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 30,September 28, 2003
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
| (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 registrantRegistrant (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 registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant is an accelerated filer (defined(as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at | |
Common Stock, $1.00 Par Value | 6,642,577 | |
Class B Common Stock, $1.00 Par Value | 2,400,752 |
PART I – FINANCIAL INFORMATION
Item l. Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS
In Thousands (Except Share Data)
Unaudited March 30, 2003 | Dec. 29, 2002 | Unaudited March 31, 2002 | |||||||
ASSETS | |||||||||
Current Assets: | |||||||||
Cash | $ | 7,162 | $ | 18,193 | $ | 9,172 | |||
Accounts receivable, trade, less allowance for doubtful accounts of $1,757, $1,676 and $2,064 |
| 79,341 |
| 79,548 |
| 81,303 | |||
Accounts receivable from The Coca-Cola Company |
| 13,134 |
| 12,992 |
| 15,475 | |||
Accounts receivable, other |
| 5,649 |
| 17,001 |
| 6,385 | |||
Inventories |
| 38,469 |
| 38,648 |
| 40,852 | |||
Prepaid expenses and other current assets |
| 9,334 |
| 4,588 |
| 5,304 | |||
Total current assets |
| 153,089 |
| 170,970 |
| 158,491 | |||
Property, plant and equipment, net |
| 462,725 |
| 466,840 |
| 478,973 | |||
Leased property under capital leases, net |
| 44,080 |
| 44,623 |
| 50,779 | |||
Other assets |
| 58,521 |
| 58,167 |
| 70,729 | |||
Franchise rights, net |
| 522,189 |
| 505,374 |
| 506,277 | |||
Goodwill, net |
| 100,754 |
| 100,754 |
| 100,754 | |||
Other identifiable intangible assets, net |
| 10,398 |
| 6,797 |
| 8,026 | |||
Total | $ | 1,351,756 | $ | 1,353,525 | $ | 1,374,029 | |||
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS
In Thousands (Except Share Data)
Unaudited March 30, 2003 | Dec. 29, 2002 | Unaudited March 31, 2002 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Portion of long-term debt payable within one year | $ | 39 |
| $ | 31 |
| $ | 147,431 |
| |||
Current portion of obligations under capital leases |
| 3,969 |
|
| 3,960 |
|
| 5,715 |
| |||
Accounts payable, trade |
| 38,617 |
|
| 38,303 |
|
| 35,476 |
| |||
Accounts payable to The Coca-Cola Company |
| 5,227 |
|
| 9,823 |
|
| 4,817 |
| |||
Accrued compensation |
| 11,354 |
|
| 20,462 |
|
| 7,817 |
| |||
Other accrued liabilities |
| 65,543 |
|
| 72,647 |
|
| 68,257 |
| |||
Accrued interest payable |
| 16,577 |
|
| 10,649 |
|
| 15,122 |
| |||
Total current liabilities |
| 141,326 |
|
| 155,875 |
|
| 284,635 |
| |||
Deferred income taxes |
| 156,330 |
|
| 155,964 |
|
| 160,578 |
| |||
Pension and postretirement benefit obligations |
| 39,286 |
|
| 37,227 |
|
| 32,941 |
| |||
Other liabilities |
| 60,248 |
|
| 58,261 |
|
| 60,510 |
| |||
Obligations under capital leases |
| 41,771 |
|
| 42,066 |
|
| 41,811 |
| |||
Long-term debt |
| 845,978 |
|
| 807,725 |
|
| 717,625 |
| |||
Total liabilities |
| 1,284,939 |
|
| 1,257,118 |
|
| 1,298,100 |
| |||
Commitments and Contingencies (Note 14) | ||||||||||||
Minority interest |
| 31,819 |
|
| 63,540 |
|
| 56,452 |
| |||
Stockholders’ Equity: | ||||||||||||
Common Stock, $1.00 par value: | ||||||||||||
Authorized – 30,000,000 shares; | ||||||||||||
Issued – 9,704,951, 9,704,851 and 9,454,851 shares |
| 9,704 |
|
| 9,704 |
|
| 9,454 |
| |||
Class B Common Stock, $1.00 par value: | ||||||||||||
Authorized – 10,000,000 shares; | ||||||||||||
Issued – 3,028,866, 3,008,966 and 3,008,966 shares |
| 3,029 |
|
| 3,009 |
|
| 3,009 |
| |||
Capital in excess of par value |
| 97,220 |
|
| 95,986 |
|
| 89,559 |
| |||
Retained earnings (accumulated deficit) |
| 5,189 |
|
| 6,043 |
|
| (8,929 | ) | |||
Accumulated other comprehensive loss |
| (18,890 | ) |
| (20,621 | ) |
| (12,362 | ) | |||
| 96,252 |
|
| 94,121 |
|
| 80,731 |
| ||||
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 stockholders’ equity |
| 34,998 |
|
| 32,867 |
|
| 19,477 |
| |||
Total | $ | 1,351,756 |
| $ | 1,353,525 |
| $ | 1,374,029 |
| |||
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands (Except Per Share Data)
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Net sales | $ | 275,200 |
| $ | 271,618 |
| $ | 325,637 | $ | 319,725 | $ | 919,002 | $ | 920,855 | ||||||
Cost of sales, excluding depreciation shown below |
| 140,306 |
|
| 137,144 |
| 168,878 | 165,902 | 473,718 | 473,245 | ||||||||||
Gross margin |
| 134,894 |
|
| 134,474 |
| 156,759 | 153,823 | 445,284 | 447,610 | ||||||||||
Selling, general and administrative expenses, excluding depreciation shown below |
| 102,125 |
|
| 96,412 |
| 108,400 | 103,087 | 317,730 | 307,674 | ||||||||||
Depreciation expense |
| 19,015 |
|
| 17,985 |
| 18,956 | 19,405 | 57,253 | 56,247 | ||||||||||
Amortization of intangibles |
| 698 |
|
| 687 |
| 846 | 683 | 2,311 | 2,056 | ||||||||||
Income from operations |
| 13,056 |
|
| 19,390 |
| 28,557 | 30,648 | 67,990 | 81,633 | ||||||||||
Interest expense |
| 10,371 |
|
| 12,140 |
| 10,414 | 11,454 | 31,701 | 35,471 | ||||||||||
Other income (expense), net |
| (199 | ) |
| (899 | ) | ||||||||||||||
Minority interest |
| 116 |
|
| 759 |
| 1,432 | 2,672 | 2,690 | 6,195 | ||||||||||
Income before income taxes |
| 2,370 |
|
| 5,592 |
| 16,711 | 16,522 | 33,599 | 39,967 | ||||||||||
Income taxes |
| 963 |
|
| 2,214 |
| 2,865 | 6,983 | 6,446 | 16,267 | ||||||||||
Net income | $ | 1,407 |
| $ | 3,378 |
| $ | 13,846 | $ | 9,539 | $ | 27,153 | $ | 23,700 | ||||||
Basic net income per share | $ | .16 |
| $ | .39 |
| $ | 1.53 | $ | 1.08 | $ | 3.00 | $ | 2.69 | ||||||
Diluted net income per share | $ | .16 |
| $ | .38 |
| $ | 1.53 | $ | 1.07 | $ | 3.00 | $ | 2.67 | ||||||
Weighted average number of common shares outstanding |
| 9,043 |
|
| 8,773 |
| 9,043 | 8,864 | 9,043 | 8,807 | ||||||||||
Weighted average number of common shares outstanding-assuming dilution |
| 9,043 |
|
| 8,857 |
| 9,043 | 8,924 | 9,043 | 8,887 | ||||||||||
Cash dividends per share | ||||||||||||||||||||
Common Stock | $ | .25 |
| $ | .25 |
| $ | .25 | $ | .25 | $ | .75 | $ | .75 | ||||||
Class B Common Stock | $ | .25 |
| $ | .25 |
| $ | .25 | $ | .25 | $ | .75 | $ | .75 |
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS
In Thousands (Except Share Data)
Unaudited 2003 | Dec. 29, 2002 | Unaudited 2002 | |||||||
ASSETS | |||||||||
Current Assets: | |||||||||
Cash | $ | 18,280 | $ | 18,193 | $ | 8,286 | |||
Accounts receivable, trade, less allowance for doubtful accounts of $1,888, $1,676 and $1,754 | 83,977 | 79,548 | 84,365 | ||||||
Accounts receivable from The Coca-Cola Company | 24,555 | 12,992 | 19,965 | ||||||
Accounts receivable, other | 4,531 | 17,001 | 6,479 | ||||||
Inventories | 41,156 | 38,648 | 42,433 | ||||||
Prepaid expenses and other current assets | 7,121 | 4,588 | 6,501 | ||||||
Total current assets | 179,620 | 170,970 | 168,029 | ||||||
Property, plant and equipment, net | 457,097 | 466,840 | 467,281 | ||||||
Leased property under capital leases, net | 43,726 | 44,623 | 44,593 | ||||||
Other assets | 59,421 | 58,167 | 72,220 | ||||||
Franchise rights, net | 520,672 | 504,374 | 505,253 | ||||||
Goodwill, net | 102,049 | 101,754 | 101,754 | ||||||
Other identifiable intangible assets, net | 9,844 | 6,797 | 6,658 | ||||||
Total | $ | 1,372,429 | $ | 1,353,525 | $ | 1,365,788 | |||
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS
In Thousands (Except Share Data)
Unaudited Sept. 28, 2003 | Dec. 29, 2002 | Unaudited Sept. 29, 2002 | ||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
Current Liabilities: | ||||||||||||
Portion of long-term debt payable within one year | $ | 35,039 | $ | 31 | $ | 154,731 | ||||||
Current portion of obligations under capital leases | 4,194 | 3,960 | 3,717 | |||||||||
Accounts payable, trade | 39,368 | 38,303 | 35,238 | |||||||||
Accounts payable to The Coca-Cola Company | 5,559 | 9,823 | 41,477 | |||||||||
Accrued compensation | 15,159 | 20,462 | 16,912 | |||||||||
Other accrued liabilities | 74,931 | 72,647 | 66,985 | |||||||||
Accrued interest payable | 18,866 | 10,649 | 16,179 | |||||||||
Total current liabilities | 193,116 | 155,875 | 335,239 | |||||||||
Deferred income taxes | 161,789 | 155,964 | 170,012 | |||||||||
Pension and postretirement benefit obligations | 39,286 | 37,227 | 31,603 | |||||||||
Other liabilities | 60,953 | 58,261 | 61,782 | |||||||||
Obligations under capital leases | 41,727 | 42,066 | 41,985 | |||||||||
Long-term debt | 785,078 | 807,725 | 620,125 | |||||||||
Total liabilities | 1,281,949 | 1,257,118 | 1,260,746 | |||||||||
Commitments and Contingencies (Note 16) | ||||||||||||
Minority interest | 34,264 | 63,540 | 62,332 | |||||||||
Stockholders’ Equity: | ||||||||||||
Common Stock, $1.00 par value: | ||||||||||||
Authorized – 30,000,000 shares; Issued – 9,704,951, 9,704,851 and 9,653,774 shares | 9,704 | 9,704 | 9,653 | |||||||||
Class B Common Stock, $1.00 par value: | ||||||||||||
Authorized – 10,000,000 shares; Issued ��� 3,028,866, 3,008,966 and 3,008,966 shares | 3,029 | 3,009 | 3,009 | |||||||||
Capital in excess of par value | 97,220 | 95,986 | 94,209 | |||||||||
Retained earnings | 26,413 | 6,043 | 9,176 | |||||||||
Accumulated other comprehensive loss | (18,896 | ) | (20,621 | ) | (12,083 | ) | ||||||
117,470 | 94,121 | 103,964 | ||||||||||
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 stockholders’ equity | 56,216 | 32,867 | 42,710 | |||||||||
Total | $ | 1,372,429 | $ | 1,353,525 | $ | 1,365,788 | ||||||
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
In Thousands
Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings (Accum. Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total | Common Stock | Class B Common Stock | Capital in Excess of Par Value | Retained Earnings (Accum. Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||
Balance on December 30, 2001 | $ | 9,454 | $ | 2,989 | $ | 91,004 |
| $ | (12,307 | ) | $ | (12,805 | ) | $ | (61,254 | ) | $ | 17,081 |
| $ | 9,454 | $ | 2,989 | $ | 91,004 | $ | (12,307 | ) | $ | (12,805 | ) | $ | (61,254 | ) | $ | 17,081 | ||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
| 3,378 |
|
| 3,378 |
| 23,700 | 23,700 | ||||||||||||||||||||||||||||||||||||||||||||
Change in fair market value of cash flow hedges, net of tax |
| 14 |
|
| 14 |
| (30 | ) | (30 | ) | ||||||||||||||||||||||||||||||||||||||||||
Change in proportionate share of Piedmont’s accum. other comprehensive loss, net of tax |
| 429 |
|
| 429 |
| 752 | 752 | ||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
| 3,821 |
|
| 24,422 |
| ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid |
| (2,193 | ) |
| (2,193 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class B Common Stock |
| 20 |
| 748 |
|
| 768 |
| ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Common ($.75 per share) | (3,197 | ) | (1,622 | ) | (4,819 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Class B Common ($.75 per share) | (1,191 | ) | (595 | ) | (1,786 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Class B Common Stock issued related to stock award | 20 | 748 | 768 | |||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 199 | 5,500 | 5,699 | |||||||||||||||||||||||||||||||||||||||||||||||||
Deferred tax adjustments related to exercise of stock options | 1,345 | 1,345 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Balance on March 31, 2002 | $ | 9,454 | $ | 3,009 | $ | 89,559 |
| $ | (8,929 | ) | $ | (12,362 | ) | $ | (61,254 | ) | $ | 19,477 |
| |||||||||||||||||||||||||||||||||
Balance on September 29, 2002 | $ | 9,653 | $ | 3,009 | $ | 94,209 | $ | 9,176 | $ | (12,083 | ) | $ | (61,254 | ) | $ | 42,710 | ||||||||||||||||||||||||||||||||||||
Balance on December 29, 2002 | $ | 9,704 | $ | 3,009 | $ | 95,986 |
| $ | 6,043 |
| $ | (20,621 | ) | $ | (61,254 | ) | $ | 32,867 |
| $ | 9,704 | $ | 3,009 | $ | 95,986 | $ | 6,043 | $ | (20,621 | ) | $ | (61,254 | ) | $ | 32,867 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income |
| 1,407 |
|
| 1,407 |
| 27,153 | 27,153 | ||||||||||||||||||||||||||||||||||||||||||||
Change in fair market value of cash flow hedges, net of tax |
| 1,731 |
|
| 1,731 |
| 1,725 | 1,725 | ||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income |
| 3,138 |
| 28,878 | ||||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid |
| (2,261 | ) |
| (2,261 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of Class B Common Stock |
| 20 |
| 1,234 |
|
| 1,254 |
| ||||||||||||||||||||||||||||||||||||||||||||
Cash dividends paid: | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Common ($.75 per share) | (4,982 | ) | (4,982 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Class B Common ($.75 per share) | (1,801 | ) | (1,801 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Class B Common Stock issued related to stock award | 20 | 1,234 | 1,254 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance on March 30, 2003 | $ | 9,704 | $ | 3,029 | $ | 97,220 |
| $ | 5,189 |
| $ | (18,890 | ) | $ | (61,254 | ) | $ | 34,998 |
| |||||||||||||||||||||||||||||||||
Balance on September 28, 2003 | $ | 9,704 | $ | 3,029 | $ | 97,220 | $ | 26,413 | $ | (18,896 | ) | $ | (61,254 | ) | $ | 56,216 | ||||||||||||||||||||||||||||||||||||
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
First Quarter | First Nine Months | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Cash Flows from Operating Activities | ||||||||||||||||
Net income | $ | 1,407 |
| $ | 3,378 |
| $ | 27,153 | $ | 23,700 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation expense |
| 19,015 |
|
| 17,985 |
| 57,253 | 56,247 | ||||||||
Amortization of intangibles |
| 698 |
|
| 687 |
| 2,311 | 2,056 | ||||||||
Deferred income taxes |
| 491 |
|
| 1,111 |
| 6,446 | 11,653 | ||||||||
Losses on sale of property, plant and equipment |
| 178 |
|
| 702 |
| 888 | 2,277 | ||||||||
Amortization of debt costs |
| 259 |
|
| 186 |
| 807 | 526 | ||||||||
Amortization of deferred gain related to terminated interest rate swaps |
| (482 | ) |
| (482 | ) | ||||||||||
Amortization of deferred gain related to terminated derivative instruments | (1,548 | ) | (1,445 | ) | ||||||||||||
Minority interest |
| 116 |
|
| 759 |
| 2,690 | 6,195 | ||||||||
Increase in current assets less current liabilities |
| (5,990 | ) |
| (288 | ) | ||||||||||
(Increase) decrease in other noncurrent assets |
| 249 |
|
| (3,235 | ) | ||||||||||
(Increase) decrease in current assets less current liabilities | (5,310 | ) | 38,099 | |||||||||||||
Increase in other noncurrent assets | (2,443 | ) | (4,567 | ) | ||||||||||||
Increase (decrease) in other noncurrent liabilities |
| 3,279 |
|
| (3,076 | ) | 5,082 | (5,232 | ) | |||||||
Other |
| 70 |
|
| (3 | ) | (84 | ) | (343 | ) | ||||||
Total adjustments |
| 17,883 |
|
| 14,346 |
| 66,092 | 105,466 | ||||||||
Net cash provided by operating activities |
| 19,290 |
|
| 17,724 |
| 93,245 | 129,166 | ||||||||
Cash Flows from Financing Activities | ||||||||||||||||
Proceeds from the issuance of long-term debt |
| 100,000 |
| |||||||||||||
Payment of long-term debt |
| (50,000 | ) | |||||||||||||
Proceeds from the issuance of senior notes | 100,000 | |||||||||||||||
Payment of term loan | (50,000 | ) | ||||||||||||||
Payment of current portion of long-term debt |
| (39 | ) |
| (56,708 | ) | (39 | ) | (154,208 | ) | ||||||
Proceeds from (payment of) lines of credit, net |
| (11,700 | ) |
| 49,900 |
| ||||||||||
Proceeds from (payment of) lines of credit and revolving credit facility, net | (37,600 | ) | 57,200 | |||||||||||||
Cash dividends paid |
| (2,261 | ) |
| (2,193 | ) | (6,783 | ) | (6,605 | ) | ||||||
Payments on capital lease obligations |
| (286 | ) |
| (471 | ) | (983 | ) | (1,511 | ) | ||||||
Debt issuance costs paid |
| (864 | ) | (979 | ) | |||||||||||
Proceeds from interest rate lock agreements |
| 3,135 |
| |||||||||||||
Proceeds from settlement of forward rate agreements | 3,135 | |||||||||||||||
Proceeds from exercise of stock options | 5,699 | |||||||||||||||
Other |
| (752 | ) |
| 179 |
| (816 | ) | 179 | |||||||
Net cash provided by (used in) financing activities |
| 37,233 |
|
| (9,293 | ) | 5,935 | (99,246 | ) | |||||||
Cash Flows from Investing Activities | ||||||||||||||||
Additions to property, plant and equipment |
| (14,286 | ) |
| (7,716 | ) | (48,161 | ) | (34,900 | ) | ||||||
Proceeds from the sale of property, plant and equipment |
| 232 |
|
| 247 |
| 1,631 | 5,033 | ||||||||
Acquisitions of companies, net |
| (53,500 | ) |
| (8,702 | ) | ||||||||||
Acquisition of companies, net | (52,563 | ) | (8,679 | ) | ||||||||||||
Net cash used in investing activities |
| (67,554 | ) |
| (16,171 | ) | (99,093 | ) | (38,546 | ) | ||||||
Net decrease in cash |
| (11,031 | ) |
| (7,740 | ) | ||||||||||
Net increase (decrease) in cash | 87 | (8,626 | ) | |||||||||||||
Cash at beginning of period |
| 18,193 |
|
| 16,912 |
| 18,193 | 16,912 | ||||||||
Cash at end of period | $ | 7,162 |
| $ | 9,172 |
| $ | 18,280 | $ | 8,286 | ||||||
Significant non-cash investing and financing activities: | ||||||||||||||||
Issuance of Class B Common Stock in connection with stock award | $ | 1,254 |
| $ | 768 |
| ||||||||||
Issuance of Class B Common Stock related to stock award | $ | 1,254 | $ | 768 | ||||||||||||
Capital lease obligations incurred |
| 41,620 |
| 879 | 41,620 |
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
1. Accounting Policies
1. | Accounting Policies |
The consolidated financial statements include the accounts of Coca-Cola Bottling Co. Consolidated and its majority owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated.
The 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 preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form
10-K for the year ended December 29, 2002 filed with the Securities and Exchange Commission. See Note 1719 for new accounting pronouncements.
Certain prior year amounts have been reclassified to conform to current year classifications.
2. Piedmont Coca-Cola Bottling Partnership
2. | Piedmont Coca-Cola Bottling Partnership |
On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont Coca-Cola Bottling Partnership (“Piedmont”) to distribute and market carbonated and noncarbonated beverages primarily in portions of North Carolina and South Carolina. The Company provides a portion of the soft drink products to Piedmont at cost and receives a fee for managing the business of Piedmont pursuant to a management agreement.
Prior to January 2, 2002, the Company and The Coca-Cola Company, through their respective subsidiaries, each beneficially owned a 50% interest in Piedmont. On January 2, 2002, the Company purchased an additional 4.651% interest in Piedmont from The
Coca-Cola Company for $10.0 million, increasing the Company’s ownership in Piedmont to 54.651%. As a result of the increase in ownership, the results of operations, financial position and cash flows of Piedmont have been consolidated with those of the Company beginning in the first quarter of 2002. The excessCompany recorded $3.4 million of the purchase price over the net book value of the interest of Piedmont acquired was $4.4 million and was recorded principally as an addition to franchise rights and other identifiable intangible assets.$.9 million related to customer relationships in connection with this acquisition of a controlling interest in Piedmont. The Company’s investment in Piedmont had been accounted for using the equity method in 2001 and prior years.
On March 28, 2003, the Company purchased half of The Coca-Cola Company’s remaining interest in Piedmont for $53.5 million. This transaction increased the Company’s ownership interest in Piedmont from 54.651% to 77.326%. The excessCompany recorded $16.3 million of the purchase price over the net book valuefranchise rights and $4.3 million related to customer relationships in connection with its acquisition of thean additional interest of Piedmontin Piedmont.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
acquired was $21.1 million and has been recorded principally as an addition to franchise rights and other identifiable intangible assets.
2. | Piedmont Coca-Cola Bottling Partnership |
Summarized financial information for Piedmont was as follows:
In Thousands | March 30, 2003 | Dec. 29, 2002 | March 31, 2002 | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | ||||||||||||||
Current assets | $ | 31,077 | $ | 31,571 | $ | 33,660 |
| $ | 35,406 | $ | 31,571 | $ | 38,585 | |||||||
Noncurrent assets |
| 309,840 |
| 310,128 |
| 309,659 |
| 310,601 | 310,128 | 309,124 | ||||||||||
Total assets | $ | 340,917 | $ | 341,699 | $ | 343,319 |
| $ | 346,007 | $ | 341,699 | $ | 347,709 | |||||||
Current liabilities | $ | 30,693 | $ | 23,757 | $ | 117,753 |
| $ | 22,975 | $ | 23,757 | $ | 121,414 | |||||||
Noncurrent liabilities |
| 170,460 |
| 178,434 |
| 101,685 |
| 171,915 | 178,434 | 89,451 | ||||||||||
Total liabilities |
| 201,153 |
| 202,191 |
| 219,438 |
| 194,890 | 202,191 | 210,865 | ||||||||||
Partners’ equity |
| 139,764 |
| 139,508 |
| 127,968 |
| 151,117 | 139,508 | 139,954 | ||||||||||
Accumulated other comprehensive loss |
| (4,087 | ) | (3,110 | ) | |||||||||||||||
Total liabilities and partners’ equity | $ | 340,917 | $ | 341,699 | $ | 343,319 |
| $ | 346,007 | $ | 341,699 | $ | 347,709 | |||||||
First Quarter | ||||||||||||||||||||
In Thousands | 2003 | 2002 | ||||||||||||||||||
Net sales | $ | 64,148 | $ | 63,154 |
| |||||||||||||||
Cost of sales |
| 32,148 |
| 30,626 |
| |||||||||||||||
Gross margin |
| 32,000 |
| 32,528 |
| |||||||||||||||
Income from operations |
| 2,344 |
| 4,646 |
| |||||||||||||||
Net income | $ | 256 | $ | 1,674 |
| |||||||||||||||
Third Quarter | First Nine Months | |||||||||||
In Thousands | 2003 | 2002 | 2003 | 2002 | ||||||||
Net sales | $ | 80,876 | $ | 79,044 | $ | 223,076 | $ | 222,644 | ||||
Cost of sales | 41,601 | 39,350 | 113,017 | 110,077 | ||||||||
Gross margin | 39,275 | 39,694 | 110,059 | 112,567 | ||||||||
Income from operations | 8,521 | 8,203 | 18,128 | 21,063 | ||||||||
Net income | $ | 6,315 | $ | 5,892 | $ | 11,609 | $ | 13,660 | ||||
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
3. Inventories
3. | Inventories |
Inventories were summarized as follows:
In Thousands | March 30, 2003 | Dec. 29, 2002 | March 31, 2002 | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | ||||||||||||
Finished products | $ | 25,898 | $ | 23,207 | $ | 28,580 | $ | 29,162 | $ | 23,207 | $ | 30,015 | ||||||
Manufacturing materials |
| 7,399 |
| 10,609 |
| 7,229 | 7,121 | 10,609 | 7,073 | |||||||||
Plastic pallets and other |
| 5,172 |
| 4,832 |
| 5,043 | 4,873 | 4,832 | 5,345 | |||||||||
Total inventories | $ | 38,469 | $ | 38,648 | $ | 40,852 | $ | 41,156 | $ | 38,648 | $ | 42,433 | ||||||
4. Property, Plant and Equipment
4. | Property, Plant and Equipment |
The principal categories and estimated useful lives of property, plant and equipment were as follows:
In Thousands | March 30, 2003 | Dec. 29, 2002 | March 31, 2002 | Estimated Useful Lives | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | Estimated Useful Lives | ||||||||||||||
Land | $ | 12,670 | $ | 12,670 | $ | 13,058 | $ | 12,851 | $ | 12,670 | $ | 12,947 | ||||||||||
Buildings |
| 113,634 |
| 113,234 |
| 114,773 | 10-50 years | 114,631 | 113,234 | 113,725 | 10-50 years | |||||||||||
Machinery and equipment |
| 95,420 |
| 96,080 |
| 93,009 | 5-20 years | 97,154 | 96,080 | 95,659 | 5-20 years | |||||||||||
Transportation equipment |
| 144,907 |
| 143,932 |
| 138,441 | 4-13 years | 149,402 | 143,932 | 140,891 | 4-13 years | |||||||||||
Furniture and fixtures |
| 39,623 |
| 39,222 |
| 38,253 | 4-10 years | 39,105 | 39,222 | 38,858 | 4-10 years | |||||||||||
Vending equipment |
| 365,498 |
| 362,689 |
| 356,415 | 6-13 years | 371,777 | 362,689 | 358,721 | 6-13 years | |||||||||||
Leasehold and land improvements |
| 49,433 |
| 47,312 |
| 45,945 | 5-20 years | 50,266 | 47,312 | 46,594 | 5-20 years | |||||||||||
Software for internal use |
| 25,835 |
| 24,439 |
| 22,302 | 3-7 years | 24,675 | 24,439 | 24,043 | 3-7 years | |||||||||||
Construction in progress |
| 6,661 |
| 3,416 |
| 3,822 | 9,554 | 3,416 | 3,530 | |||||||||||||
Total property, plant and equipment, at cost |
| 853,681 |
| 842,994 |
| 826,018 | 869,415 | 842,994 | 834,968 | |||||||||||||
Less: Accumulated depreciation and amortization |
| 390,956 |
| 376,154 |
| 347,045 | 412,318 | 376,154 | 367,687 | |||||||||||||
Property, plant and equipment, net | $ | 462,725 | $ | 466,840 | $ | 478,973 | $ | 457,097 | $ | 466,840 | $ | 467,281 | ||||||||||
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
5. Leased Property Under Capital Leases
5. | Leased Property Under Capital Leases |
In Thousands | March 30, 2003 | Dec. 29, 2002 | March 31, 2002 | Estimated Useful Lives | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | Estimated Useful Lives | ||||||||||||||
Leased property under capital leases | $ | 47,618 | $ | 47,618 | $ | 60,761 | 1-29 years | $ | 48,497 | $ | 47,618 | $ | 47,115 | 1-29 years | ||||||||
Less: Accumulated amortization |
| 3,538 |
| 2,995 |
| 9,982 | 4,771 | 2,995 | 2,522 | |||||||||||||
Leased property under capital leases, net | $ | 44,080 | $ | 44,623 | $ | 50,779 | $ | 43,726 | $ | 44,623 | $ | 44,593 | ||||||||||
6. | Franchise Rights and Goodwill |
In Thousands | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | ||||||
Franchise rights | $ | 677,769 | $ | 661,471 | $ | 662,350 | |||
Goodwill | 155,487 | 155,192 | 155,192 | ||||||
Franchise rights and goodwill | 833,256 | 816,663 | 817,542 | ||||||
Less: Accumulated amortization | 210,535 | 210,535 | 210,535 | ||||||
Franchise rights and goodwill, net | $ | 622,721 | $ | 606,128 | $ | 607,007 | |||
The Company recorded $3.4 million of franchise rights in connection with its 2002 acquisition of a capital leasecontrolling interest in Piedmont and recorded $16.3 million of $41.6 million at the endfranchise rights in connection with its acquisition of the first quarter of 2002 related to its production/distribution center locatedan additional interest in Charlotte, North Carolina. This facility is leased from a related party.Piedmont in 2003. The lease obligation was capitalized asonly intangible assets the Company received a renewal option to extend the term of the lease, which it expects to exercise.
6. Franchise Rightstreats as indefinite lived are franchise rights and Goodwill
In Thousands | March 30, 2003 | Dec. 29, 2002 | March 31, 2002 | ||||||
Franchise rights | $ | 678,286 | $ | 661,471 | $ | 662,374 | |||
Goodwill |
| 155,192 |
| 155,192 |
| 155,192 | |||
Franchise rights and goodwill |
| 833,478 |
| 816,663 |
| 817,566 | |||
Less: Accumulated amortization |
| 210,535 |
| 210,535 |
| 210,535 | |||
Franchise rights and goodwill, net | $ | 622,943 | $ | 606,128 | $ | 607,031 | |||
goodwill. The Company adopted the provisionprovisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets,” at the beginning of 2002, which resulted in goodwill and franchise rights no longer being amortized.
Intangible assets with indefinite lives are evaluated at least annually to determine whether fair value is in excess of carrying value. This valuation consists of valuation methodologies including (a) a discounted cash flow analysis, (b) an assessment of total enterprise value which includes the Company’s long-term debt and the market value of its equity and (c) a market multiple of the Company’s cash flow, which for purposes of the valuation is defined as income from operations plus depreciation and amortization expense. The discounted cash flow model utilizes certain assumptions as to future growth in net selling price, cost of sales, sales volume, operating expenses and capital expenditures. The future cash flows are then discounted at the Company’s weighted average cost of capital. Calculation of total enterprise value consists of adding the Company’s long-term debt to the market value of the Company’s issued stock. The market multiple approach incorporates the average market cash flow multiple of the Company and three other publicly traded U. S. soft drink bottlers. The valuations derived under these methods are adjusted for all tangible assets and liabilities (including identifiable intangible assets) resulting in a value ascribed to intangible assets with indefinite usefullives. The calculated value ascribed to intangible assets with indefinite lives is compared to its carrying value. As of September 28, 2003, there was no longer being amortized. The Company will perform an annual impairment test inof the third quartercarrying value of each year or earlier if significant impairment indicators arise.franchise rights and goodwill.
7. Other Identifiable Intangible Assets
In Thousands | March 30, 2003 | Dec. 29, 2002 | March 31, 2002 | Estimated Useful Lives | |||||||
Customer lists | $ | 60,042 | $ | 55,743 | $ | 54,864 | 3-20 years | ||||
Less: Accumulated amortization |
| 49,644 |
| 48,946 |
| 46,838 | |||||
Other identifiable intangible assets, net | $ | 10,398 | $ | 6,797 | $ | 8,026 | |||||
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
7. | Other Identifiable Intangible Assets |
8. Long-Term Debt
In Thousands | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | Estimated Useful Lives | |||||||
Other identifiable intangible assets | $ | 61,101 | $ | 55,743 | $ | 54,864 | 3-20 years | ||||
Less: Accumulated amortization | 51,257 | 48,946 | 48,206 | ||||||||
Other identifiable intangible assets, net | $ | 9,844 | $ | 6,797 | $ | 6,658 | |||||
The Company recorded $.9 million related to customer relationships in connection with its 2002 acquisition of a controlling interest in Piedmont and recorded $4.3 million related to customer relationships in connection with its acquisition of an additional interest in Piedmont in 2003.
8. | Other Accrued Liabilities |
Long-term debt was
Other accrued liabilities were summarized as follows:
In Thousands | Maturity | Interest Rate | Interest Paid | March 30, 2003 | Dec. 29, 2002 | March 31, 2002 | ||||||||||
Lines of Credit | 2005 | 1.86 | % | Varies | $ | 25,900 | $ | 37,600 | $ | 19,900 | ||||||
Revolving Credit | 2005 | Varies |
| 30,000 | ||||||||||||
Term Loan Agreement | 2004 | 1.95 | % | Varies |
| 35,000 |
| 85,000 |
| 85,000 | ||||||
Term Loan Agreement | 2005 | 1.95 | % | Varies |
| 85,000 |
| 85,000 |
| 85,000 | ||||||
Term Loan Agreement | 2002 | Varies |
| 97,500 | ||||||||||||
Term Loan Agreement | 2003 | Varies |
| 97,500 | ||||||||||||
Debentures | 2007 | 6.85 | % | Semi-annually |
| 100,000 |
| 100,000 |
| 100,000 | ||||||
Debentures | 2009 | 7.20 | % | Semi-annually |
| 100,000 |
| 100,000 |
| 100,000 | ||||||
Debentures | 2009 | 6.38 | % | Semi-annually |
| 250,000 |
| 250,000 |
| 250,000 | ||||||
Senior Notes | 2012 | 5.00 | % | Semi-annually |
| 150,000 |
| 150,000 | ||||||||
Senior Notes | 2015 | 5.30 | % | Semi-annually |
| 100,000 | ||||||||||
Other notes payable | 2003 – 2006 | 5.75 | % | Varies |
| 117 |
| 156 |
| 156 | ||||||
| 846,017 |
| 807,756 |
| 865,056 | |||||||||||
Less: Portion of long-term debt payable within one year |
| 39 |
| 31 |
| 147,431 | ||||||||||
Long-term debt | $ | 845,978 | $ | 807,725 | $ | 717,625 | ||||||||||
In Thousands | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | ||||||
Accrued marketing costs | $ | 17,451 | $ | 17,972 | $ | 18,348 | |||
Accrued insurance costs | 13,485 | 9,424 | 6,921 | ||||||
Accrued taxes (other than income taxes) | 7,617 | 7,518 | 10,751 | ||||||
Employee benefit plan accruals | 19,720 | 17,120 | 15,568 | ||||||
All other accrued expenses | 16,658 | 20,613 | 15,397 | ||||||
Total | $ | 74,931 | $ | 72,647 | $ | 66,985 | |||
.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
9. | Long-Term Debt |
8. Long-Term Debt (cont.)
Long-term debt was summarized as follows:
In Thousands | Maturity | Interest Rate | Interest Paid | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | |||||||||
Lines of Credit | 2005 | Varies | $ | 37,600 | $ | 7,200 | |||||||||
Revolving Credit | 2005 | Varies | 50,000 | ||||||||||||
Term Loan | 2004 | 1.70% | Varies | $ | 35,000 | 85,000 | 85,000 | ||||||||
Term Loan | 2005 | 1.70% | Varies | 85,000 | 85,000 | 85,000 | |||||||||
Term Loan | 2003 | Varies | 97,500 | ||||||||||||
Debentures | 2007 | 6.85% | Semi- annually | 100,000 | 100,000 | 100,000 | |||||||||
Debentures | 2009 | 7.20% | Semi- annually | 100,000 | 100,000 | 100,000 | |||||||||
Debentures | 2009 | 6.38% | Semi- annually | 250,000 | 250,000 | 250,000 | |||||||||
Senior Notes | 2012 | 5.00% | Semi- annually | 150,000 | 150,000 | ||||||||||
Senior Notes | 2015 | 5.30% | Semi- annually | 100,000 | |||||||||||
Other notes payable | 2003 - 2006 | 5.75% | Varies | 117 | 156 | 156 | |||||||||
820,117 | 807,756 | 774,856 | |||||||||||||
Less: Portion of long-term debt payable within one year | 35,039 | 31 | 154,731 | ||||||||||||
Long-term debt | $ | 785,078 | $ | 807,725 | $ | 620,125 | |||||||||
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
9. | Long-Term Debt |
The Company borrows periodically under its available lines of credit. These lines of credit, in the aggregate amount of $65$60 million at March 30,September 28, 2003, are made available at the discretion of the two participating banks and may be withdrawn at any time by such banks. On March 30,September 28, 2003, $25.9 million wasthere were no amounts outstanding under these lines of credit. The Company intends to refinance short-term maturities with currently available lines of credit. To the extent that these borrowings do not exceed the amount available under the Company’s $125 million revolving credit facility, they are classified as noncurrent liabilities.
In December 2002, the Company entered into a three-year, $125 million revolving credit facility. This facility includes an option to extend the term for an additional year at the participating banks’ discretion. The revolving credit facility bears interest at a floating rate of LIBOR plus an interest rate spread of .60%. In addition, there is a facility fee of .15% required for this revolving credit facility. Both the interest rate spread and the facility fee are determined from a commonly used pricing grid based on the Company’s long-term senior unsecured noncredit-enhanced debt rating. This new revolving credit facility replaced the Company’s $170 million facility that expired in December 2002. The newThis facility contains covenants, which establish ratio requirements related to debt, interest expense and cash flow. On March 30,September 28, 2003, there were no amounts outstanding under this new facility.
In January 1999, the Company filed ana shelf registration relating to up to $800 million shelf registration forof debt and equity securities. The Company has used this shelf registration to issue long-term debt including $250 million in debentures in 1999, $150 million in senior notes in 2002 and $100 million in Marchsenior notes in 2003. The Company currently has up to $300 million available for use under this shelf registration.
In November 2002, the Company issued $150 million of ten-year senior notes at a coupon rate of 5.00%. The proceeds from this issuance were used to repay borrowings under the Company’s revolving credit facility and lines of credit, and to loan amounts to Piedmont to enable it to repay a $97.5 million term loan. In March 2003, the Company issued $100 million of twelve-year senior notes at a coupon rate of 5.30%. The proceeds from this issuance were used to purchase an additional interest in Piedmont for $53.5 million and repay a portion of the Company’s $170 million term loan, reducing the amount outstanding under the term loan to $120 million at March 30, 2003.million.
With regards to the Company’s $120 million term loan agreement that matures in 2004 and 2005, the Company must maintain its public debt ratings at investment grade as determined by both Moody’s and Standard & Poor’s. If the Company’s public debt ratings fall below investment grade within 90 days after the public announcement of certain designated events and such ratings stay below investment grade for an additional 40 days, a trigger event resulting in a default occurs. The Company does not anticipate a trigger event will occur.occur in the foreseeable future. Subsequent to September 28, 2003, the Company repaid $20 million of the term loan using cash on hand and available lines of credit to reduce the amount outstanding to $100 million.
During 2002, Piedmont refinanced a $195 million term loan using the proceeds from a loan from the Company. The Company’s source of funds for this loan to Piedmont included the issuance of $150 million of senior notes, its lines of credit, its revolving credit facility and available cash flow. Piedmont pays the
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
9. | Long-Term Debt |
Company interest on the loan at the Company’s average cost of funds plus 0.50%. The Company plans to provide for Piedmont’s future financing requirements under these terms.
After taking into account all of the interest rate hedging activities, the Company had a weighted average interest rate of 5.0%4.8%, 5.0% and 5.4%5.3% for its debt and capital lease obligations as of March 30,September 28, 2003, December 29, 2002 and March 31,September 29, 2002, respectively. The Company’s overall weighted average interestborrowing rate on its debt and capital lease obligations was 5.1%4.9% for the first quarternine months of 2003 compared to 5.5%5.6% for the first quarternine months of 2002.
Before giving effect to the forward rate agreements, discussed in Note 9 to the consolidated financial statements, approximately 38%48% of the Company’s debt and capital lease obligations of $891.8$866.0 million as of September 28, 2003 was subject to changes in short-term interest rates. The Company currently has four forward rate agreements that fix the interest rate through 2003 on $200 million of floating rate debt. After giving effect to the forward rate agreements, approximately 24% of the Company’s debt and capital lease obligations are subject to changes in short-term interest rates as of March 30,through 2003. The Company considers all floating rate debt and fixed rate debt with a maturity of less than one year to be subject to changes in short-term interest rates.
IfIncluding the effect of all interest rate hedging agreements, if average interest rates for the floating rate component of the Company’s debt and capital lease obligations increased by 1%, interest expense for the first quarter ended March 30,nine months of 2003 would have increased by approximately $.8$1.9 million and net income would have been reduced by approximately $.5$1.1 million.
During the first quarters of 2003 and 2002, interest expense was lower due to amortizationThe Company has issued all of the deferred gain on previously terminated interest rate swap agreementsoutstanding long-term debt with none being issued by approximately $.5 million in each period.any of the Company’s subsidiaries. There are no guarantees of the Company’s debt.
9. Derivative Financial Instruments
10. | Derivative Financial Instruments |
The Company periodically uses interest rate hedging products to modify risk from interest rate fluctuations. The Company has historically altered its fixed/floating rate mix based upon anticipated cash flows from operations relative to the Company’s debt level and the potential impact of changesincreases in interest rates on the Company’s overall financial condition. Sensitivity analyses are performed to review the impact on the Company’s financial position and coverage of various interest rate movements. The Company does not use derivative financial instruments for trading purposes nor does it use leveraged financial instruments. All of the Company’s outstanding interest rate swap agreements and forward rate agreements are LIBOR-based.
DerivativeThe Company periodically enters into interest rate swap and forward rate agreements. The Company has standardized procedures for evaluating the appropriate accounting for derivative financial instruments were summarized as follows:in accordance with applicable accounting standards. These procedures include:
March 30, 2003 | December 29, 2002 | March 31, 2002 | |||||||||||||
In Thousands | Notional Amount | Remaining Term | Notional Amount | Remaining Term | Notional Amount | Remaining Term | |||||||||
Interest rate swaps – fixed | $ | 27,000 | .7 years | ||||||||||||
Interest rate swaps – fixed |
| 19,000 | .7 years | ||||||||||||
Interest rate swaps – fixed |
| 40,000 | .2 years | ||||||||||||
Interest rate swaps – fixed |
| 90,000 | 1.2 years | ||||||||||||
Interest rate swaps – floating | $ | 50,000 | 4.67 years | $ | 50,000 | 4.92 years | |||||||||
Interest rate swaps – floating |
| 50,000 | 6.33 years |
| 50,000 | 6.58 years | |||||||||
Interest rate swaps – floating |
| 50,000 | 9.67 years |
| 50,000 | 9.92 years |
Ø | Identification and matching of the hedging instrument and the hedged item to ensure that significant features such as maturity dates and interest reset dates coincide; |
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
10. | Derivative Financial Instruments |
9. Derivative Financial Instruments (cont.)
Ø | Identification of the nature of the risk being hedged and the Company’s intent for undertaking the hedge; |
Ø | Assessing the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or variability to cash flows attributable to the hedged risk; |
Ø | Reviewing evidence, at the hedge’s inception and on an ongoing basis, indicating that the hedging relationship will be highly effective in achieving offsetting changes in the fair value or cash flows that are attributable to the hedged risk; and |
Ø | Implementing a process for assessment of ongoing hedge effectiveness. |
To the extent the interest rate swap agreements meet the specified criteria, they are accounted for as either cash flow or fair value hedges. Effective changes in the fair values of designated and qualifying fair value hedges are recognized in earnings as offsets to changes in the fair value of the related hedged liabilities. Changes in the fair value of cash flow hedging instruments are recognized in accumulated other comprehensive income. Amounts recognized in accumulated other comprehensive income are then subsequently reclassified to earnings in the same periods the forecasted payments affect earnings. Ineffectiveness of cash flow hedges, defined as the amount by which the change in the value of the hedge does not offset the change in the value of the hedged item, is reflected in current operating results.
March 30, 2003 | December 29, 2002 | |||||||||||||
In Thousands | Notional Amount | Start Date | Length of Term | Notional Amount | Start Date | Length of Term | ||||||||
Forward rate agreement – fixed | $ | 50,000 | 1/02/03 | 1 year | $ | 50,000 | 1/02/03 | 1 year | ||||||
Forward rate agreement – fixed |
| 50,000 | 5/01/03 | 1 year |
| 50,000 | 5/01/03 | 1 year | ||||||
Forward rate agreement – fixed |
| 50,000 | 5/15/03 | 1 year |
| 50,000 | 5/15/03 | 1 year | ||||||
Forward rate agreement – fixed |
| 50,000 | 5/30/03 | 3 months |
| 50,000 | 5/30/03 | 3 months | ||||||
Forward rate agreement – fixed |
| 50,000 | 5/30/03 | 1 year |
Derivative financial instruments were summarized as follows:
Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | |||||||||||||
In Thousands | Notional Amount | Remaining Term | Notional Amount | Remaining Term | Notional Amount | Remaining Term | |||||||||
Interest rate swap agreement-fixed | $ | 27,000 | .21 year | ||||||||||||
Interest rate swap agreement-fixed | 19,000 | .21 year | |||||||||||||
Interest rate swap agreement-fixed | 90,000 | .75 year | |||||||||||||
Interest rate swap agreement-floating | $ | 50,000 | 4.17 years | $ | 50,000 | 4.92 years | |||||||||
Interest rate swap agreement-floating | 50,000 | 5.83 years | 50,000 | 6.58 years | |||||||||||
Interest rate swap agreement-floating | 50,000 | 9.17 years | 50,000 | 9.92 years | |||||||||||
Interest rate swap agreement-floating | 25,000 | 4.17 years | |||||||||||||
Interest rate swap agreement-floating | 25,000 | 4.17 years | |||||||||||||
Interest rate swap agreement-floating | 50,000 | 5.67 years |
Sept. 28, 2003 | Dec. 29, 2002 | |||||||||||||
In Thousands | Notional Amount | Start Date | Length of Term | Notional Amount | Start Date | Length of Term | ||||||||
Forward rate agreement-fixed | $ | 50,000 | 1/02/03 | 1 year | $ | 50,000 | 1/02/03 | 1 year | ||||||
Forward rate agreement-fixed | 50,000 | 5/01/03 | 1 year | 50,000 | 5/01/03 | 1 year | ||||||||
Forward rate agreement-fixed | 50,000 | 5/15/03 | 1 year | 50,000 | 5/15/03 | 1 year | ||||||||
Forward rate agreement-fixed | 50,000 | 5/30/03 | 3 months | |||||||||||
Forward rate agreement-fixed | 50,000 | 5/30/03 | 1 year |
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
10. | Derivative Financial Instruments |
During November 2002, the Company entered into three interest rate swap agreements in conjunction with the issuance of $150 million of senior notes and the refinancing of other Company debt as previously discussed. The interest rate swap agreements effectively convert $150 million of the Company’s debt from fixed to floating rate in conjunction with its ongoing debt management strategy. These swap agreements were accounted for as fair value hedges.
During the fourth quarter of 2002, the Company terminated two interest rate swap agreements related to long-term debt that was retired early. These swap agreements were accounted forclassified as cash flow hedges. These two interest rate swap agreements hedged the cash flows on part of a variable rate term loan that was previously outstanding. In conjunction with the issuance of $150 million of long-term senior notes in November 2002, the variable rate term loan was repaid early. The Company recordedterm loan had a maturity of May 2003. Upon the repayment of the term loan, the cash flow hedges no longer qualified as hedges because the variability of cash flows being hedged was eliminated with the repayment of the variable rate term loan and thus the forecasted schedule of payments did not occur. Accordingly, the interest expense in the fourth quarterrate swap agreements were terminated and a charge of $2.2 million related to the amounts paid upon termination of these interest rate swap agreements.was reflected in 2002 earnings.
The Company has entered into fivefour forward rate agreements for twelve-month terms which fix short-term rates on certain components of the Company’s floating rate debt for periods ranging from three to twelve months. Twodebt. One of these forward rate agreements havehas been accounted for as a cash flow hedges.hedge. The other three forward rate agreements do not meet the criteria set forth in Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, for hedge accounting and have been accounted for on a mark-to-market basis. The mark-to-market adjustment for these three forward rate agreements was an increase to interest expense of approximately $.4$.1 million during the first quarternine months of 2003.
In conjunction with the issuance of $100 million 5.30% Senior Notesthe twelve-year senior notes in March 2003, the Company entered into certain interestforward rate agreements to hedge the issuance price. These interestforward rate agreements have beenwere accounted for as a cash flow hedges.hedge. The Company received $3.1 million from these cash flow hedges uponthe settlement of this hedge, which has been recorded in other comprehensive income, net of tax, and will be amortized as a reduction of interest expense over the life of the related senior notes.
In July 2003, the Company entered into three additional interest rate swap agreements totaling $100 million. These interest rate swap agreements allow the Company to pay floating rates on components of the Company’s fixed rate debt portfolio and were accounted for as fair value hedges.
The counterparties to these contractual arrangements are major financial institutions with which the Company also has other financial relationships. The Company is exposed to credit loss in the event of nonperformance by the other parties.these counterparties. However, the Company does not anticipate nonperformance by the other parties.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
10. Fair Values of Financial Instruments
11. | Fair Values of Financial Instruments |
The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments:
Cash, Accounts Receivable and Accounts Payable
The fair values of cash, accounts receivable and accounts payable approximate carrying values due to the short maturity of these financial instruments.
Public Debt
The fair values of the Company’s public debt are based on estimated market prices.
Non-Public Variable Rate Long-Term Debt
The carrying amounts of the Company’s variable rate borrowings approximate their fair values.
Non-Public Fixed Rate Long-Term Debt
The fair values of the Company’s fixed rate long-term borrowings are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.
Derivative Financial Instruments
Fair values for the Company’s interest rate swapsswap agreements and forward rate agreements are based on estimated current settlement values.
The carrying amounts and fair values of the Company’s long-term debt and derivative financial instruments were as follows:
March 30, 2003 | December 29, 2002 | March 31, 2002 | Sept. 28, 2003 | Dec. 29, 2002 | Sept. 29, 2002 | |||||||||||||||||||||||||||||||||||||||
In Thousands | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||||||||||||||||||||||
Public debt | $ | 700,000 |
| $ | 744,954 |
| $ | 600,000 |
| $ | 634,150 |
| $ | 450,000 | $ | 441,990 | $ | 700,000 | $ | 746,922 | $ | 600,000 | $ | 634,150 | $ | 450,000 | $ | 487,715 | ||||||||||||||||
Non-public variable rate long-term debt |
| 145,900 |
|
| 145,900 |
|
| 207,600 |
|
| 207,600 |
|
| 414,900 |
| 414,900 | 120,000 | 120,000 | 207,600 | 207,600 | 324,700 | 324,700 | ||||||||||||||||||||||
Non-public fixed rate long-term debt |
| 117 |
|
| 117 |
|
| 156 |
|
| 156 |
|
| 156 |
| 156 | 117 | 117 | 156 | 156 | 156 | 156 | ||||||||||||||||||||||
Interest rate swaps and forward rate agreements |
| (1,372 | ) |
| (1,372 | ) |
| (2,023 | ) |
| (2,023 | ) |
| 4,056 |
| 4,056 | ||||||||||||||||||||||||||||
Interest rate swap agreements and forward rate agreements | (1,591 | ) | (1,591 | ) | (2,023 | ) | (2,023 | ) | 3,152 | 3,152 |
The fair values of the interest rate swapsswap agreements and forward rate agreements at March 30,September 28, 2003 and December 29, 2002 represent the estimated amounts the Company would have received upon termination of these agreements. The fair valuesvalue of the interest rate swapsswap agreements at March 31,September 29, 2002 representrepresents the estimated amountsamount the Company would have paid upon termination of these agreements.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
11. Income Taxes
12. | Income Taxes |
The provision for income taxes consisted of the following:
Third Quarter | First Nine Months | |||||||||||||||||||
In Thousands | March 30, 2003 | March 31, 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||||
Current: | ||||||||||||||||||||
Federal | $ | 472 | $ | 1,103 | $ | — | $ | — | $ | — | $ | 4,614 | ||||||||
State | — | — | — | — | ||||||||||||||||
Total current provision |
| 472 |
| 1,103 | — | — | — | 4,614 | ||||||||||||
Deferred: | ||||||||||||||||||||
Federal |
| 354 |
| 827 | 7,917 | 6,099 | 13,650 | 9,580 | ||||||||||||
State |
| 137 |
| 284 | (5,052 | ) | 884 | (7,204 | ) | 2,073 | ||||||||||
Total deferred provision |
| 491 |
| 1,111 | 2,865 | 6,983 | 6,446 | 11,653 | ||||||||||||
Income tax expense | $ | 963 | $ | 2,214 | $ | 2,865 | $ | 6,983 | $ | 6,446 | $ | 16,267 | ||||||||
Current tax expense represents alternative minimum tax.
Reported income tax expense is reconciled to the amount computed on the basis of income before income taxes at the statutory rate as follows:
Third Quarter | First Nine Months | ||||||||||||||||||||
In Thousands | March 30, 2003 | March 31, 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Statutory expense | $ | 830 | $ | 1,957 | $ | 5,849 | $ | 5,782 | $ | 11,760 | $ | 13,988 | |||||||||
State income taxes, net of federal benefit |
| 89 |
| 185 | 856 | 575 | 1,476 | 1,348 | |||||||||||||
Valuation allowance change-state NOL carryforwards | (10,165 | ) | — | (14,944 | ) | — | |||||||||||||||
Federal benefit of valuation allowance change-state NOL carryforwards | 3,558 | — | 5,230 | — | |||||||||||||||||
Termination of certain Company-owned life insurance policies | 5,442 | — | 5,442 | — | |||||||||||||||||
Federal benefit of termination of certain Company-owned life insurance policies | (3,537 | ) | — | (3,537 | ) | — | |||||||||||||||
Officers’ life insurance premiums | — | 62 | — | 1,109 | |||||||||||||||||
Cash surrender value | (41 | ) | 375 | 593 | (1,284 | ) | |||||||||||||||
Other |
| 44 |
| 72 | 903 | 189 | 426 | 1,106 | |||||||||||||
Income tax expense | $ | 963 | $ | 2,214 | $ | 2,865 | $ | 6,983 | $ | 6,446 | $ | 16,267 | |||||||||
The Company’s effective income tax rates for the first nine months of 2003 and 2002 were 19.2% and 40.7%, respectively. During the third quarter of 2003, the Company recorded two adjustments to income tax expense. Based upon an updated assessment of future utilization of state net operating loss carryforwards in conjunction with a reorganization of certain of the Company’s subsidiaries, the Company reduced its valuation allowance related to such carryforwards during the third quarter. The reduction of the valuation allowance reduced income tax expense by $6.5 million in the third quarter.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
12. | Income Taxes |
12. Supplemental Disclosures
Also, during the third quarter of Cash Flow Information2003, the Company decided to terminate several Company-owned life insurance policies resulting in a taxable gain and incremental income tax expense of $1.9 million. There was no gain or loss for financial reporting purposes related to the termination of these life insurance policies.
During the second quarter of 2003, the Company recorded a favorable adjustment to its income tax expense of $3.1 million. This adjustment was made upon the completion of a state income tax audit.
13. | Other Comprehensive Income (Loss) |
The reconciliation of the components of accumulated other comprehensive income (loss) was as follows:
In Thousands | Derivatives Gain/(Loss) | Minimum Pension Liability Adjustment | Total | |||||||||
Balance at December 30, 2001 | $ | (1,821 | ) | $ | (10,984 | ) | $ | (12,805 | ) | |||
Change in fair market value of cash flow hedges, net of tax | (30 | ) | (30 | ) | ||||||||
Change in proportionate share of Piedmont’s accumulated other comprehensive loss, net of tax | 752 | 752 | ||||||||||
Balance at September 29, 2002 | $ | (1,099 | ) | $ | (10,984 | ) | $ | (12,083 | ) | |||
Balance at December 29, 2002 | $ | $ | (20,621 | ) | $ | (20,621 | ) | |||||
Change in fair market value of cash flow hedges, net of tax | 1,725 | 1,725 | ||||||||||
Balance as of September 28, 2003 | $ | 1,725 | $ | (20,621 | ) | $ | (18,896 | ) | ||||
A summary of the components of other comprehensive income (loss) was as follows:
In Thousands | Before Tax Amount | Deferred Income Tax Effect | After Tax Amount | |||||||||
For the first nine months of 2003 | ||||||||||||
Change in fair market value of cash flow hedges | $ | 2,856 | $ | (1,131 | ) | $ | 1,725 | |||||
Other comprehensive income (loss) | $ | 2,856 | $ | (1,131 | ) | $ | 1,725 | |||||
For the first nine months of 2002 | ||||||||||||
Change in fair market value of cash flow hedges | $ | (50 | ) | $ | 20 | $ | (30 | ) | ||||
Change in proportionate share of Piedmont’s accumulated other comprehensive loss | 1,245 | (493 | ) | 752 | ||||||||
Other comprehensive income (loss) | $ | 1,195 | $ | (473 | ) | $ | 722 | |||||
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
14. | Supplemental Disclosures of Cash Flow Information |
Changes in current assets and current liabilities affecting cash, net of effect of acquisitions, were as follows:
First Quarter | First Nine Months | |||||||||||||||
In Thousands | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Accounts receivable, trade, net | $ | 207 |
| $ | 3,081 |
| $ | (4,429 | ) | $ | 19 | |||||
Accounts receivable, The Coca-Cola Company |
| (142 | ) |
| (10,470 | ) | (11,563 | ) | (14,961 | ) | ||||||
Accounts receivable, other |
| 11,352 |
|
| 1,218 |
| 12,470 | 1,124 | ||||||||
Inventories |
| 179 |
|
| 4,960 |
| (2,508 | ) | 3,379 | |||||||
Prepaid expenses and other current assets |
| (4,746 | ) |
| (2,092 | ) | (2,533 | ) | (3,290 | ) | ||||||
Accounts payable, trade |
| 314 |
|
| 1,262 |
| 1,065 | 1,024 | ||||||||
Accounts payable, The Coca-Cola Company |
| (4,596 | ) |
| (3,376 | ) | (4,264 | ) | 33,284 | |||||||
Other accrued liabilities |
| (6,632 | ) |
| 11,768 |
| 2,284 | 14,006 | ||||||||
Accrued compensation |
| (7,854 | ) |
| (8,765 | ) | (4,049 | ) | 330 | |||||||
Accrued interest payable |
| 5,928 |
|
| 2,126 |
| 8,217 | 3,184 | ||||||||
Increase in current assets less current liabilities | $ | (5,990 | ) | $ | (288 | ) | ||||||||||
(Increase) decrease in current assets less current liabilities | $ | (5,310 | ) | $ | 38,099 | |||||||||||
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
13. Earnings Per Share
15. | Earnings Per Share |
The following table sets forth the computation of basic net income per share and diluted net income per share:
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||
In Thousands (Except Per Share Data) | 2003 | 2002 | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Numerator: | ||||||||||||||||||
Numerator: | ||||||||||||||||||
Numerator for basic net income per share and diluted net income per share | $ | 1,407 | $ | 3,378 | $ | 13,846 | $ | 9,539 | $ | 27,153 | $ | 23,700 | ||||||
Denominator: | ||||||||||||||||||
Denominator: | ||||||||||||||||||
Denominator for basic net income per share – weighted average common shares |
| 9,043 |
| 8,773 | 9,043 | 8,864 | 9,043 | 8,807 | ||||||||||
Effect of dilutive securities – stock options |
| — |
| 84 | — | 60 | — | 80 | ||||||||||
Denominator for diluted net income per share – adjusted weighted average common shares |
| 9,043 |
| 8,857 | 9,043 | 8,924 | 9,043 | 8,887 | ||||||||||
Basic net income per share | $ | .16 | $ | .39 | $ | 1.53 | $ | 1.08 | $ | 3.00 | $ | 2.69 | ||||||
Diluted net income per share | $ | .16 | $ | .38 | $ | 1.53 | $ | 1.07 | $ | 3.00 | $ | 2.67 | ||||||
14. Commitments and Contingencies
16. | Commitments and Contingencies |
The Company has guaranteed a portion of the debt for two cooperatives in which the Company is a member. The amounts guaranteed were $40.0$39.3 million, $34.8 million and $45.8$33.9 million as of March 30,September 28, 2003, December 29, 2002 and March 31,September 29, 2002, respectively. The Company has not recorded any liability associated with these guarantees as the Company considers the risk of default associated with these guarantees to be remote. The guarantees relate to debt and lease obligations, which resulted primarily from the purchase of production equipment and facilities.facilities by these cooperatives. Both cooperatives consist solely of Coca-Cola bottlers. In the event either of these cooperatives failfails to fulfill theirits commitments under the related debt and lease obligations, 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 maximum borrowing capacity, the Company’s maximum potential amount of payments under these guarantees on March 30,September 28, 2003 would have been $59.8$58.9 million. The Company does not anticipate that either of these cooperatives will fail to fulfill their commitments under these agreements. The Company believes that each of these cooperatives has sufficient assets including production equipment, facilities and working capital,the ability to adjust selling prices of their products to adequately mitigate the risk of material loss.
The Company has standby letters of credit, primarily related to its casualty insurance program. On September 28, 2003, these letters of credit totaled $8.6 million.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
16. | Commitments and Contingencies |
With respect to Southeastern Container, Inc., one of the cooperatives which the Company is a member, the Company is obligated to purchase at least 80% of its actual volume requirement of plastic bottles for certain designated territories. However, there is no specified minimum dollar purchase commitment on an annual basis.
The Company’s multi-year agreement related to aluminum cans, which expires in December 2003, is only for its actual volume requirements and does not obligate the Company to a specified minimum dollar purchase commitment on an annual basis.
The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with legal counsel, that the ultimate disposition of these claims will not
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
have a material adverse effect on the financial condition, cash flows or results of operations of the Company.
15.
17. | Capital Transactions |
On May 12, 1999, the stockholders of the Company approved a restricted stock award for J. Frank Harrison, III, the Company’s Chairman of the Board of Directors and Chief Executive Officer, consisting of 200,000 shares of the Company’s Class B Common Stock. The award provides that the shares of restricted stock are earned at the rate of 20,000 shares per year over a ten-year period. The vesting of each annual installment is contingent upon the Company achieving at least 80% of the Overall Goal Achievement Factor for the selected performance indicators used in determining bonuses for all officers under the Company’s Annual Bonus Plan. The fair value of the restricted stock award, when approved, was approximately $11.7 million based on the market price of the Common Stock on the effective date of the award.
On March 4, 2003,5, 2002, the Compensation Committee of the Board of Directors determined that 20,000 shares of restricted Class B Common Stock, $1.00 par value, vested and should be issued pursuant to athis performance-based award to J. Frank Harrison, III in connection with his services as Chairman of the Board of Directors and Chief Executive Officer of the Company. This award was approved byOn March 4, 2003, the Company’s stockholders in 1999.Compensation Committee determined that an additional 20,000 shares of restricted Class B Common Stock, $1.00 par value, vested. The shares were issued without registration under the Securities Act of 1933 in reliance on Section 4(2) thereof.
16. Related Party TransactionsAt September 28, 2003, the fair value of the potentially issuable shares related to the restricted stock award (which are subject to annual vesting) approximated $6.1 million.
On May 13, 2002, the Company announced that two of its directors, J. Frank Harrison, Jr., Chairman Emeritus, and J. Frank Harrison, III, Chairman and Chief Executive Officer, had entered into plans providing for sales of up to an aggregate total of 250,000 shares of the Company’s Common Stock in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Through the third quarter of
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
17. | Capital Transactions |
2002, 198,923 shares of Common Stock had been sold under the plans and the Company had received proceeds of approximately $5.7 million. The remaining shares under these plans were sold during October 2002 bringing the total number of shares sold to 250,000. Total proceeds to the Company from the exercise of the stock options under the 10b5-1 plans were approximately $7.2 million.
18. | Related Party Transactions |
The Company’s business consists primarily of the production, marketing and distribution of soft drink products 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 30,September 28, 2003, The Coca-Cola Company had aowned 27.4% interest inof the Company’s total outstanding Common Stock and Class B Common Stock on a combined basis.
The following table summarizes the significant transactions between the Company and The Coca-Cola Company:
First Nine Months | ||||||||||||
In Millions | First Quarter 2003 | First Quarter 2002 | 2003 | 2002 | ||||||||
Payments by the Company for concentrate, syrup, sweetener and other miscellaneous purchases | $ | 61.6 | $ | 60.4 | $ | 220.8 | $ | 216.8 | ||||
Payments by the Company for customer marketing programs |
| 12.3 |
| 11.2 | 38.5 | 38.0 | ||||||
Marketing funding support payments to the Company |
| 13.1 |
| 12.6 | 40.8 | 41.7 | ||||||
Payments by the Company for local media |
| — |
| — | .2 | — | ||||||
Local media and presence marketing funding support provided by The Coca-Cola Company |
| 2.7 |
| 3.1 | 8.7 | 10.2 | ||||||
The Company has a production arrangement with Coca-Cola Enterprises Inc. (“CCE”) to buy and sell finished products at cost. Sales to CCE under this agreement were $5.5$18.8 million and $5.2$18.1 million in the first quarternine months of 2003 and the first quarternine months of 2002, respectively. Purchases from CCE under this arrangement were $4.6$15.6 million and $4.5$15.8 million in the first quarternine months of 2003 and the first quarternine months of 2002, respectively. The Coca-Cola Company has significant equity interests in the Company and CCE. As of March 30,September 28, 2003, CCE held 10.5% of the Company’s outstanding Common Stock but held no shares of the Company’s Class B Common Stock, giving CCE a 7.7% equity interest in the Company’s total outstanding Common Stock and Class B Common Stock on a combined basis.
On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont. Prior to January 2, 2002, the Company and The Coca-Cola Company, through their respective subsidiaries, each beneficially owned a 50% interest in Piedmont. On January 2, 2002, the Company purchased an additional 4.651% interest in
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
16. Related Party Transactions (cont.)
Piedmont from The Coca-Cola Company, increasing the Company’s ownership in Piedmont to 54.651%. On March 28, 2003, the Company purchased an additional 22.675% interest in Piedmont from The Coca-Cola Company, increasing the Company’s ownership to 77.326%. The Company provides a portion of the soft drink products for Piedmont at cost and receives a fee for managing the operations of Piedmont
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
18. | Related Party Transactions |
pursuant to a management agreement. The Company sold product at cost to Piedmont during the first quarternine months of 2003 and the first quarternine months of 2002 totaling $12.6$49.7 million and $12.3$44.2 million, respectively. The Company received $3.9$13.4 million and $4.1$13.7 million for management services pursuant to its management agreement with Piedmont for the first quarternine months of 2003 and the first quarternine months of 2002, respectively.
During 2002, Piedmont refinanced a $195 million term loan using the proceeds from a loan from the Company. The Company’s source of funds for this loan to Piedmont included the issuance of $150 million of senior notes, its lines of credit, the revolving credit facility and available cash flow. Piedmont pays the Company interest on the loan at the Company’s average cost of funds plus 0.50%. As of March 30,September 28, 2003, the Company hadhas loaned $144.0$145.6 million to Piedmont. The Company plans to provide for Piedmont’s future financing requirements under these terms.
The Company also subleases various fleet and vending equipment to Piedmont at cost. These sublease rentals amounted to $2.1$6.3 million and $2.5 million infor both the first quarternine months of 2003 and the first quarternine months of 2002, respectively.2002. In addition, Piedmont subleases various fleet and vending equipment to the Company at cost. These sublease rentals amounted to approximately $50,000 each period$150,000 for all periods presented.both the first nine months of 2003 and the first nine months of 2002.
The Company is a shareholder in two cooperatives from which it purchases substantially all its requirements for plastic bottles. Net purchases from these entities were approximately $10.5$37.9 million and $11.1$35.6 million in the first quarternine months of 2003 and the first quarternine months of 2002, respectively. In connection with its participation in one of these cooperatives, the Company has guaranteed a portion of the cooperative’s debt. Such guarantee amounted to $17.3$18.7 million as of March 30,September 28, 2003.
The Company is a member of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative. SAC sells finished products to the Company and Piedmont at cost. Purchases from SAC by the Company and Piedmont for finished products were $25.9$82.4 million and $23.2$83.9 million in the first quarternine months of 2003 and the first quarternine months of 2002, respectively. The Company also manages the operations of SAC pursuant to a management agreement. Management fees from SAC were $.2$.9 million and $.3$1.1 million infor the first quarternine months of 2003 and the first quarternine months of 2002, respectively. Also, theThe Company has also guaranteed a portion of the debt for SAC. SuchSAC and such guarantee was $22.7$20.6 million as of March 30,September 28, 2003.
17. New Accounting Pronouncements
19. | New Accounting Pronouncements |
In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” (“EITF 02-16”), addressing the recognition and income statement classification of various considerationconsiderations given by a vendor to a customer. Among its requirements, the consensus requires that certain cash consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor’s products, and therefore should be characterized as a reduction of cost of sales when recognized in the customer’s income statement, unless certain criteria are met.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
19. | New Accounting Pronouncements |
recognized in the customer’s income statement, unless certain criteria are met.
EITF 02-16 iswas effective for the first quarter of 2003. Previously, the Company classified marketing funding support received from The Coca-Cola Company and other beverage companies as an adjustment to net sales. In accordance with EITF 02-16, the Company classified marketing funding support as a reduction of cost of sales forbeginning the first quarter of 2003. Prior year amounts have been reclassified to conform to the current year presentation.
In January 2003,November 2002, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). This interpretation requires additional disclosure in the guarantor’s balance sheet for current guarantees entered into or modified subsequent to December 31, 2002. The Company adopted the provisions of FIN 45 for its fiscal year ended December 29, 2002. This interpretation has not had a material impact on our financial statements at this time. See Note 16 for information concerning existing guarantees.
In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities,”Entities” (“FIN 46”). This interpretation addresses consolidation by business enterprises of variable interest entities with certain defined characteristics. TheBased on our current understanding, the Company believes thatdoes not expect FIN 46 to have a significant impact on our financial statements. However, the provisionsCompany expects the FASB to issue certain implementation guidance regarding this interpretation and our current understanding of FIN 46 will not have any impact on the Company’s results of operations or financial position atcould be impacted by this time.implementation guidance.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
IntroductionIntroduction::
Coca-Cola Bottling Co. Consolidated (the “Company”) produces, markets and distributes carbonated and noncarbonated 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 currently the second largest bottler of products of The Coca-Cola Company in the United States, operating in eleven states, primarily in the Southeast. The Company also distributes several other beverage brands. The Company’s product offerings include carbonated soft drinks, bottled water, teas, juices, isotonics and energy drinks. Over the past several years, the Company has expanded its bottling territory primarily throughout the southeastern region of the United States via acquisitions. These acquisitions, and, combined with internally generated growth, hadresulted in net sales of overapproximately $1.2 billion in 2002.
On January 2, 2002, the Company purchased an additional 4.651% interest in Piedmont Coca-Cola Bottling Partnership (“Piedmont”) from The Coca-Cola Company for $10.0 million, increasing the Company’s ownership in Piedmont to 54.651%. On March 28, 2003, the Company purchased an additional 22.675% interest in Piedmont from The Coca-Cola Company for $53.5 million. This transaction increased the Company’s ownership interest in Piedmont to 77.326%. The Company recorded $19.7 million of franchise rights and $5.2 million related to customer relationships in connection with its acquisitions of additional interests in Piedmont.
As of March 30,September 28, 2003, The Coca-Cola Company owned 27.4% of the Company’s outstanding Common Stock and Class B Common Stock on a combined basis and had a 22.674% interest in Piedmont.
Management’s discussion and analysis should be read in conjunction with the Company’s consolidated unaudited financial statements and the accompanying footnotesnotes to the consolidated unaudited financial statements along with the cautionary forward-looking statements at the end of this section.
Basis of Presentation
The statementstatements of operations, statementstatements of cash flows and the consolidated balance sheetsheets include the combined operations of the Company and its majority owned subsidiaries. Minority interest includesconsists of The Coca-Cola Company’s interest in Piedmont, which was 45.349% for the first quarter of 2003 and all of 2002. The Coca-Cola Company’s interest in Piedmont for the second and third quarters of both 2003 and 2002.was 22.674%.
New Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” (“EITF 02-16”), addressing the recognition and income statement classification of various considerationconsiderations given by a vendor to a customer. Among its requirements, the consensus requires that certain cash consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor’s products, and therefore should be characterized as a reduction of cost of sales when recognized in the customer’s income statement, unless certain criteria are met. EITF 02-16 is
was effective for the first quarter of 2003. Previously, the Company classified marketing funding support received from The
Coca-Cola Company and other beverage companies as an adjustment to net sales. In accordance with EITF
02-16, the Company classified marketing funding support as a reduction of cost of sales forbeginning the first quarter of 2003. Prior year amounts have been reclassified to conform to the current year presentation.
In January 2003,November 2002, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). This interpretation requires additional disclosure in the guarantor’s balance sheet for current guarantees entered into or modified subsequent to December 31, 2002. The Company adopted the provisions of FIN 45 for its fiscal year ended December 29, 2002. This interpretation has not had a material impact on our financial statements at this time. See Note 16 for information concerning existing guarantees.
In January 2003, the FASB issued Financial Interpretation No. 46, “Consolidation of Variable Interest Entities,”Entities” (“FIN 46”). ThisThe interpretation addresses consolidation by business enterprises of variable interest entities with certain defined characteristics. TheBased on our current understanding, the Company believes thatdoes not expect FIN 46 to have a significant impact on our financial statements. However, the provisionsCompany expects the FASB to issue certain implementation guidance regarding this interpretation and our current understanding of FIN 46 will not have any impact on the Company’s results of operations or financial position atcould be impacted by this time.implementation guidance.
Discussion of Critical Accounting Policies and Critical Accounting Estimates
In the ordinary course of business, theThe 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 financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company has included in its Annual Report on Form 10-K for the year ended December 29, 2002 a discussion of the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results of operations and requirerequired 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.
During the third quarter of 2003, the Company adjusted its valuation allowance related to certain deferred income tax assets. This adjustment was made based on an updated assessment of the Company’s ability to utilize certain state net operating loss carryforwards in conjunction with a reorganization of certain of the Company’s subsidiaries. Based upon the updated assessment, the Company believes that it will be able to utilize more of such carryforwards. Accordingly, the Company reduced its valuation allowance against these carryforwards resulting in a reduction of income tax expense of $6.5 million during the third quarter.
The Company completed its annual evaluation of intangible assets with indefinite lives during the third quarter of 2003. Intangible assets with indefinite lives are evaluated at least annually to determine whether fair value is in excess of carrying value. This valuation consists of valuation methodologies including (a) a discounted cash flow analysis, (b) an assessment of total enterprise value which includes the Company’s long-term debt and the market value of its equity and (c) a market multiple of the Company’s cash flow, which for purposes of the valuation is defined as income from operations plus depreciation and amortization expense. The discounted cash flow model utilizes certain assumptions
as to future growth in net selling price, cost of sales, sales volume, operating expenses and capital expenditures. The future cash flows are then discounted at the Company’s weighted average cost of capital. Calculation of total enterprise value consists of adding the Company’s long-term debt to the market value of the Company’s issued stock. The market multiple approach incorporates the average market cash flow multiple of the Company and three other publicly traded U. S. soft drink bottlers. The valuations derived under these methods are adjusted for all tangible assets and liabilities (including identifiable intangible assets) resulting in a value ascribed to intangible assets with indefinite lives. The calculated value ascribed to intangible assets with indefinite lives is compared to its carrying value. As of September 28, 2003, there was no impairment of the carrying value of franchise rights and goodwill.
The Company has not made any changes in any of these critical accounting policies during the first three quarters of 2003. The Company changed its estimate relating to the realizability of certain income tax assets during the third quarter of 2003, nor has it made any materialas previously discussed. Any changes in anycritical accounting policies and estimates are discussed with the Audit Committee of the critical accounting estimates underlying these accounting policiesBoard of Directors of the Company during the first quarter of 2003.in which a change is made.
OverviewOverview::
The following discussion presents management’s analysis of the results of operations for the third quarter and first quarternine months of 2003 compared to the results for the first quartersame periods of 2002 and changes in financial condition from March 31,September 29, 2002 and December 29, 2002 to March 30,September 28, 2003. The results for interim periods are not necessarily indicative of the results to be expected for the fiscal year due to seasonal factors.
The Company reported net income of $1.4$13.8 million or $.16$1.53 per share for the firstthird quarter of 2003 compared with net income of $3.4$9.5 million or $.39$1.08 per share for the same period in 2002. For the first nine months of 2003, net income was $27.2 million or $3.00 per share compared to net income of $23.7 million or $2.69 per share for the first nine months of 2002. The Company’s results for the third quarter of 2003 included a net favorable adjustment to income tax expense of $4.6 million relating to the reduction of its valuation allowance for certain deferred income tax assets, offset partially by incremental tax expense associated with the decision to terminate certain Company-owned life insurance policies. The Company’s results for the first nine months of 2003 included the aforementioned income tax expense adjustment as well as a favorable adjustment to income tax expense during the second quarter of $3.1 million related to the completion of a state income tax audit.
Results of Operations:
The Company’s net sales increased 1.8% in the third quarter of 2003 as compared to the third quarter of 2002. This increase in net sales reflected growth in average revenue per case and contract sales, which more than offset a 3.8% decline in bottle/can volume. The decline in volume reflected unseasonably cool and abnormally wet weather across the Company’s territories in July and August as well as less aggressive retail pricing by several of the Company’s larger customers. For the third quarter of 2003, average revenue per case, excluding customer marketing costs, increased by 1.9% compared to the third quarter of 2002. For the first nine months of 2003, net sales were approximately even with the prior year. These results reflected a 2.6% decline in bottle/can volume offset by a 1.2% increase in average revenue per case, excluding customer marketing costs, and higher contract sales. Operating results for the first nine months
were also adversely affected by unusually cool and wet weather throughout much of the Company’s territory, during the Memorial Day holiday, the early weeks of June and most of July and August. Higher pricing of our products by some customers also contributed to the decline in volume for the first nine months of 2003.
Cost of sales on a per unit basis increased slightly over one percent for the third quarter and first nine months of 2003 compared to the same periods in 2002. The increase in cost of sales on a per unit basis resulted primarily from modest increases in raw material costs. Cost of sales includes the following: raw material costs; manufacturing labor; manufacturing overhead; inbound freight charges related to raw materials; receiving costs; inspection costs; manufacturing warehousing costs and freight charges related to the movement of finished goods from manufacturing locations to sales distribution centers.
The Company’s gross margin percentage was relatively unchanged from the comparable periods in the prior year at 48.1% for the third quarter of 2003 included physical case volume growthand 48.5% for the first nine months of approximately 1%2003. The Company’s gross margins may not be comparable to other companies, since some entities include all costs related to their distribution network in cost of sales and net revenue per case that was approximately equivalent to the prior year. The decline in net income was primarilyCompany excludes a resultportion of flatthese costs from gross margin, and an increaseincluding them instead in selling, general and administrative (“S,G&A”) expenses of approximately 6%. Gross margin was impacted by lower salesexpenses. In addition, the Company presents depreciation expense as a separate expense line item.
New package and product introductions during 2003 included Sprite Remix and 12-ounce PET bottles in our cold drink channels due to unseasonably cold and wet weather during much ofFridge Packs™ for the firsttake home market. Sales results for Sprite Remix through the third quarter of 2003 and the movement of the Easter holiday from the first quarter in 2002 to the second quarter in 2003. S,G&A expense increases were primarily driven by increased employment costs, increased property and casualty insurance costs and increased fuel costs. Lower interest rates and reduced debt balances resulted in a decrease in interest expense from the first quarter of 2002 of approximately $1.8 million.
Results of Operations:
The Company’s operations for the first quarter of 2003 reflected an increase in net sales of approximately 1% over the prior year. The increase reflects higher volume in supermarkets offset by lower volume in convenience stores and other cold drink channels. Physical case volume for the quarter increased by
approximately 1%. Gross margin as a percentage of net sales declined to 49.0% in the first quarter of 2003 from 49.5% for the same period in 2002. The decrease in gross margin as a percentage of net sales primarily reflects an unfavorable shift in the Company’s channel mix during the first quarter due to adverse weather conditions and the movement of the Easter holiday from the first quarter in 2002 to the second quarter in 2003.
The Company’s carbonated soft drink volume was unchanged in the first quarter of 2003 from the same period in the prior year. Noncarbonated beverage volume grew by almost 13%, led by Dasani bottled water which increased nearly 20% over the first quarter of 2002. Continuing its recent practice of introducinghave been very positive. This new products and packaging in response to consumer demand, the Company will introduce Sprite Remix, a new offering in the lemon-lime category, during the second quarter of 2003. Thisproduct follows the successful introduction of Vanilla Coke and diet Vanilla Coke in 2002. The Company expects to introduce new packaging in its territory duringintroduction of the balance of 2003.
Cost of sales on12-ounce PET bottle provides consumers with a per unit basis was approximately evensmaller, resealable package in the popular Fridge Pack™. Noncarbonated beverages, which include bottled water, comprised approximately 11.6% of the Company’s total sales volume through the first quarternine months of 2003 compared to the same period in 2002. Modest increases in raw material costs were offset by a reduction in manufacturing labor and overhead costs on a per unit basis. The Company anticipates that the cost of PET containers will increase significantly during the second quarter of 2003 due to expected increases in raw material costs.2003.
As previously discussed, the Company adopted the provisions of EITF 02-16 at the beginning of 2003. As a result, the Company has recorded marketing funding support from The Coca-Cola Company and other beverage companies as a reduction in cost of sales. Prior year marketing funding support was reclassified from net sales to cost of sales to conform to the current year presentation.
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 of the 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 provide marketing funding support in 2003, it is not obligated to do so under the Company’s master bottle contract.Master Bottle Contract. Significant decreases in marketing funding support from The Coca-Cola Company or other beverage companies could adversely impact operating results of the Company. Total marketing funding support from The Coca-Cola Company and other beverage companies, which include direct payments to the Company as well as payments to customers for marketing programs, was $14.9$46.5 million and $14.7$47.8 million in the first quartersnine months of 2003 and 2002, respectively. In 2003 and 2002, The Coca-Cola Company has offered through its Strategic Growth Initiative an opportunity for the Company to receive additional marketing funding support, subject to the Company’s achievement of certain volume
performance requirements. The Company recorded $1.6$2.3 million and $.3$1.5 million as a reduction in cost of sales related to the Strategic Growth Initiative during the first quartersnine months of 2003 and 2002, respectively.
S,G&A expenses for the third quarter of 2003 increased by 5.2% compared to the same period in the prior year. S,G&A expenses for the first quarternine months of 2003 increased approximately 6%3.3% from the first quarter ofsame period in 2002. The increase for the third quarter and first nine months of 2003 was attributable primarily attributable to increases in employee compensation and employee benefit plans (including costs related to the Company’s pension plans), property and casualty insurance costs and fuel costs. Based on the performance of the Company’s pension plan investments prior to 2003 and lower interest rates, pension expense will increaseincreased from approximately $6.2 million in 2002 to approximately $9.5 million in 2003. Nonhealth relatedIf interest rates at the measurement date on November 30, 2003 are comparable to current interest rates, the Company anticipates that pension expense will further increase in 2004. Property and casualty insurance costs increased by $1.4$3.4 million or 39% over32% during the first quarternine months of 2003 compared to the first nine months of 2002. Fuel costs were approximately $.6increased by $1.3 million higher inor 20% during the first nine months of 2003 compared to the first nine months of 2002. The S,G&A line item includes the following: sales management labor costs; costs of distribution from sales distribution centers to customer locations; sales distribution center warehouse costs; point of sale expenses; advertising and marketing expenses; vending equipment repair costs and administrative support labor and operating costs, such as treasury, legal, information services, accounting, internal audit, as well as executive management costs.
Income from operations, for the third quarter and first nine months of 2003.2003 compared to the comparable periods in 2002, declined by $2.1 million and $13.6 million, respectively. The decline in income from operations with relatively flat net sales, was attributable to higher operating expenses driven by increased wage rates, employee benefit costs, fuel costs and property and casualty insurance costs.
Depreciation expense increased approximately $1.0 million for the first quarternine months of 2003 compared to the first quarternine months of 2002. The increase in depreciation expense in the first quarternine months of 2003 was related primarily related to amortization of a capital lease for the Company’s Charlotte, North Carolina production/distribution center.center and increases in capital expenditures. The lease obligation was capitalized at the end of the first quarter of 2002 as the Company received a renewal option to extend the term of the lease, which it expects to exercise. The lease was previously accounted for as an operating lease. The Company anticipates that additions to property, plant and equipment in 2003 will be in the range of $70 million to $75 million and plans to fund such additions through cash flows from operations and its available credit facilities. Additions to property, plant and equipment during 2002 were $57.3 million. The Company is in the process of initiatingimplementing an upgrade of its Enterprise Resource Planning (ERP) computer software systems, which is anticipated willto take four to fiveseveral years to complete. During the first nine months of 2003, the Company capitalized $4.4 million on the new ERP software project. The Company anticipates using a portion of the new ERP software beginning in 2004.
Interest expense for the third quarter of 2003 of $10.4 million decreased by $1.8$1.0 million or 9.1% from the third quarter of 2002. Interest expense for the first nine months of 2003 decreased by $3.8 million or almost 15%10.6% from the first quarter of 2002.same period in the prior year. The decrease in interest expense is primarily attributable to lower average interest rates on the Company’s outstanding debt and lower debt balances.debt. The Company’s overall weighted average interest rate on debt and capital lease obligations was 5.1%decreased from 5.6% during the first quarternine months of 2003 as compared2002 to 5.5% in4.9% during the first quarternine months of 2002.2003.
The Company’s effective income tax rates for the first quartersnine months of 2003 and 2002 were 40.6%19.2% and 39.6%40.7%, respectively. During the third quarter of 2003, the Company recorded two adjustments to income tax expense. Based upon an updated assessment of future utilization of net state operating loss
carryforwards in conjunction with a reorganization of certain of the Company’s subsidiaries, the Company reduced its valuation allowance related to such carryforwards during the third quarter. The reduction of the valuation allowance reduced income tax expense by $6.5 million in the third quarter. Also, during the third quarter of 2003, the Company decided to terminate several Company-owned life insurance policies resulting in a taxable gain and incremental income tax expense of $1.9 million. There was no gain or loss for financial reporting purposes related to the decision to terminate these life insurance policies. During the second quarter of 2003, the Company recorded a favorable adjustment to its income tax expense of $3.1 million. This adjustment was made upon the completion of a state income tax audit. The Company’s first quarter 2003 effective tax rate reflectsfor interim periods reflected expected fiscal year 2003 earnings.earnings and the aforementioned adjustments. The Company’s effective income tax rate for the remainder of 2003 is dependent upon operating results and may change if the results for the year are different from current expectations.
Changes in Financial ConditionCondition::
Working capital decreased $3.3$28.6 million from December 29, 2002 and increased by $137.9$153.7 million from March 31,September 29, 2002 to March 30,September 28, 2003. The significant change in working capital from March 31,September 29, 2002 was due to the refinancing of approximately $147$154.7 million of debt, which was included as short-termin current liabilities at the end of the firstthird quarter of 2002. The short-term debtmost significant other change from September 29, 2002 to September 28, 2003 was refinanced using proceeds froma reduction in accounts payable to The Coca-Cola Company of $35.9 million which was due to the issuancetiming of long-term debt, as discussed more fully below.payments. Certain payments to The Coca-Cola Company for marketing related programs were made during the third quarter of 2003 while these payments were not made until the fourth quarter of 2002.
Working capital decreased by $3.3$28.6 million from December 29, 2002 to March 30,September 28, 2003. The moremost significant change was an increase in the current portion of long-term debt of $35 million which relates to a July 2004 maturity on the Company’s term loan from a bank. Other significant changes included declinesa decline in cash of $11.0 million and accounts receivable, other of $11.4$12.5 million offset by decreasesan increase in other accrued liabilitiesaccounts receivable from The Coca-Cola Company of $7.1 million and accrued compensation of $9.1$11.6 million. The decline in accounts receivable, other iswas due to the receipt of life insurance proceeds of $6.8 million and a refund of estimated federal income taxes of $1.7$4.2 million. TheseThe life insurance proceeds related to certain policies covering J. Frank Harrison, Jr., the former Chairman of the Board of Directors of the Company, who passed away in November 2002. The receipt of these proceeds had no impact on the results of operations for the first quarternine months of 2003. The declineincrease in accrued compensation reflectsaccounts receivable from The Coca-Cola Company is due to the timing of payments underto the Company’s incentive plans in March 2003.
Capital expenditures in the first quarternine months of 2003 were $14.3$48.2 million compared to $7.7$34.9 million in the first quarternine months of 2002.
The Company’s outstanding debt and capital lease obligations declined to $891.8were $866.0 million at March 30,September 28, 2003 from $912.6compared to $820.6 million at March 31,September 29, 2002. Total debt and capital lease obligations as of March 30,September 28, 2003 include $53.5 millionincluded debt related to the purchase for $53.5 million of an additional interest in Piedmont on March 28, 2003, as previously discussed.
As of March 30,September 28, 2003, the Company’s debt and capital lease obligations had a weighted average interest rate of approximately 5.0%.4.8% after taking into account the interest rate hedging activities. Before giving effect to forward rate agreements discussed below, approximately 38%48% of the Company’s debt and capital lease obligations of $891.8$866.0 million as of March 30,September 28, 2003 was maintained on a floating rate basis and was subject to changes in short-term interest rates. As a result of the aforementionedThe Company currently has four forward rate agreements that fix the interest rate through 2003 on
$200 million of floating rate debt. After giving effect to the forward rate agreements, approximately 24% of the Company’s exposuredebt and capital lease obligations are subject to changes in short-term interest rate movements has been significantly reduced forrates through 2003. Including the estimated interest expense related to debt incurred for the additional ownership in Piedmont, theThe Company estimates that interest expense for 2003 will approximate $44be between $42 million and $43 million, a reduction of approximately $5between $6 million and $7 million from 2002.
In December 2002, the Company entered into a three-year $125 million revolving credit facility. This facility includes an option to extend the term for an additional year at the participating banks’ discretion. The revolving credit facility bears interest at a floating rate of LIBOR plus an interest rate spread of .60%. In addition, there is a facility fee of .15% required for this revolving credit facility. Both the interest rate spread and the facility fee are determined from a commonly used pricing grid based on the Company’s long-term senior unsecured noncredit-enhanced debt rating. This new revolving credit facility replaced the Company’s $170 million facility that expired in December 2002. The newThis facility contains covenants, which establish ratio requirements related to debt, interest expense and cash flow. On March 30,September 28, 2003, there were no amounts outstanding under this new facility.
The Company borrows periodically under its available lines of credit. These lines of credit, in the aggregate amount of $65$60 million at March 30,September 28, 2003, are made available at the discretion of the two participating banks and may be withdrawn at any time by such banks. The Company can utilize its $125 million revolving credit facility in the event the lines of credit are not available. As of March 30,September 28, 2003, the Company had $25.9 millionno amounts outstanding under its lines of credit at ancredit.
Including the effect of all interest rate of 1.86%.
Ifhedging agreements, if average interest rates for the floating rate component of the Company’s debt and capital lease obligations increased by 1%, interest expense for the first quarternine months of 2003 would have increased by approximately $.8$1.9 million and net income would have been reduced by approximately $.5$1.1 million.
In January 1999, the Company filed ana shelf registration relating to up to $800 million shelf registration forof debt and equity securities. The Company has used this shelf registration to issue long-term debt including $250 million in 1999, $150 million in 2002 and $100 million in March 2003. The Company currently has up to $300 million available for use under this shelf registration.
In November 2002, the Company issued $150 million of ten-year senior notes at a coupon rate of 5.00%. The proceeds from this issuance were used to repay borrowings under the Company’s revolving credit facility and lines of credit, and to loan amounts to Piedmont to enable it to repay a $97.5 million term loan. In March 2003, the Company issued $100 million of twelve-year senior notes at a coupon rate of 5.30%. The proceeds from this issuance were used to purchase an additional
interest in Piedmont for $53.5 million and repay a portion of the Company’s $170 million term loan, reducing the amount outstanding under the term loan to $120 million.
With regard to the Company’s $120 million term loan, the Company must maintain its public debt ratings at March 30, 2003.investment grade as determined by both Moody’s and Standard & Poor’s. If the Company’s public debt ratings fall below investment grade within 90 days after the public announcement of certain designated events and such ratings stay below investment grade for an additional 40 days, a trigger event resulting in a default occurs. The Company does not anticipate a trigger event will occur in the foreseeable future.
At September 28, 2003, the Company’s debt ratings were as follows:
Long-Term Debt | ||
Standard & Poor’s | BBB | |
Moody’s | Baa |
There were no changes in these debt ratings from the prior year. It is the Company’s intent to operate in a manner that will allow it to maintain its investment grade ratings.
During 2002, Piedmont refinanced a $195 million term loan using the proceeds from a loan from the Company. The Company’s source of funds for this loan to Piedmont included the issuance of $150 million of senior notes, its lines of credit, its revolving credit facility and available cash flow. Piedmont pays the Company interest on the loan at the Company’s average cost of funds plus 0.50%. The Company plans to provide for Piedmont’s future financing requirements under these terms.
With regard to the Company’s $120 million term loan agreement, the Company must maintain its public debt ratings at investment grade as determined by both Moody’s and Standard & Poor’s. If the Company’s public debt ratings fall below investment grade within 90 days after the public announcement of certain designated events and such ratings stay below investment grade for an additional 40 days, a trigger event resulting in a default occurs. The Company does not anticipate a trigger event will occur.
At March 30, 2003, the Company’s debt ratings were as follows:
| ||
| ||
|
| |
|
|
There were no changes in these debt ratings from the prior year. It is the Company’s intent to operate in a manner that will allow it to maintain its investment grade ratings.
The Company issued 20,000 shares of Class B Common Stock to J. Frank Harrison, III, its Chairman of the Board of Directors and Chief Executive Officer, with respect to fiscal year 2002, effective January 1, 2003, under a restricted stock award plan that provides for annual awards of such shares subject to the Company meeting certain performance criteria. The performance criteria were also met with respect to fiscal year 2002.2001.
Sources of capital for the Company include operating cash flows from operating activities, bank borrowings, issuance of public or private debt and the issuance of equity securities. Management believes that the Company, through these sources, has sufficient financial resources available to maintain its current operations and provide for its current capital expenditure and working capital requirements, scheduled debt payments, interest and income tax payments and dividends for stockholders. 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.
The Company periodically uses interest rate hedging products to modify risk from interest rate fluctuations. The Company has historically altered its fixed/floating rate mix based upon anticipated cash flows from operations relative to the Company’s debt level and the potential impact of changes in interest rates on the Company’s overall financial condition. Sensitivity analyses are performed to review the impact on the Company’s financial position and coverage of various interest rate movements. The Company does not use derivative financial instruments for trading purposes nor does it use leveraged financial instruments.
The Company has entered into fivefour forward rate agreements for twelve-month terms which fix short-term rates on certain components of the Company’s floating rate debt for periods ranging from three to twelve months. Twodebt. One of these forward rate agreements havehas been accounted for as a cash flow hedges.hedge. The other three forward rate agreements do not meet the criteria set forth in Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, for hedge accounting and have been accounted for on a mark-to-market basis. The mark-to-market adjustment for these three forward rate agreements was an increase to interest expense of approximately $.4$.1 million during the first quarternine months of 2003.
In conjunction with the issuance of $100 million 5.30% Senior Notestwelve-year senior notes in March 2003, the Company entered into certain interestforward rate agreements to hedge the issuance price. These interestforward rate agreements have beenwere accounted for as a cash flow hedges.hedge. The Company received $3.1 million from thesethis cash flow hedges
hedge upon settlement, which has been recorded in other comprehensive income, net of tax, and will be amortized as a reduction of interest expense over the life of the related senior notes.
During the first quartersnine months of 2003 and the first nine months of 2002, interest expense was lower due to amortization of the deferred gaingains on previously terminated interest rate swap agreements by approximately $.5$1.5 million in each period.
CAUTIONARY FORWARD-LOOKING STATEMENTS
This Quarterly Report to Stockholders 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, press releases and oral statements issued by or on behalf of the Company, contains, or may contain, several forward-looking management comments and other statements that reflect management’s current outlook for future periods. These statements include, among others, statements relating to: potential increases in pension expense; anticipated return on pension plan investments;expense in 2004; the Company’s estimate of interest expense for 2003; anticipated costs associated with nonhealth related insurance; potential marketing funding support from The Coca-Cola Company; sufficiency of financial resources; anticipated additions to property, plant and equipment and financing, therefore; the Company’s belief that disposition of certain litigation and claims will not have a material adverse effect; the Company’s expectation of exercising its option to extend certain lease obligations; the effectstiming of the upgrade of its ERP systems;software; management’s belief that the Company has sufficient financial resources to maintain current operations and provide for its current capital expenditures and working capital requirements, scheduled debt payments, interest and income tax payments and dividends for stockholders; the Company’s intention to refinance short-term debt maturities with currently available lines of credit; the Company’s intention to operate in a manner to maintain its investment grade ratings; the Company’s intention to provide for Piedmont’s future financing requirements; the Company’s belief that parties to certain contractual obligations will perform their obligations under the contracts; the Company’s plans to introduce Sprite Remix; the Company’s plans to introduce new packaging during the balance of 2003; the Company’s beliefs regarding the costs of PET containers and management’s belief that a trigger event will not occur under the Company’s term loan agreement. loan; 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 the agreements; the Company’s belief that FIN 46 will not have any significant impact on the Company’s financial statements at this time; the Company’s belief that it will be able to utilize more of its state net operating loss carryforwards and the Company’s introduction of its new Fridge Pack™ with 12-ounce PET bottles.
These statements and expectations are based on the current available competitive, financial and economic data along with the Company’s operating plans, and are subject to future events and uncertainties. Among the events or uncertainties which could adversely affect future periods are: lower than expected net pricing resulting from increased marketplace competition; changes in how significant customers market our products; an inability to meet performance requirements for expected levels of marketing funding support payments from The Coca-Cola Company or other beverage companies; reduced marketing and advertising spending by The Coca-Cola Company or other beverage companies; an inability to meet requirements under bottling contracts; the inability of our aluminum can or PET bottle suppliers to meet our demand; material changes from expectations in the cost of raw materials; higher than expected insurance premiums; lower than anticipated return on pension plan assets; higher than anticipated health care costs; higher than expected fuel prices; unfavorable interest rate fluctuations; adverse weather conditions; terrorist attacks, war or other civil disturbances; changes in financial marketsmarkets; changes in the Company’s public debt ratings and an inability to meet projections in acquired bottling territories.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.Risk
Not applicable.
Item 4. ControlsControl and Procedures.Procedures
WithinAs of the 90-dayend of the period prior to the date ofcovered 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“disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”).) pursuant to Rule 13a-15 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 are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s Exchange Act filings.
There havehas been no significant changeschange in the Company’s internal controlscontrol over financial reporting during the quarter ended September 28, 2003 that has materially affected, or in other factors which could significantlyis reasonably likely to materially affect, the Company’s internal controls subsequent to the date the Company carried out its evaluation.control over financial reporting.
PART II –- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits |
Exhibit | Description | |
4.1 |
| |
4.2 |
| |
|
| |
|
| |
| 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 subsidiaries for which consolidated financial statements are required to be filed, and which authorizes a total amount of securities not in excess of 10 percent of total assets of the Registrant and its subsidiaries on a consolidated basis. | |
| Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification Pursuant to 18 U.S.C. Section 1350, as | |
|
|
(b) | Reports on Form 8-K |
On March 3,July 25, 2003, the Company filed a Current Report on Form 8-K relating to the announcement of the Company’s financial results for the period ended DecemberJune 29, 2002.2003.
On March 6,August 8, 2003, the Company filed a Current Report on Form 8-K relating to the appointment of a new member to the Board of Directors.
On September 5, 2003, the Company filed a Current Report on Form 8-K relating to the issuance of the Report to Stockholders for the period ended June 29, 2003.
On October 27, 2003, the Company filed a Current Report on Form 8-K relating to the announcement of the Company’s plan to increase its ownership of Piedmont Coca-Cola Bottling Partnership.
On March 27, 2003, the Company filed a Current Report on Form 8-K relating to the issuance of $100 million of its 5.30% Senior Notes due 2015.
On March 31, 2003, the Company filed a Current Report on Form 8-K relating to the announcement of the Company’s purchase of an additional interest in Piedmont Coca-Cola Bottling Partnership from The Coca-Cola Company for $53.5 million.
On April 25, 2003, the Company filed a Current Report of Form 8-K relating to the announcement of the Company’s financial results for the period ended March 30,September 28, 2003.
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 (REGISTRANT) | ||||||||
Date: | By: | /s/ | ||||||
David V. Singer Principal Financial Officer of the Registrant and Executive Vice President and Chief Financial Officer |
I, J. Frank Harrison, III, certify that:
|
| |||
| ||||
|
I, David V. Singer, certify that:
|
| |||
| ||||
|