million five-year unsecured revolving credit facility (the “Revolving Credit Facility”) which amended and restated the Company’s existing $200 million five-year unsecured revolving credit agreement. On April 27, 2015, the Company exercised the accordion feature of the Revolving Credit Facility, thereby increasing the aggregate availability by $100 million to $450 million. The Revolving Credit Facility has a scheduled maturity date of October 16, 2019 and up to $50 million is available for the issuance of letters of credit. Borrowings under the Revolving Credit Facility 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 Revolving Credit Facility. The Revolving Credit Facility includes two financial covenants: a cash flow/fixed charges ratio (“fixed charges coverage ratio”) and funded indebtedness/cash flow ratio (“operating cash flow ratio”), each as defined in the agreement. The Company was in compliance with these covenants at March 29, 2015. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

On March 29, 2015, the Company had $153.0 million of outstanding borrowings on the Revolving Credit Facility and had $197.0 million available to meet its cash requirements. On December 28, 2014, the Company had $71.0 million of outstanding borrowings on the Revolving Credit Facility. On March 30, 2014, the Company had $40.0 million of outstanding borrowings on the Company’s prior revolving credit facility.

On March 30, 2014, the Company had $20.0 million outstanding on an uncommitted line of credit at a weighted average interest rate of 0.91%. On October 31, 2014, the Company terminated this uncommitted line of credit and refinanced the outstanding balance with additional borrowings under the Revolving Credit Facility.

The Company used borrowings under the Revolving Credit Facility to repay $100 million of senior notes which matured in April 2015. Accordingly, the Company has classified all the $100 million Senior Notes due April 2015 as long-term debt on the balance sheet at March 29, 2015. See Note 22 to the consolidated financial statements for information about the outstanding borrowings on the Revolving Credit Facility following the borrowings made for such purpose and additional borrowings made at the closing of several territory expansion transactions that occurred subsequent to March 29, 2015.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

8. Debt

 

As of March 29, 2015, December 28, 2014 and March 30, 2014, the Company had a weighted average interest rate of 5.2%, 5.8% and 5.8%, 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 5.3% and 5.9% for Q1 2015 and Q1 2014, respectively. As of March 29, 2015, $153.0 million of the Company’s debt and capital lease obligations of $584.4 million were subject to changes in short-term interest rates.

9. Derivative Financial Instruments

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 following summarizes Q1 2015 and Q1 2014 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 Quarter  

In Thousands

   Classification of Gain    2015      2014  

Commodity hedges

   Cost of sales    $ 213       $ 781   

Commodity hedges

   Selling, delivery and administrative expenses      430         —     
     

 

 

    

 

 

 

Total

      $ 643       $ 781   
     

 

 

    

 

 

 

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    Mar. 29,
2015
     Dec. 28,
2014
     Mar. 30,
2014
 

Commodity hedges at fair market value

   Prepaid expenses and other current assets    $ 452       $ 0       $ 781   

Commodity hedges at fair market value

   Other assets    $ 191       $ 0       $ 0   
     

 

 

    

 

 

    

 

 

 

Total

      $ 643       $ 0       $ 781   
     

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

9. Derivative Financial Instruments

 

The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. Accordingly, the net amounts of derivative assets are recognized in either prepaid expenses and other current assets or other assets in the consolidated balance sheet at March 29, 2015. The Company had gross derivative assets of $1.8 million, offset by gross derivative liabilities of $1.2 million as of March 29, 2015. The Company did not have any outstanding derivative transactions at December 28, 2014. The Company did not have any offsetting derivative transactions with its counterparties on March 30, 2014, and, accordingly, the gross amounts of derivative assets are recognized in prepaid expenses and other current assets in the consolidated balance sheet at March 28, 2014.

The Company’s outstanding commodity derivative agreements as of March 29, 2015 had a notional amount of $62.2 million and a latest maturity date of December 2016.

Subsequent to March 29, 2015, the Company entered into additional agreements to hedge certain commodity costs for 2016. The notional amount of these agreements was $8.7 million.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

10. Fair Value of Financial Instruments

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

 

Instrument

  

Method and Assumptions

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 or paid upon termination of these agreements. Credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair value of derivative financial instruments.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

10. 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:

 

     Mar. 29, 2015     Dec. 28, 2014     Mar. 30, 2014  
     Carrying     Fair     Carrying     Fair     Carrying     Fair  

In Thousands

   Amount     Value     Amount     Value     Amount     Value  

Public debt securities

   $ (373,809   $ (406,500   $ (373,759   $ (404,400   $ (373,613   $ (411,564

Non-public variable rate debt

     (153,000     (153,000     (71,000     (71,000     (60,000     (60,000

Deferred compensation plan assets

     19,720        19,720        18,580        18,580        17,453        17,453   

Deferred compensation plan liabilities

     (19,720     (19,720     (18,580     (18,580     (17,453     (17,453

Commodity hedging agreements

     643        643        0        0        781        781   

Acquisition related contingent consideration

     (98,505     (98,505     (46,850     (46,850     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:

 

     Mar. 29, 2015      Dec. 28, 2014      Mar. 30, 2014  

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

   $ 19,720             $ 18,580             $ 17,453         

Commodity hedging agreements

      $ 643             $ 0             $ 781      

Liabilities

                          

Deferred compensation plan liabilities

     19,720               18,580               17,453         

Acquisition related contingent consideration

         $ 98,505             $ 46,850             $ 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)

 

10. 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 2015 and 2014 territory acquisitions, 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 specified covered beverages and beverage products in the acquired territories. 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 will result in increases or decreases to the fair value measurement for the acquisition related contingent consideration.

The acquisition related contingent consideration is the Company’s only Level 3 asset or liability. A reconciliation of the activity is as follows:

 

     First Quarter  

In Thousands

   2015      2014  

Opening balance

   $ 46,850       $ 0   

Increase due to the Cleveland and Cookeville purchase

     14,572         0   

Increase due to the Louisville and Evansville purchase

     32,711         0   

Accrual of Q1 2015 payment

     (717      0   

Fair value adjustment

     5,089         0   
  

 

 

    

 

 

 

Ending balance

   $ 98,505       $ 0   
  

 

 

    

 

 

 

The unfavorable fair value adjustment of the acquisition related contingent consideration, which was primarily due to a change in the discount rate used, is recorded in other income (expense) on the Company’s consolidated statements of operations.

There were no transfers of assets or liabilities between Levels in Q1 2015 or Q1 2014.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Other Liabilities

 

     Mar. 29,      Dec. 28,      Mar. 30,  

In Thousands

   2015      2014      2014  

Accruals for executive benefit plans

   $ 120,911       $ 117,965       $ 111,863   

Acquisition related contingent consideration

     92,963         43,850         0   

Other

     16,015         15,435         16,112   
  

 

 

    

 

 

    

 

 

 

Total other liabilities

   $ 229,889       $ 177,250       $ 127,975   
  

 

 

    

 

 

    

 

 

 

12. 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. 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. The Company has an equity ownership in each of the entities.

The Company also guarantees a portion of SAC’s and Southeastern’s debt. The amounts guaranteed were $34.1 million, $30.9 million and $31.2 million as of March 29, 2015, December 28, 2014 and March 30, 2014, 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 fail 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 March 29, 2015 would have been $23.9 million for SAC and $25.3 million for Southeastern. The Company’s maximum total exposure, including its equity investment, would have been $28.0 million for SAC and $43.6 million for Southeastern.

The Company has standby letters of credit, primarily related to its property and casualty insurance programs. On March 29, 2015, 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 March 29, 2015 amounted to $40.2 million and expire at various dates through 2024.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

12. Commitments and Contingencies

 

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.

13. Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for Q1 2015 and Q1 2014 was 33.9% and 36.6%, 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 Q1 2015 and Q1 2014 was 40.5% and 42.3%, respectively.

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

 

     First Quarter  

In Thousands

   2015      2014  

Statutory expense

   $ 1,563       $ 1,712   

State income taxes, net of federal benefit

     160         187   

Valuation allowance change

     18         142   

Noncontrolling interest – Piedmont

     (286      (270

Manufacturing deduction benefit

     (107      (235

Meals and entertainment

     73         111   

Adjustment for uncertain tax positions

     52         84   

Other, net

     40         61   
  

 

 

    

 

 

 

Income tax expense

   $ 1,513       $ 1,792   
  

 

 

    

 

 

 

The Company had $2.9 million of uncertain tax positions, including accrued interest, all of which would affect the Company’s effective tax rate if recognized as of March 29, 2015, December 28, 2014 and March 30, 2014. 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.

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.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

14. 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 Q1 2015 and Q1 2014 is as follows:

 

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

In Thousands

   2014      Activity      Effect      2015  

Net pension activity:

           

Actuarial loss

   $ (74,867    $ 796       $ (307    $ (74,378

Prior service costs

     (99      9         (4      (94

Net postretirement benefits activity:

           

Actuarial loss

     (22,759      717         (277      (22,319

Prior service costs

     7,812         (840      324         7,296   

Foreign currency translation adjustment

     (1      (7      3         (5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (89,914    $ 675       $ (261    $ (89,500
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

In Thousands

   2013      Activity      Effect      2014  

Net pension activity:

           

Actuarial loss

   $ (43,028    $ 422       $ (163    $ (42,769

Prior service costs

     (121      9         (4      (116

Net postretirement benefits activity:

           

Actuarial loss

     (18,441      563         (217      (18,095

Prior service costs

     3,410         (378      146         3,178   

Foreign currency translation adjustment

     4         0         0         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (58,176    $ 616       $ (238    $ (57,798
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

14. 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  

Q1 2015

        

Cost of sales

   $ 81       $ (16    $ 65   

S,D&A expenses

     724         (107      617   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     805         (123      682   

Income tax expense

     311         (47      264   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 494       $ (76    $ 418   
  

 

 

    

 

 

    

 

 

 

Q1 2014

        

Cost of sales

   $ 78       $ 24       $ 102   

S,D&A expenses

     353         161         514   
  

 

 

    

 

 

    

 

 

 

Subtotal pre-tax

     431         185         616   

Income tax expense

     167         71         238   
  

 

 

    

 

 

    

 

 

 

Total after tax effect

   $ 264       $ 114       $ 378   
  

 

 

    

 

 

    

 

 

 

15. Capital Transactions

Compensation expense for the Performance Unit Award Agreement recognized in Q1 2015 was $1.1 million, which was based upon a common stock share price of $111.57 on March 27, 2015. Compensation expense for the Performance Unit Award Agreement recognized in Q1 2014 was $0.9 million, which was based upon a common stock share price of $85.25 on March 28, 2014.

On March 3, 2015 and March 4, 2014, 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 2014 and 2013, 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, 19,080 and 19,100 of such shares were settled in cash in 2015 and 2014, respectively, to satisfy tax withholding obligations in connection with the vesting of the performance units.

The increase in the total number of shares outstanding in Q1 2015 and Q1 2014 was due to the issuance of the 20,920 and 20,900 shares, respectively, of Class B Common Stock related to the Performance Unit Award Agreement in each year.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

16. Benefit Plans

Pension Plans

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

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

 

     First Quarter  

In Thousands

   2015      2014  

Service cost

   $ 35       $ 29   

Interest cost

     2,974         2,896   

Expected return on plan assets

     (3,388      (3,457

Amortization of prior service cost

     9         9   

Recognized net actuarial loss

     796         422   
  

 

 

    

 

 

 

Net periodic pension cost (benefit)

   $ 426       $ (101
  

 

 

    

 

 

 

The Company did not make contributions to the Company-sponsored pension plans during Q1 2015. Anticipated contributions for the two Company-sponsored pension plans will be in the range of $7 million to $10 million during the remainder of 2015.

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:

 

     First Quarter  

In Thousands

   2015      2014  

Service cost

   $ 325       $ 383   

Interest cost

     708         825   

Recognized net actuarial loss

     717         563   

Amortization of prior service cost

     (840      (378
  

 

 

    

 

 

 

Net periodic postretirement benefit cost

   $ 910       $ 1,393   
  

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

16. Benefit Plans

 

Multi-Employer Benefits

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 increased 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.

17. 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 March 29, 2015, 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.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

17. Related Party Transactions

 

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

 

     First Quarter  

In Millions

   2015      2014  

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

   $ 103.2       $ 98.3   

Marketing funding support payments to the Company

     (11.5      (10.5
  

 

 

    

 

 

 

Payments by the Company net of marketing funding support

   $ 91.7       $ 87.8   

Payments by the Company for customer marketing programs

   $ 14.5       $ 14.2   

Payments by the Company for cold drink equipment parts

     2.9         2.2   

Fountain delivery and equipment repair fees paid to the Company

     3.7         3.2   

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

     0.0         1.5   

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

     1.2         0.9   

The Company has a production arrangement with CCR to buy and sell finished products at cost. Sales to CCR under this arrangement were $8.8 million and $12.7 million in Q1 2015 and Q1 2014, respectively. Purchases from CCR under this arrangement were $32.0 million and $11.9 million in Q1 2015 and Q1 2014, respectively. CCR distributes one of the Company’s own brands (Tum-E Yummies). Total sales to CCR for this brand were $4.9 million and $5.4 million in Q1 2015 and Q1 2014, respectively. In addition, the Company transports product for CCR to the Company’s and other Coca-Cola bottler’s locations. Total sales to CCR for transporting CCR’s product were $2.3 million and $0.3 million in Q1 2015 and Q1 2014, respectively.

The Company and CCR have entered into, and closed prior to March 29, 2015, the following asset purchase agreements relating to certain territories previously served by CCR’s facilities and equipment located in these territories:

 

     Asset Agreement      Acquisition Closing  

Territory

   Date      Date  

Johnson City and Morristown, Tennessee

     May 7, 2014         May 23, 2014   

Knoxville, Tennessee

     August 28, 2014         October 24, 2014   

Cleveland and Cookeville, Tennessee

     December 5, 2014         January 30, 2015   

Louisville, Kentucky and Evansville, Indiana

     December 17, 2014         February 27, 2015   

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

17. Related Party Transactions

 

As part of the asset purchase agreements, the Company signed CBAs which have terms of ten years and are renewable by the Company indefinitely for successive additional terms of ten years each unless earlier terminated as provided therein. Under the CBAs, 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 authorized brands of The Coca-Cola Company and related products in the Expansion Territories. 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, beverage product or certain cross-licensed brands. As of March 29, 2015, the Company had recorded a liability of $98.5 million to reflect the estimated fair value of the contingent consideration related to the future sub-bottling payments. No payments to CCR under the CBAs were made during Q1 2015.

See Note 22 to the consolidated financial statements for information about (1) an additional asset purchase agreement for territory previously served by CCR’s facilities in Paducah and Pikeville, Kentucky and (2) an asset exchange agreement involving the territory previously served by CCR’s facilities located in Lexington, Kentucky, both of which transactions closed subsequent to March 29, 2015.

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 $0.1 million in both Q1 2015 and Q1 2014. Amounts due from CCBSS for rebates on raw materials were $3.4 million, $4.5 million and $3.6 million as of March 29, 2015, December 28, 2014 and March 30, 2014, 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 at cost. Purchases from SAC by the Company for finished products were $30.5 million and $30.8 million in Q1 2015 and Q1 2014, respectively. In addition, the Company transports product for SAC to the Company’s and other Coca-Cola bottlers’ locations. Total sales to SAC for transporting SAC’s product were $1.8 million for both Q1 2015 and Q1 2014. The Company also manages the operations of SAC pursuant to a management agreement. Management fees earned from SAC were $0.4 million and $0.5 million in Q1 2015 and Q1 2014, respectively. The Company has also guaranteed a portion of debt for SAC. Such guarantee amounted to $22.3 million as of March 29, 2015. The Company’s equity investment in SAC was $4.1 million as of March 29, 2015, December 28, 2014 and March 30, 2014 and was recorded in other assets on the Company’s consolidated balance sheets.

The Company is a shareholder in two entities from which it purchases substantially all of its requirements for plastic bottles. Net purchases from these entities were $18.1 million in Q1 2015 and $18.4 million in Q1 2014. 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 $11.8 million as of March 29, 2015. The Company’s equity investment in Southeastern was $18.3 million, $18.4 million and $18.3 million as of March 29, 2015, December 28, 2014, March 30, 2014, respectively, 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)

 

17. Related Party Transactions

 

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 March 29, 2015 nor was there any impairment in 2014.

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 March 29, 2015, December 28, 2014, March 30, 2014 was $19.4 million, $20.0 million and $21.6 million, respectively. Rental payments related to this lease were $1.0 million and $0.9 million in Q1 2015 and Q1 2014, 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 March 29, 2015, December 28, 2014 and March 30, 2014 was $20.0 million, $20.6 million and $22.3 million, respectively. Rental payments related to this lease were $1.0 million in both Q1 2015 and Q1 2014.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

18. 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:

 

     First Quarter  

In Thousands (Except Per Share Data)

   2015      2014  

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

   $ 2,224       $ 2,449   

Less dividends:

     

Common Stock

     1,785         1,785   

Class B Common Stock

     532         527   
  

 

 

    

 

 

 

Total undistributed earnings

   $ (93    $ 137   
  

 

 

    

 

 

 

Common Stock undistributed earnings – basic

   $ (72    $ 106   

Class B Common Stock undistributed earnings – basic

     (21      31   
  

 

 

    

 

 

 

Total undistributed earnings – basic

   $ (93    $ 137   
  

 

 

    

 

 

 

Common Stock undistributed earnings – diluted

   $ (71    $ 105   

Class B Common Stock undistributed earnings – diluted

     (22      32   
  

 

 

    

 

 

 

Total undistributed earnings – diluted

   $ (93    $ 137   
  

 

 

    

 

 

 

Numerator for basic net income per Common Stock share:

     

Dividends on Common Stock

   $ 1,785       $ 1,785   

Common Stock undistributed earnings – basic

     (72      106   
  

 

 

    

 

 

 

Numerator for basic net income per Common Stock share

   $ 1,713       $ 1,891   
  

 

 

    

 

 

 

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

     

Dividends on Class B Common Stock

   $ 532       $ 527   

Class B Common Stock undistributed earnings – basic

     (21      31   
  

 

 

    

 

 

 

Numerator for basic net income per Class B Common Stock share

   $ 511       $ 558   
  

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

18. Net Income Per Share

 

     First Quarter  

In Thousands (Except Per Share Data)

   2015      2014  

Numerator for diluted net income per Common Stock share:

     

Dividends on Common Stock

   $ 1,785       $ 1,785   

Dividends on Class B Common Stock assumed converted to Common Stock

     532         527   

Common Stock undistributed earnings – diluted

     (93      137   
  

 

 

    

 

 

 

Numerator for diluted net income per Common Stock share

   $ 2,224       $ 2,449   
  

 

 

    

 

 

 

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

     

Dividends on Class B Common Stock

   $ 532       $ 527   

Class B Common Stock undistributed earnings – diluted

     (22      32   
  

 

 

    

 

 

 

Numerator for diluted net income per Class B Common Stock share

   $ 510       $ 559   
  

 

 

    

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

18. Net Income Per Share

 

     First Quarter  

In Thousands (Except Per Share Data)

   2015      2014  

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   

Class B Common Stock weighted average shares outstanding – basic

     2,136         2,115   

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)

     9,317         9,296   

Class B Common Stock weighted average shares outstanding – diluted

     2,176         2,155   

Basic net income per share:

     

Common Stock

   $ .24       $ .26   
  

 

 

    

 

 

 

Class B Common Stock

   $ .24       $ .26   
  

 

 

    

 

 

 

Diluted net income per share:

     

Common Stock

   $ .24       $ .26   
  

 

 

    

 

 

 

Class B Common Stock

   $ .23       $ .26   
  

 

 

    

 

 

 

 

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)

 

19. Supplemental Disclosures of Cash Flow Information

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

 

     First Quarter  

In Thousands

   2015      2014  

Accounts receivable, trade, net

   $ (18,630    $ (12,595

Accounts receivable from The Coca-Cola Company

     (7,898      (7,967

Accounts receivable, other

     2,223         3,167   

Inventories

     (17,883      (14,126

Prepaid expenses and other current assets

     4,800         (2,678

Accounts payable, trade

     4,269         9,712   

Accounts payable to The Coca-Cola Company

     8,984         13,180   

Other accrued liabilities

     8,042         484   

Accrued compensation

     (12,918      (13,421

Accrued interest payable

     5,113         5,335   
  

 

 

    

 

 

 

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

   $ (23,898    $ (18,909
  

 

 

    

 

 

 

20. Segments

The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board (“FASB”) ASC 280, Segment Reporting each reporting period, including evaluating the reporting package reviewed by the Chief Operation Decision Maker (“CODM”). The Company has concluded the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as a group, represent the CODM. The Company believes five operating segments exist. Two operating segments, Franchised Nonalcoholic Beverages and Internally-Developed Nonalcoholic Beverages, have been aggregated due to their similar economic characteristics as well as the similarity of products, production processes, types of customers, methods of distribution, and nature of the regulatory environment. This combined segment, Nonalcoholic Beverages, represents the vast majority of the Company’s consolidated revenues, operating income, and assets. The remaining three operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate. As a result, these three operating segments have been combined into an “All Other” reportable segment.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

20. Segments

 

The Company’s segment results are as follows:

 

     First Quarter  

In Thousands

   2015      2014  

Net Sales:

     

Nonalcoholic Beverages

   $ 441,683       $ 381,254   

All Other

     33,815         27,222   

Eliminations*

     (22,245      (19,894
  

 

 

    

 

 

 

Consolidated

   $ 453,253       $ 388,582   
  

 

 

    

 

 

 

Operating Income:

     

Nonalcoholic Beverages

   $ 15,331       $ 11,590   

All Other

     1,571         526   
  

 

 

    

 

 

 

Consolidated

   $ 16,902       $ 12,116   
  

 

 

    

 

 

 

Depreciation and Amortization:

     

Nonalcoholic Beverages

   $ 16,705       $ 13,913   

All Other

     952         656   
  

 

 

    

 

 

 

Consolidated

   $ 17,657       $ 14,569   
  

 

 

    

 

 

 

Capital Expenditures:

     

Nonalcoholic Beverages

   $ 19,252       $ 13,690   

All Other

     7,140         3,143   
  

 

 

    

 

 

 

Consolidated

   $ 26,392       $ 16,833   
  

 

 

    

 

 

 

Total Assets:

     

Nonalcoholic Beverages

   $ 1,525,267       $ 1,294,379   

All Other

     54,522         37,988   

Eliminations

     (7,052      (12,103
  

 

 

    

 

 

 

Consolidated

   $ 1,572,737       $ 1,320,264   
  

 

 

    

 

 

 

 

* NOTE: the entire net sales elimination for each year presented represent net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are either recognized at fair market value or cost depending on the nature of the transaction.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

20. Segments

 

Net sales by product category were as follows:

 

     First Quarter  

In Thousands

   2015      2014  

Bottle/can sales:

     

Sparkling beverages (including energy products)

   $ 297,819       $ 254,971   

Still beverages

     70,588         57,150   
  

 

 

    

 

 

 

Total bottle/can sales

     368,407         312,121   

Other sales:

     

Sales to other Coca-Cola bottlers

     37,846         37,121   

Post-mix and other

     47,000         39,340   
  

 

 

    

 

 

 

Total other sales

     84,846         76,461   
  

 

 

    

 

 

 

Total net sales

   $ 453,253       $ 388,582   
  

 

 

    

 

 

 

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)

 

21. New Accounting Pronouncements

Recently Adopted 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 was 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.

Recently Issued Pronouncements

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 February 2015, the FASB issued new guidance which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated financial statements.

In April 2015, the FASB issued new guidance on accounting for debt issuance costs. The new guidance requires that all cost incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued new guidance on whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the arrangement should be accounted for consistent with the acquisition of other software licenses, otherwise, the arrangement should be accounted for consistent with other service contracts. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated financial statements.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

22. Subsequent Events

Paducah and Pikeville Asset Purchase Agreement

On February 13, 2015, 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 Paducah and Pikeville, Kentucky (the “Paducah and Pikeville Expansion Territory”). The CBA that the Company entered into with CCR at the closing of this transaction, which occurred on May 1, 2015, grants the Company certain exclusive rights in the Paducah and Pikeville Expansion Territory and obligates the Company to make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of such rights. 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 $7.5 million. The amount paid remains subject to adjustment post-closing. The Company has not completed the preliminary allocation of the purchase price to the individual acquired assets and assumed liabilities. The transaction will be accounted for as a business combination under FASB ASC 805.

Asset Exchange Agreement

On October 17, 2014, the Company and CCR entered into an agreement (“the Asset Exchange Agreement”) pursuant to which CCR 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 (the “Lexington Expansion Territory”), including the rights to produce such beverages in the Lexington Expansion 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 served by the Company’s facilities and equipment located in Jackson, Tennessee, including the rights to produce such beverages in that territory. The Company and CCR closed the Asset Exchange Transaction on May 1, 2015. The net assets received in the exchange, after deducting the value of certain retained assets and retained liabilities, was approximately $10.3 million, which was paid at closing. The assets exchanged remain subject to adjustment post-closing. The Company has not completed the preliminary allocation of the net assets exchanged to the individual acquired assets and assumed liabilities.

Exercise of Accordion Loan Feature of Revolving Credit Agreement

On April 27, 2015, the Company exercised the accordion loan feature of its five-year unsecured amended and restated Revolving Credit Facility, thereby increasing the aggregate revolving credit commitments under the Revolving Credit Facility by $100 million, from $350 million to $450 million. After giving effect to such increase, the amount by which the revolving credit commitments under this facility may be further increased has been reduced to zero.

As of May 1, 2015, there were approximately $300 million of outstanding borrowings under the Revolving Credit Facility, including the borrowings made to repay $100 million of the Company’s senior notes which matured in April 2015 and to fund the closings of the asset purchase agreement for the Paducah and Pikeville Expansion Territory and the Asset Exchange Agreement described above.

 

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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 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.

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 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.

A summary of the territory expansion completed as of March 29, 2015 is as follows:

 

     Acquisition      Cash Purchase  

Territory

   Date      Price  
            (In Millions)  

Johnson City and Morristown, Tennessee

     May 23, 2014       $ 12.2   

Knoxville, Tennessee

     October 24, 2014         29.5   

Cleveland and Cookeville, Tennessee

     January 30, 2015         13.8   

Louisville, Kentucky and Evansville, Indiana

     February 27, 2015         19.8   

The financial results for the expansion territories have been included in the Company’s consolidated financial statements from their acquisition dates. These territories contributed $53.3 million in sales and $2.9 million in operating income in the first quarter of 2015 (“Q1 2015”).

In addition, on May 1, 2015, the Company acquired certain assets from CCR relating to the marketing, promotion, distribution and sale of Cola-Cola and other beverage products, including the rights to distribute certain beverages in the Paducah and Pikeville, Kentucky territory pursuant to a Comprehensive Beverage Agreement (“CBA”). The Company paid a cash purchase price of $7.5 million. Also on May 1, 2015, the Company exchanged 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) 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 net assets received in the Jackson-for-Lexington exchange transaction, after deducting the value of certain retained assets and retained liabilities, was approximately $10.3 million, which was paid at closing.

With the closing of the Paducah and Pikeville, Kentucky acquisition and the closing of the Jackson-for-Lexington exchange transaction described above on May 1, 2015, the expansion of the geographic region served by the Company contemplated by the letter of intent the Company and The Coca-Cola Company signed April 2013 is complete.

 

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Our Business and the Nonalcoholic Beverage Industry

The Company produces, markets and distributes nonalcoholic beverages, primarily products of The Coca-Cola Company, which include some of the most recognized and popular beverage brands in the world. The Company is the largest independent bottler of products of The Coca-Cola Company in the United States, distributing these products in thirteen 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 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 81% of the Company’s Q1 2015 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 first quarter of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters versus the first and fourth quarters of the fiscal year. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

Net sales by product category were as follows:

 

     First Quarter  

In Thousands

   2015      2014  

Bottle/can sales:

     

Sparkling beverages (including energy products)

   $ 297,819       $ 254,971   

Still beverages

     70,588         57,150   
  

 

 

    

 

 

 

Total bottle/can sales

     368,407         312,121   

Other sales:

     

Sales to other Coca-Cola bottlers

     37,846         37,121   

Post-mix and other

     47,000         39,340   
  

 

 

    

 

 

 

Total other sales

     84,846         76,461   
  

 

 

    

 

 

 

Total net sales

   $ 453,253       $ 388,582   
  

 

 

    

 

 

 

 

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Areas of Emphasis

In addition to expansion of the Company’s franchise territories, 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 products and packaging introductions over the last several years include Coca-Cola Life, the 1.25-liter bottle, the 7.5-ounce sleek can, 253-ml and 300-ml bottles and the 2-liter contour bottle for Coca-Cola products.

Distribution Cost Management

Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs amounted to $57.3 million and $49.0 million in Q1 2015 and the first quarter of 2014 (“Q1 2014”), 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.

 

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Items Impacting Operations and Financial Conditions

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

Q1 2015

 

   

$53.3 million in net sales and $2.9 million of pre-tax operating income related to expansion territories;

 

   

$3.0 million recorded in S,D&A expenses (pre-tax) related to the Company’s franchise territory expansion; and

 

   

a $5.1 million pre-tax unfavorable fair value adjustment of acquisition-related contingent consideration.

Q1 2014

 

   

$2.0 million recorded in S,D&A expenses (pre-tax) related to the Company’s franchise territory expansion.

Results of Operations

Q1 2015 Compared to Q1 2014

The following overview provides a summary of key information concerning the Company’s financial results for Q1 2015 compared to Q1 2014.

 

     First Quarter             %  

In Thousands (Except Per Share Data)

   2015      2014      Change      Change  

Net sales

   $ 453,253       $ 388,582       $ 64,671         16.6   

Cost of sales

     268,880         232,249         36,631         15.8   
  

 

 

    

 

 

    

 

 

    

Gross margin

     184,373         156,333         28,040         17.9   

S,D&A expenses

     167,471         144,217         23,254         16.1   
  

 

 

    

 

 

    

 

 

    

Income from operations

     16,902         12,116         4,786         39.5   

Interest expense, net

     7,347         7,223         124         1.7   

Other income (expense), net

     (5,089      0         (5,089      N/A   
  

 

 

    

 

 

    

 

 

    

Income before taxes

     4,466         4,893         (427      (8.7

Income tax expense

     1,513         1,792         (279      (15.6
  

 

 

    

 

 

    

 

 

    

Net income

     2,953         3,101         (148      (4.8

Net income attributable to the Company

     2,224         2,449         (225      (9.2

Basic net income per share:

           

Common Stock

   $ .24       $ .26       $ (0.02      (7.7

Class B Common Stock

   $ .24       $ .26       $ (0.02      (7.7

Diluted net income per share:

           

Common Stock

   $ .24       $ .26       $ (0.02      (7.7

Class B Common Stock

   $ .23       $ .26       $ (0.03      (11.5

 

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Net Sales

Net sales increased $64.7 million, or 16.6%, to $453.3 million in Q1 2015 compared to $388.6 million in Q1 2014.

The increase in net sales for Q1 2015 compared to Q1 2014 was principally attributable to the following:

 

Q1 2015

   

Attributable to:

(In Millions)      
$ 53.3      Sales related to newly acquired expansion territories acquired in 2014 and Q1 2015
  6.9     

2.2% increase in bottle/can sales price per unit to retail customers in the Company’s legacy territories, primarily due to an increase in all beverage categories sales price per unit

  4.7      Increase in freight revenue
  (0.2   Other

 

 

   
$ 64.7      Total increase in net sales

 

 

   

In Q1 2015, the Company’s bottle/can sales to retail customers accounted for 81.3% 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 Q1 2015 and Q1 2014 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

   Q1 2015     Q1 2014     % Increase

Sparkling beverages (including energy products)

     81.0     81.9   13.7

Still beverages

     19.0     18.1   20.9
  

 

 

   

 

 

   

Total bottle/can sales volume

     100.0     100.0   15.0
  

 

 

   

 

 

   

Bottle/can volume to retail customers (excluding expansion territories acquired in 2014 and Q1 2015) decreased 0.3% which represented a 2.2% decrease in sparkling beverages and a 8.3% increase in still beverages. The growth trajectory and driving factors of sparkling and still beverages are different. Sparkling beverages other than energy beverages are in a mature state and have a lower growth trajectory, while still beverages and energy beverages have a higher growth trajectory primarily driven by changing customer preferences. Post-mix volume (excluding expansion territories acquired in 2014 and Q1 2015) decreased 0.4%.

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 Q1 2015 and Q1 2014, approximately 69% 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 31% was sold for immediate consumption. The Company’s largest customer, Wal-Mart Stores, Inc., accounted for approximately 23% and 22% of the Company’s total bottle/can volume to retail customers during Q1 2015 and Q1 2014, respectively. The Company’s second largest customer, Food Lion, LLC, accounted for approximately 7% and 9% of the Company’s total bottle/can volume to retail customers during Q1 2015 and Q1 2014, respectively. All of the Company’s beverage sales are to customers in the United States.

 

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Cost of Sales

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

Cost of sales increased 15.8%, or $36.6 million, to $268.9 million in Q1 2015 compared to $232.3 million in Q1 2014.

The increase in cost of sales for Q1 2015 compared to Q1 2014 was principally attributable to the following:

 

Q1 2015

    

Attributable to:

(In Millions)       
$ 32.5       Cost of sales related to newly acquired expansion territories acquired in 2014 and Q1 2015, including purchases of finished goods
  3.4       Increase in freight cost of sales
  0.7       Other

 

 

    
$ 36.6       Total increase in cost of sales

 

 

    

Sweeteners, packaging materials (including plastic bottles and aluminum cans), and finished products purchased from other vendors represent a substantial portion of the Company’s total cost of sales.

The Company purchases concentrate from The Coca-Cola Company under an incidence-based pricing arrangement. 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.

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 $14.0 million for Q1 2015 compared to $12.5 million for Q1 2014. The increase related primarily to marketing funding support received in the expansion territories.

 

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Gross Margin

Gross margin dollars increased 17.9%, or $28.1 million, to $184.4 million in Q1 2015 compared to $156.3 million in Q1 2014. Gross margin as a percentage of net sales increased to 40.7% for Q1 2015 from 40.2% for Q1 2014.

The increase in gross margin dollars for Q1 2015 compared to Q1 2014 was principally attributable to the following:

 

Q1 2015

   

Attributable to:

(In Millions)      
$ 20.8     

Gross margin related to the newly acquired expansion territories acquired in 2014 and Q1 2015

  6.9     

2.2% increase in bottle/can sales price per unit to retail customers in the Company’s legacy territories primarily due to an increase in all beverage categories sales price per unit

  1.3     

Increase in freight gross margin

  (0.9  

Other

 

 

   
$ 28.1     

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.

S,D&A expenses increased by $23.3 million, or 16.1%, to $167.5 million in Q1 2015 from $144.2 million in Q1 2014. S,D&A expenses as a percentage of net sales decreased to 36.9% in Q1 2015 from 37.1% in Q1 2014.

 

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The increase in S,D&A expenses for Q1 2015 compared to Q1 2014 was principally attributable to the following:

 

Q1 2015

   

Attributable to:

(In Millions)      
$ 11.5     

Increase in employee salaries and related payroll taxes excluding bonus and incentives due to normal salary increases and additional personnel added from territory expansion

  2.4     

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

  2.3     

Increase in depreciation and amortization of property, plant and equipment primarily due to assets added from the Company’s franchise territory expansion

  1.3     

Increase in marketing expense primarily due to increased spending for promotional items and media sponsorships

  1.3     

Increase in employee benefit costs primarily due to additional medical expenses for employees from territory expansion

  1.3     

Increase in software and other technology expenses primarily to improve sales support

  (1.3  

Decrease in fuel costs related to the movement of finished goods from sales distribution centers to customer locations primarily due to improved fuel pricing and hedging activities

  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

  3.5     

Other

 

 

   
$ 23.3     

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 $57.3 million and $49.0 million in Q1 2015 and Q1 2014, respectively.

Interest Expense

Net interest expense increased by $0.1 million or 1.7% in Q1 2015 compared to Q1 2014. The slight increase in Q1 2015 compared to Q1 2014 was primarily due to additional borrowings to finance the acquisition of the territory expansion. The Company’s overall weighted average interest rate on its debt and capital lease obligations was 5.3% and 5.9% during Q1 2015 and Q1 2014.

Other Income (Expense)

Other expense in Q1 2015 included a noncash charge of $5.1 million related to the fair value adjustment of acquisition related contingent consideration, primarily driven by a decrease in the underlying discount rate.

Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the expansion territories covered by a CBA to fair value. The fair value is determined by discounting future expected sub-bottler payments required under the CBAs using the Company’s estimated weighted average cost of capital (“WACC”). These future expected sub-bottler payments being discounted extend through the life of the related distribution asset acquired in each expansion territory, which is generally 40 years. In addition, the Company is required quarterly to pay the current portion of the sub-bottling fee. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, the Company’s best estimate of the amounts that will be paid in the future under the CBAs, and current sub-bottling payments. Changes in any of these factors will impact the amount of noncash expense (or income) recorded on a quarterly basis.

 

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Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for Q1 2015 and Q1 2014 was 33.9% and 36.6%, 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 Q1 2015 and Q1 2014 was 40.5% and 42.3%, respectively.

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.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $0.7 million in both Q1 2015 and Q1 2014 related to the portion of Piedmont owned by The Coca-Cola Company.

Other Comprehensive Income

Other comprehensive income (net of tax) was $0.4 million in both Q1 2015 and Q1 2014.

Segment Operating Results

The Company operates its business under five operating segments. Two of these operating segments have been aggregated due to their similar economic characteristics as well as the similarity of products, production processes, types of customers, methods of distribution, and nature of the regulatory environment. The combined reportable segment, Nonalcoholic Beverages, represents the vast majority of the Company’s net sales and operating income for all periods presented. None of the remaining three operating segments individually meet the quantitative thresholds in ASC 280 for separate reporting. As a result, the discussion of the Company’s operations is focused on the consolidated results. Below is a breakdown of the Company’s net sales and operating income by reportable segment.

 

     First Quarter  

In Thousands

   2015      2014  

Net Sales:

     

Nonalcoholic Beverages

   $ 441,683       $ 381,254   

All Other

     33,815         27,222   

Eliminations

     (22,245      (19,894
  

 

 

    

 

 

 

Consolidated

   $ 453,253       $ 388,582   
  

 

 

    

 

 

 

Operating Income:

     

Nonalcoholic Beverages

   $ 15,331       $ 11,590   

All Other

     1,571         526   
  

 

 

    

 

 

 

Consolidated

   $ 16,902       $ 12,116   
  

 

 

    

 

 

 

 

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Financial Condition

Total assets increased to $1.57 billion at March 29, 2015, from $1.43 billion at December 28, 2014 primarily due to assets acquired from the acquisition territories.

Net working capital, defined as current assets less current liabilities, increased by $41.9 million to $101.5 million at March 29, 2015 from December 28, 2014 and increased by $43.4 million at March 29, 2015 from March 30, 2014.

Significant changes in net working capital from December 28, 2014 were as follows:

 

   

An increase in cash and cash equivalents of $12.1 million primarily due to borrowings from the Company’s revolving credit facility.

 

   

An increase in accounts receivable, trade of $18.6 million primarily due to normal seasonal increase in sales and accounts receivable sales from territories acquired in Q1 2015.

 

   

An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $7.9 million and $9.0 million, respectively, primarily due to the timing of payments.

 

   

An increase in inventories of $20.4 million primarily due to normal seasonal increase in sales and acquired inventories from the expansion territories.

 

   

An increase in other accrued liabilities of $11.7 million primarily due to timing of payments (increase of $2.5 million of current portion of acquisition related contingent consideration).

 

   

A decrease in accrued compensation of $14.0 million primarily due to payment of bonuses in March of 2015.

 

   

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

Significant changes in net working capital from March 30, 2014 were as follows:

 

   

An increase in accounts receivable, trade of $26.2 million primarily due to accounts receivable sales from territories acquired in 2014 and Q1 2015 of approximately $26 million.

 

   

An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $4.8 million and $21.2 million, respectively, primarily due to the timing of payments and territories acquired in 2014 and Q1 2015.

 

   

An increase in inventories of $15.0 million primarily due to inventories from the territories acquired in 2014 and Q1 2015 of approximately $9 million and inventory required for future marketing strategy.

 

   

An increase in prepaid expenses and other current assets of $11.6 million primarily due to overpayment of federal and state income taxes in 2014.

 

   

A decrease of $20.0 million in the current portion of debt due to repayment of an uncommitted line of credit with borrowings from the Company’s revolving credit facility.

 

   

An increase in accounts payable trade of $6.1 million primarily due to accounts payable from territories acquired in 2014 and Q1 2015 of approximately $4 million.

 

   

An increase in accrued compensation of $7.2 million primarily due to the payment of certain bonuses on the last day of March, which is included in the second quarter in 2015.

Debt and capital lease obligations were $584.4 million as of March 29, 2015 compared to $503.8 million as of December 28, 2014 and $497.2 million as of March 30, 2014. Debt and capital lease obligations as of March 29, 2015 included $57.6 million of capital lease obligations related primarily to Company facilities.

 

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Liquidity and Capital Resources

Capital Resources

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

On October 16, 2014, the Company entered into a $350 million five-year unsecured revolving credit facility (the “Revolving Credit Facility”) which amended and restated the Company’s existing $200 million five-year unsecured revolving credit agreement. The Revolving Credit Facility has a scheduled maturity date of October 16, 2019 and up to $50 million is available for the issuance of letters of credit. On April 27, 2015, subsequent to the end of Q1 2015, the Company exercised the accordion feature of the Revolving Credit Facility thereby increasing the aggregate availability by $100 million to $450 million. Borrowings under the Revolving Credit Facility 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. The Revolving Credit Facility includes 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 as of March 29, 2015. 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 Revolving Credit Facility have the ability to and will meet any funding requests from the Company. On March 29, 2015 and December 28, 2014, the Company had $153.0 million and $71.0 million, respectively, of outstanding borrowings under the Revolving Credit Facility. As of March 30, 2014, the Company had $40.0 million outstanding under the Company’s prior revolving credit facility.

The Company had $100 million of senior notes which matured in April 2015. The Company used borrowings under the Revolving Credit Facility to repay the notes when due and, accordingly, has classified all the $100 million Senior Notes due April 2015 as long-term on the Company’s balance sheet as of March 29, 2015. As a result of these borrowings, along with the borrowings associated with the territory expansion that occurred subsequent to the end of Q1 2015, the Company had $300 million of outstanding borrowings under the Revolving Credit Facility as of May 1, 2015.

On October 31, 2014, the Company terminated an uncommitted line of credit under which the Company could borrow up to a total of $20 million for periods of 7 days, 30 days, 60 days or 90 days at the discretion of the participating bank and refinanced the outstanding balance with additional borrowings under the Revolving Credit Facility. On March 30, 2014, the Company had $20.0 million outstanding under the uncommitted line of credit.

The Company historically has obtained the majority of its long-term financing, other than capital leases, from public markets. As of March 29, 2015, $373.8 million of the Company’s total outstanding balance of debt and capital lease obligations of $584.4 million was financed through publicly offered debt. The Company had capital lease obligations of $57.6 million as of March 29, 2015.

 

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As of March 29, 2015, December 28, 2014 and March 30, 2014, the weighted average interest rate of the Company’s debt and capital lease obligations was 5.2%, 5.8% and 5.8%, 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 5.3% and 5.9% in Q1 2015 and Q1 2014 respectively. As of March 29, 2015, $153.0 million of the Company’s debt and capital lease obligations of $584.4 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 nine capital leases.

At March 29, 2015, 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.

Net debt and capital lease obligations were summarized as follows:

 

     Mar. 29,      Dec. 28,      Mar. 30,  

In Thousands

   2015      2014      2014  

Debt

   $ 526,809       $ 444,759       $ 433,613   

Capital lease obligations

     57,584         59,050         63,539   
  

 

 

    

 

 

    

 

 

 

Total debt and capital lease obligations

     584,393         503,809         497,152   

Less: Cash and cash equivalents

     21,163         9,095         18,774   
  

 

 

    

 

 

    

 

 

 

Total net debt and capital lease obligations (1)

   $ 563,230       $ 494,714       $ 478,378   
  

 

 

    

 

 

    

 

 

 

 

(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.

The Company’s only Level 3 asset or liability is the acquisition-related contingent liability incurred as a result of the territory expansion transactions completed in 2015 and 2014. The March 29, 2015 balance of $98.5 million included a $5.1 million fair value adjustment to increase the liability in Q1 2015. There were no transfers from

 

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Level 1 or Level 2. The $5.1 million noncash fair value adjustment did not impact the Company’s liquidity or capital resources.

Cash Sources and Uses

The primary sources of cash for the Company in Q1 2015 and Q1 2014 were operating activities and borrowings under credit facilities. The primary uses of cash in Q1 2015 and Q1 2014 were acquisitions for territory expansion, capital expenditures, the payment of capital lease obligations, dividend payments, income tax payments, and funding working capital.

A summary of activity for Q1 2015 and Q1 2014 follows:

 

     First Quarter  

In Millions

   2015      2014  

Cash Sources

     

Proceeds from revolving credit facilities

   $ 82.0       $ 35.0   

Proceeds from the sale of property, plant and equipment

     0.1         0.9   
  

 

 

    

 

 

 

Total cash sources

   $ 82.1       $ 35.9   
  

 

 

    

 

 

 

Cash Uses

     

Cash used in operating activities (excluding income tax and pension payments)

   $ 1.7       $ 3.9   

Capital expenditures

     30.8         17.8   

Acquisition of expansion territories

     33.4         —     

Payment on capital lease obligations

     1.6         1.4   

Dividends

     2.3         2.3   

Income tax payments

     0.1         3.4   

Other

     0.1         0.1   
  

 

 

    

 

 

 

Total cash uses

   $ 70.0       $ 28.9   
  

 

 

    

 

 

 

Increase in cash

   $ 12.1       $ 7.0   
  

 

 

    

 

 

 

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 $15 million and $22 million for the remainder of 2015. This projection does not include any anticipated cash income tax requirements from additional expansion territory transactions.

Operating Activities

During Q1 2015, cash used in operating activities decreased $5.5 million as compared to Q1 2014. The decrease in cash used was primarily due to an increase in income from operations of $4.8 million. Included in net income is a noncash unfavorable fair value adjustment to acquisition related contingent consideration, which did not impact the Company’s cash flows from operations.

Investing Activities

During Q1 2015, the Company acquired the geographic territories previously served by CCR in Cleveland and Cookeville, Tennessee, Louisville, Kentucky and Evansville, Indiana. The total cash used to purchase these expansion transactions totaled $33.4 million.

Additions to property, plant and equipment during Q1 2015 were $26.4 million, of which $4.7 million were accrued in accounts payable, trade as unpaid. This amount does not include $23.3 million in property, plant and equipment acquired in the territory expansion transactions completed in Q1 2015. This compared to $16.8 million

 

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in additions to property, plant and equipment during Q1 2014, of which $6.2 million were accrued in accounts payable, trade as unpaid. Capital expenditures during Q1 2015 were funded with cash flows from operations and available credit facilities. The Company anticipates that additions to property, plant and equipment in 2015 will be in the range of $130 million to $160 million.

Financing Activities

During Q1 2015, the Company’s net borrowings under the Revolving Credit Facility increased $82.0 million primarily to fund the purchases of the January and February Expansion Territories, working capital requirements and capital expenditures. During Q1 2014, the Company’s net borrowings under the Company’s prior revolving credit facility increased $35.0 million primarily to fund seasonal working capital requirements and capital expenditures.

Off-Balance Sheet Arrangements

The Company is a member of two manufacturing cooperatives and has guaranteed $34.1 million of debt for these entities as of March 29, 2015. 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 March 29, 2015, the Company’s maximum exposure, if the entities borrowed up to their borrowing capacity, would have been $71.6 million including the Company’s equity interests. See Note 12 and Note 17 to the consolidated financial statements for additional information about these entities.

Hedging Activities

The Company entered into derivative instruments to hedge certain commodity purchases for 2016, 2015 and 2014. Fees paid by the Company for derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment of cost of sales or S,D&A expenses.

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

Subsequent to March 29, 2015, the Company entered into additional agreements to hedge certain commodity costs for 2016. The notional amount of these agreements was $8.7 million.

The net impact of the commodity hedges was to decrease the cost of sales by $0.2 million and $0.8 million in Q1 2015 and Q1 2014, respectively, and to decrease S,D&A expenses by $0.4 million in Q1 2015. Commodity hedges did not impact S,D&A expenses in Q1 2014.

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

 

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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 28, 2014 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 Q1 2015. 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 April 2014, the Financial Accounting Standards Board (“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 was 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.

Recently Issued Pronouncements

In May 2014, the FASB issued new guidance on accounting for revenue from contracts with customers. The new guidance was 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 February 2015, the FASB issued new guidance which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated financial statements.

In April 2015, the FASB issued new guidance on accounting for debt issuance costs. The new guidance requires that all costs incurred to issue debt be presented in the balance sheet as a direct reduction from the carrying value of the debt. The new guidance is effective for annual and interim periods beginnings after December 15, 2015. The Company does not expect the new guidance to have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued new guidance on whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the arrangement should be accounted for consistent with the acquisition of other software licenses, otherwise, the arrangement should be accounted for consistent with other service contracts. The new guidance is effective for annual and interim periods beginning after December 15, 2015. The Company is in process of evaluating the impact of the new guidance on the Company’s consolidated financial statements.

 

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Cautionary Information Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, as well as information included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, news releases and oral statements issued by or on behalf of the Company, contains, or may contain, forward-looking management comments and other statements that reflect management’s current outlook for future periods. The words “believe”, “expect”, “project”, “will”, “should”, “could” and similar expressions are intended to identify forward-looking statements. These statements include, among others, statements relating to:

 

   

the Company’s belief that the undiscounted amounts to be paid under the acquisition related contingent consideration arrangement will be between $6 million and $11 million per year;

 

   

the Company’s belief that the covenants on the Company’s Revolving Credit Facility will not restrict its liquidity or capital resources;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

the Company’s belief that cash contributions to the two Company-sponsored pension plans will be in the range of $7 million to $10 million for the remainder of 2015;

 

   

the Company’s belief that cash requirements for income taxes will be in the range of $15 million to $22 million for the remainder of 2015;

 

   

the Company’s expectation that additions to property, plant and equipment in 2015 will be in the range of $130 million to $160 million;

 

   

the Company’s belief that compliance with environmental laws will not have a material adverse effect on its capital expenditures, earnings or competitive position;

 

   

the Company’s belief that the majority of its deferred tax assets will be realized;

 

   

the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements;

 

   

the Company’s belief that all of the banks participating in the Company’s Revolving Credit Facility have the ability to and will meet any funding requests from the Company;

 

   

the Company’s belief that it is competitive in its territories with respect to the principal methods of competition in the nonalcoholic beverage industry;

 

   

the Company’s estimate that a 10% increase in the market price of certain commodities over the current market prices would cumulatively increase costs during the next 12 months by approximately $26 million assuming no change in volume;

 

 

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the Company’s belief that innovation of new brands and packages will continue to be important to the Company’s overall revenue;

 

   

the Company’s expectation that uncertain tax positions may change over the next 12 months but will not have a significant impact on the consolidated financial statements;

 

   

the Company’s belief that the risk of loss with respect to funds deposited with banks is minimal; and

 

   

the Company’s hypothetical calculation of the impact of a 1% increase in interest rates on outstanding floating rate debt and capital lease obligations for the next twelve months as of March 29, 2015.

These statements and expectations are based on currently available competitive, financial and economic data along with the Company’s operating plans, and are subject to future events and uncertainties that could cause anticipated events not to occur or actual results to differ materially from historical or anticipated results. Factors that could impact those statements and expectations or adversely affect future periods include, but are not limited to, the factors set forth in Part I. Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 28, 2014.

Caution should be taken not to place undue reliance on the Company’s forward-looking statements, which reflect the expectations of management of the Company only as of the time such statements are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to certain market risks that arise in the ordinary course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for trading purposes. A discussion of the Company’s primary market risk exposure and interest rate risk is presented below.

Debt and Derivative Financial Instruments

The Company is subject to interest rate risk on its fixed and floating rate debt. As of March 29, 2015, $153.0 million of the Company’s debt and capital lease obligations of $584.4 million were subject to changes in short-term interest rates. As of May 1, 2015 there were approximately $300 million of outstanding borrowings under the Revolving Credit Facility, including the borrowings made to repay $100 million of the Company’s senior notes which matured in April 2015 and to fund the closings of the asset purchase agreement for the Paducah and Pikeville, Kentucky acquisition and the closing of Jackson-for-Lexington exchange transaction.

As it relates to the Company’s variable rate debt, assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of March 29, 2015, interest expense for the next twelve months would increase by approximately $1.5 million. This amount was determined by calculating the effect of the hypothetical interest rate on the Company’s variable rate debt. This calculated, hypothetical increase in interest expense for the following twelve months may be different from the actual increase in interest expense from a 1% increase in interest rates due to varying interest rate reset dates on the Company’s floating debt.

The Company’s acquisition related contingent consideration, which is adjusted to fair value at each reporting period, is also impacted by changes in interest rates. The risk free interest rate is a component of the discount rate used to calculate the present value of future cash flows due under the CBAs related to the Expansion Territories. As a result, any changes in the underlying interest rates will impact the fair value of the acquisition related contingent consideration.

 

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Raw Material and Commodity Price Risk

The Company is also subject to commodity price risk arising from price movements for certain commodities included as part of its raw materials. The Company manages this commodity price risk in some cases by entering into contracts with adjustable prices. The Company periodically uses derivative commodity instruments in the management of this risk. The Company estimates that a 10% increase in the market prices of these commodities over the current market prices would cumulatively increase costs during the next 12 months by approximately $26 million assuming no change in volume.

In Q1 2015 and Q1 2014, the Company entered into agreements to hedge a portion of the Company’s 2015 and 2014 commodity purchases. Subsequent to March 29, 2015, the Company entered into additional agreements to hedge certain commodity costs for 2016.

Fees paid by the Company for agreements to hedge commodity purchases are amortized over the corresponding period of the instruments. The Company accounts for commodity hedges on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or S,D&A expenses.

Effects of Changing Prices

The annual rate of inflation in the United States, as measured by year-over-year changes in the consumer price index, was .8% in 2014 compared to 1.5% in 2013 and 1.7% in 2012. Inflation in the prices of those commodities important to the Company’s business is reflected in changes in the consumer price index, but commodity prices are volatile and in recent years have moved at a faster rate of change than the consumer price index.

The principal effect of inflation in both commodity and consumer prices on the Company’s operating results is to increase costs, both of goods sold and S,D&A. Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover these increased costs and may reduce their volume of purchases of those products. In that event, selling price increases may not be sufficient to offset completely the Company’s cost increases.

 

Item 4. Controls and Procedures.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)), pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 29, 2015.

There has been no change in the Company’s internal control over financial reporting during the quarter ended March 29, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1A. Risk Factors.

There have been no material changes to the factors disclosed in Part I. Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 28, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Purchase of Equity Securities

The following table provides information about repurchase of our common stock during the three-month period ended March 29, 2015:

 

Period

   Number of
Shares
Purchased (1)
     Average
Price Paid
Per Share
($)
     Total Number
Of Shares
Purchased as
Part of
Publically
Announced
Program
     Approximate
Dollar Value
of Shares that

May Yet Be
Purchased
Under the
Program
 

December 29, 2014 through January 25, 2015

     —           —           —           —     

January 26, 2015 through February 22, 2015

     —           —           —           —     

February 23, 2015 through March 29, 2015

     19,080         106.37         —           —     

 

(1) 

Represents shares of common stock withheld for income tax purposes in connection with the vesting of 40,000 shares of restricted Class B Common Stock issued pursuant to a Performance Unit Award Agreement to J. Frank Harrison, III, in connection with his services in 2014.

 

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Item 6. Exhibits.

 

Exhibit
Number

  

Description

  4.1    The registrant, by signing this report, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument which defines the rights of holders of long-term debt of the registrant and its consolidated subsidiaries which authorizes a total amount of securities not in excess of 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis.
10.1    Distribution Agreement entered into as of March 26, 2015 between Monster Energy Company, a Delaware corporation (formerly known as Hansen Beverage Company), and CCBCC Operations, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Company. *
12    Ratio of earnings to fixed charges (filed herewith).
31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K).
101    Financial statements from the quarterly report on Form 10-Q of Coca-Cola Bottling Co. Consolidated for the quarter ended March 29, 2015, filed on May 8, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Changes in Equity; (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

 

* Certain portions of the exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested for such portions of the exhibit.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

     COCA-COLA BOTTLING CO. CONSOLIDATED  
     (REGISTRANT)  

Date:  May 8, 2015

           By:                  /s/  James E. Harris                            
           James E. Harris  
           Principal Financial Officer of the Registrant  
           and  
           Senior Vice President, Shared Services  
           and  
           Chief Financial Officer  

Date:  May 8, 2015

           By:                 /s/ William J. Billiard                          
    

      William J. Billiard

      Principal Accounting Officer of the Registrant

      and

      Chief Accounting Officer

 

 

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