UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended APRIL 4, 1999
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Commission File Number 0-9286
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COCA-COLA BOTTLING CO. CONSOLIDATED
(Exact name of registrant as specified in its charter)
DELAWARE 56-0950585
- ----------------------------------------------- -------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification Number)
organization)
4100 COCA-COLA PLAZA, CHARLOTTE, NORTH CAROLINA 28211
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(Address of principal executive offices) (Zip Code)
(704) 551-4400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 4, 1999
--------- ------------------------------
Common Stock, $1 Par Value 6,023,739
Class B Common Stock, $1 Par Value 2,341,108
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Thousands (Except Share Data)
April 4, Jan. 3, March 29,
1999 1999 1998
-------- ---------- --------------
ASSETS
Current Assets:
Cash $ 6,654 $ 6,691 $ 5,177
Accounts receivable, trade, less allowance for
doubtful accounts of $611, $600 and $512 58,372 57,217 52,599
Accounts receivable from The Coca-Cola Company 13,279 10,091 11,594
Due from Piedmont Coca-Cola Bottling Partnership 693 1,931
Accounts receivable, other 6,371 7,997 5,983
Inventories 43,035 41,010 40,154
Prepaid expenses and other current assets 17,200 15,545 13,414
--------- --------- ----------
Total current assets 145,604 138,551 130,852
-------- -------- ---------
Property, plant and equipment, net 430,327 258,329 251,663
Leased property under capital leases, net 9,306
Investment in Piedmont Coca-Cola Bottling Partnership 61,086 62,847 61,601
Other assets 53,403 51,576 45,525
Identifiable intangible assets, less accumulated
amortization of $118,705, $116,015 and $107,937 250,483 253,156 259,620
Excess of cost over fair value of net assets of
businesses acquired, less accumulated
amortization of $31,423, $30,850 and $29,132 60,196 60,769 62,486
--------- --------- ----------
Total $1,010,405 $825,228 $811,747
========== ======== ========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Thousands (Except Share Data)
April 4, Jan. 3, March 29,
1999 1999 1998
----------- ---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Portion of long-term debt payable within one year $117,544 $ 30,115 $ 72,733
Current portion of obligations under capital leases 4,176
Accounts payable and accrued liabilities 69,082 72,623 65,609
Accounts payable to The Coca-Cola Company 8,103 5,194 7,639
Due to Piedmont Coca-Cola Bottling Partnership 435
Accrued compensation 5,897 10,239 3,297
Accrued interest payable 9,715 15,325 9,515
---------- --------- ----------
Total current liabilities 214,517 133,931 158,793
Deferred income taxes 118,247 120,659 110,142
Deferred credits 4,319 4,838 6,545
Other liabilities 59,695 58,780 56,275
Obligations under capital leases 5,083
Long-term debt 599,329 491,234 475,272
---------- --------- --------
Total liabilities 1,001,190 809,442 807,027
--------- --------- --------
Shareholders' Equity:
Convertible Preferred Stock, $100 par value:
Authorized-50,000 shares; Issued-None
Nonconvertible Preferred Stock, $100 par value:
Authorized-50,000 shares; Issued-None
Preferred Stock, $.01 par value:
Authorized-20,000,000 shares; Issued-None
Common Stock, $1 par value:
Authorized-30,000,000 shares;
Issued-9,086,113, 9,086,113 and 10,107,421 shares 9,086 9,086 10,107
Class B Common Stock, $1 par value:
Authorized-10,000,000 shares;
Issued-2,969,222, 2,969,222 and 1,947,914 shares 2,969 2,969 1,948
Class C Common Stock, $1 par value:
Authorized-20,000,000 shares; Issued-None
Capital in excess of par value 92,618 94,709 100,983
Accumulated deficit (34,204) (29,724) (47,064)
------------ --------- ---------
70,469 77,040 65,974
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 shareholders' equity 9,215 15,786 4,720
------------- --------- ----------
Total $1,010,405 $825,228 $811,747
========== ======== ========
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
-----------------------------
1999 1998
---------- ----------
Net sales (includes sales to Piedmont of $15,181 and
$12,203) $ 220,263 $ 203,331
Cost of sales, excluding depreciation shown below
(includes $13,604 and $10,835 related to sales to Piedmont) 128,111 118,397
--------- ---------
Gross margin 92,152 84,934
---------- ----------
Selling expenses, excluding depreciation shown below 49,555 50,698
General and administrative expenses 18,669 15,781
Depreciation expense 14,648 8,780
Amortization of goodwill and intangibles 3,262 3,175
----------- -----------
Income from operations 6,018 6,500
Interest expense 11,695 9,258
Other income (expense), net (1,215) (1,157)
------------ ----------
Income (loss) before income taxes (6,892) (3,915)
Income taxes (benefit) (2,412) (1,453)
----------- ----------
Net income (loss) $ (4,480) $ (2,462)
=========== ===========
Basic net income (loss) per share $ (.54) $ (.29)
Diluted net income (loss) per share $ (.53) $ (.29)
Weighted average number of common
shares outstanding 8,365 8,365
Weighted average number of common
shares outstanding - assuming dilution 8,489 8,493
Cash dividends per share
Common Stock $ .25 $ .25
Class B Common Stock $ .25 $ .25
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
In Thousands
Capital
Class B in
Common Common Excess of Accumulated Treasury
Stock Stock Par Value Deficit Stock
--------- --------- ----------- ------------- -------------
Balance on
December 28, 1997 $ 10,107 $ 1,948 $ 103,074 $ (44,602) $ 61,254
Net loss (2,462)
Cash dividends
paid (2,091)
-------- -------- -------- --------- ---------
Balance on
March 29, 1998 $ 10,107 $ 1,948 $ 100,983 $ (47,064) $ 61,254
======== ======== ======== ========= =========
Balance on
January 3, 1999 $ 9,086 $ 2,969 $ 94,709 $ (29,724) $ 61,254
Net loss (4,480)
Cash dividends
paid (2,091)
--------- ---------- ---------- ---------- ----------
Balance on
April 4, 1999 $ 9,086 $ 2,969 $ 92,618 $ (34,204) $ 61,254
========= ======== ========= ========== ==========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
First Quarter
---------------------------
1999 1998
---------- -----------
Cash Flows from Operating Activities
Net income (loss) $ (4,480) $ (2,462)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation expense 14,648 8,780
Amortization of goodwill and intangibles 3,262 3,175
Deferred income taxes (benefit) (2,412) (1,453)
Losses on sale of property, plant and equipment 725 729
Amortization of debt costs 150 149
Amortization of deferred gain related to terminated
interest rate swaps (141) (141)
Undistributed losses of Piedmont Coca-Cola Bottling
Partnership 1,761 1,725
Increase in current assets less current liabilities (18,108) (11,402)
Increase in other noncurrent assets (1,978) (2,556)
(Decrease) increase in other noncurrent liabilities 804 (173)
Other (126) 3
----------- -------------
Total adjustments (1,415) (1,164)
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Net cash used in operating activities (5,895) (3,626)
--------- -----------
Cash Flows from Financing Activities
Proceeds from the issuance of long-term debt 108,095
Increase in current portion of long-term debt 87,429 60,733
Payments on long-term debt (18,517)
Cash dividends paid (2,091) (2,091)
Payments on capital lease obligations (1,045)
Proceeds from interest rate swap termination 6,480
Debt fees paid (185) (11)
Other (268) 82
---------- ----------
Net cash provided by financing activities 191,935 46,676
-------- --------
Cash Flows from Investing Activities
Additions to property, plant and equipment (186,101) (8,906)
Proceeds from the sale of property, plant and equipment 41 10
Acquisition of companies, net of cash acquired (17) (33,404)
--------- --------
Net cash used in investing activities (186,077) (42,300)
-------- --------
Net increase (decrease) in cash (37) 750
Cash at beginning of period 6,691 4,427
---------- ---------
Cash at end of period $ 6,654 $ 5,177
========= =========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
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 information contained in the financial statements is unaudited. The
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 accounting policies followed in the presentation of interim financial
results are the same as 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 January 3, 1999 filed
with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to current year
classifications.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
2. Summarized Income Statement Data of 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 soft drink products
primarily in portions of North Carolina and South Carolina. The Company and The
Coca-Cola Company, through their respective subsidiaries, each beneficially own
a 50% interest in Piedmont. 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. Summarized income statement data
for Piedmont is as follows:
First Quarter
---------------------
In Thousands 1999 1998
- -------------------------------------------------------------------------------------------------
Net sales $ 63,326 $ 57,358
Gross margin 27,651 24,725
Income (loss) from operations (248) (219)
Net loss (3,522) (3,450)
3. Inventories
Inventories are summarized as follows:
Apr. 4, Jan. 3, Mar. 29,
In Thousands 1999 1999 1998
- -------------------------------------------------------------------------------------------------
Finished products $27,125 $26,300 $24,066
Manufacturing materials 11,340 10,382 12,684
Plastic pallets and other 4,570 4,328 3,404
--------- --------- ---------
Total inventories $43,035 $41,010 $40,154
======= ======= =======
Substantially all merchandise inventories are valued by the LIFO method. The
amounts included above for inventories valued by the LIFO method were greater
than replacement or current cost by approximately $3.2 million, $3.2 million and
$2.7 million on April 4, 1999, January 3, 1999 and March 29, 1998, respectively,
as a result of inventory premiums associated with certain acquisitions.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
4. Property, Plant and Equipment
The principal categories and estimated useful lives of property, plant and
equipment were as follows:
April 4, Jan. 3, March 29, Estimated
In Thousands 1999 1999 1998 Useful Lives
- -----------------------------------------------------------------------------------------------------
Land $ 11,781 $ 11,781 $ 9,685
Buildings 81,566 81,527 80,807 10-50 years
Machinery and equipment 88,933 84,047 79,234 5-20 years
Transportation equipment 99,053 60,620 57,794 4-10 years
Furniture and fixtures 27,978 26,395 26,081 7-10 years
Vending equipment 272,508 152,163 143,997 6-13 years
Leasehold and land improvements 34,203 33,894 30,395 5-20 years
Construction in progress 22,556 4,532 5,867
- ----------------------------------------------------------------------------------------------------
Total property, plant and equipment, at cost 638,578 454,959 433,860
Less: Accumulated depreciation 208,251 196,630 182,197
- ----------------------------------------------------------------------------------------------------
Property, plant and equipment, net $430,327 $258,329 $251,663
- ----------------------------------------------------------------------------------------------------
On January 15, 1999, the Company purchased approximately $155 million of
equipment (principally vehicles and vending equipment) previously leased under
various operating lease agreements. The assets purchased will continue to be
used in the distribution and sale of the Company's products and will be
depreciated over their remaining useful lives, which range from three years to
12.5 years. The Company used a combination of its revolving credit facility and
its informal lines of credit with certain banks to finance this purchase.
5. Leased Property Under Capital Leases
The category and terms of the capital leases were as follows:
In Thousands April 4, 1999 Terms
- -------------------------------------------------------------------------------------------------
Transportation equipment $10,433 1-4 years
Less: Accumulated amortization 1,127
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Leased property under capital leases, net $ 9,306
=======
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
6. Long-Term Debt
Long-term debt is summarized as follows:
Fixed(F) or
Interest Variable Interest April 4, Jan. 3, Mar. 29,
In Thousands Maturity Rate (V)Rate Paid 1999 1999 1998
- ------------------------------------------------------------------------------------------------------------
Lines of Credit 2002 5.13% - V Varies $177,014 $36,400 $20,400
5.25%
Revolving Credit 2002 5.17% V Varies 85,000
Term Loan Agreement 2004 5.76% V Varies 85,000 85,000 85,000
Term Loan Agreement 2005 5.76% V Varies 85,000 85,000 85,000
Medium-Term Notes 1998 6.28% V Quarterly 10,000
Medium-Term Notes 1998 10.05% F Semi- 2,000
annually
Medium-Term Notes 1999 7.99% F Semi- 28,585 28,585
annually
Medium-Term Notes 2000 10.00% F Semi- 25,500 25,500 25,500
annually
Medium-Term Notes 2002 8.56% F Semi- 47,000 47,000 47,000
annually
Debentures 2007 6.85% F Semi- 100,000 100,000 100,000
annually
Debentures 2009 7.20% F Semi- 100,000 100,000 100,000
annually
Other notes payable 1999 - 7.33% - F Varies 12,359 13,864 44,520
2001 10.00%
---------------------------------------
716,873 521,349 548,005
Less: Portion of long-term
debt payable within one year 117,544 30,115 72,733
- ----------------------------------------------------------------------------------------------------------
Long-term debt $599,329 $491,234 $475,272
- ----------------------------------------------------------------------------------------------------------
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
6. Long-Term Debt (cont.)
It is the Company's intent to renew its lines of credit and borrowings under
the revolving credit facility as they mature. To the extent that these
borrowings do not exceed the amount available under the Company's $170
million revolving credit facility, they are classified as noncurrent
liabilities.
On October 12, 1994, a $400 million shelf registration for debt and equity
securities filed with the Securities and Exchange Commission became effective
and the securities thereunder became available for issuance. On November 1,
1995, the Company issued $100 million of 6.85% debentures due 2007 pursuant
to such registration. In July 1997, the Company issued $100 million of 7.20%
debentures due 2009. The net proceeds from these issuances were used for
refinancing a portion of existing public debt with the remainder used to
repay other debt. On January 22, 1999, the Company filed a new $800 million
shelf registration for debt and equity securities (which includes $200
million of unused availability from the prior shelf registration).
The Company has guaranteed a portion of the debt for two cooperatives in
which the Company is a member. The amounts guaranteed were $32.8 million,
$30.7 million and $30.3 million as of April 4, 1999, January 3, 1999 and
March 29, 1998, respectively.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
7. Derivative Financial Instruments
The Company uses derivative financial instruments to modify risk from
interest rate fluctuations in its underlying debt. The Company has
historically altered its fixed/floating interest rate mix based upon
anticipated operating cash flows of the Company relative to its debt level
and the Company's ability to absorb increases in interest rates. These
derivative financial instruments are not used for trading purposes.
The Company had weighted average interest rates for its debt portfolio of
approximately 6.4%, 7.3% and 7.1% as of April 4, 1999, January 3, 1999 and
March 29, 1998, respectively. The Company's overall weighted average interest
rate on its long-term debt decreased from an average of 7.1% during the first
quarter of 1998 to an average of 6.5% during the first quarter of 1999. After
taking into account the effect of all of the interest rate swap activities,
approximately 48%, 23% and 21% of the total debt portfolio was subject to
changes in short-term interest rates as of April 4, 1999, January 3, 1999 and
March 29, 1998, respectively.
A rate increase of 1% on the floating rate component of the Company's debt
would have increased interest expense for the first quarter of 1999 by
approximately $0.7 million and the net loss for the first quarter ended
April 4, 1999 would have been increased by approximately $0.4 million.
Derivative financial instruments were as follows:
April 4, 1999 January 3, 1999 March 29, 1998
-------------------------------------------------------------------------
Remaining Remaining Remaining
In Thousands Amount Term Amount Term Amount Term
----------------------------------------------------------------------------------------------------
Interest rate swaps-floating $ 60,000 4.5 years $ 60,000 4.75 years $ 60,000 5.5 years
Interest rate swaps-fixed 60,000 4.5 years 60,000 4.75 years 60,000 5.5 years
Interest rate swaps-fixed 50,000 5.75 years 50,000 6 years 50,000 6.75 years
Interest rate cap 35,000 1.25 years 35,000 1.5 years 35,000 2.25 years
In January 1998, the Company terminated two floating rate interest swaps with
a total notional amount of $100 million. The gain of $6.5 million resulting
from this termination will be amortized over 11.5 years, the remaining term
of the initial swap agreements.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
7. Derivative Financial Instruments (cont.)
The carrying amounts and fair values of the Company's balance sheet and
off-balance-sheet instruments were as follows:
April 4, 1999 January 3, 1999 March 29, 1998
----------- ---------------- ----------------
Carrying Fair Carrying Fair Carrying Fair
In Thousands Amount Value Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------
Balance Sheet Instruments
Public debt $272,500 $282,991 $301,085 $312,118 $313,085 $326,544
Non-public variable rate
long-term debt 432,014 432,014 206,400 206,400 190,400 190,400
Non-public fixed rate
long-term debt 12,359 13,012 13,864 14,476 44,520 45,456
Off-Balance-Sheet Instruments
Interest rate swaps (225) (2,030) (2,450)
Interest rate cap 2 10 41
The fair values of the interest rate swaps at April 4, 1999, January 3, 1999
and March 29, 1998 represent the estimated amounts the Company would have had
to expense to terminate these agreements. The fair values of the interest
rate cap at April 4, 1999, January 3, 1999 and March 29, 1998 represent the
estimated amount the Company would have received upon termination of this
agreement.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
8. Supplemental Disclosures of Cash Flow Information
Changes in current assets and current liabilities affecting cash, net of effect
of acquisition, were as follows:
First Quarter
-------------------------
In Thousands 1999 1998
- ----------------------------------------------------------------------------------------------
Accounts receivable, trade, net $ (1,155) $ 3,286
Accounts receivable, The Coca-Cola Company (3,188) (6,904)
Accounts receivable, other 1,626 2,820
Inventories (2,025) (1,228)
Prepaid expenses and other current assets (1,655) (518)
Accounts payable and accrued liabilities (3,541) (6,146)
Accounts payable, The Coca-Cola Company 2,909 3,531
Accrued compensation (4,342) (1,798)
Accrued interest payable (5,610) (4,523)
Due to (from) Piedmont Coca-Cola Bottling Partnership (1,127) 78
--------- -----------
Increase in current assets less current liabilities $(18,108) $(11,402)
======== ========
9. Subsequent Event
On April 26, 1999, the Company issued $250 million of 10-year debentures at a
fixed interest rate of 6.375% under the Company's $800 million shelf
registration filed in January 1999. The Company subsequently entered into
10-year floating interest rate swap agreements for $100 million related to these
debentures. The proceeds from the issuance of these debentures were used to
reduce amounts outstanding under the revolving credit facility and the informal
lines of credit.
10. Earnings Per Share
The following table sets forth the computation of basic net income per share and
diluted net income per share.
First Quarter
----------------------
In Thousands (Except Per Share Data) 1999 1998
- --------------------------------------------------------------------------------
Numerator:
- ----------
Numerator for basic net income and diluted net income $(4,480) $(2,462)
Denominator:
- ------------
Denominator for basic net income per share - weighted
average common shares 8,365 8,365
Effect of dilutive securities - Stock options 124 128
------ -------
Denominator for diluted net income per share-
adjusted weighted average common shares 8,489 8,493
====== =======
Basic net income per share $ (.54) $ (.29)
======= =======
Diluted net income per share $ (.53) $ (.29)
======= =======
11. Estimates and Assumptions
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
INTRODUCTION:
The following discussion presents management's analysis of the results of
operations for the first three months of 1999 compared to the first three months
of 1998 and changes in financial condition from March 29, 1998 and January 3,
1999 to April 4, 1999.
The Company reported a net loss of $4.5 million or $.54 per share for the first
quarter of 1999 compared with a net loss of $2.5 million or $.29 per share for
the same period in 1998. The first quarter of 1999 was highlighted by volume
growth of 6%, significantly outpacing the U.S. soft drink industry average
growth. This growth in the first quarter is on top of 11% volume growth for all
of 1998.
The decline in earnings from the first quarter of the prior year reflects the
Company's continued investment in its selling infrastructure including vehicles,
sales personnel, cold drink equipment and the additional support personnel
required to service the cold drink equipment. Expenses related to the continued
infrastructure investments are recognized throughout the year although the
benefit from these investments is disproportionately realized during the
seasonally higher volume periods in the second and third quarters. To the extent
the Company continues to make such infrastructure investments, earnings in the
lower volume periods of the fiscal year, typically the first and fourth
quarters, may be lower than prior periods.
The Company signed an Agreement and Plan of Merger effective March 26, 1999 to
acquire a Coca-Cola bottler with territory covering certain parts of South
Carolina. The acquisition is expected to close during the second quarter of
1999.
The results for interim periods are not necessarily indicative of the results to
be expected for the year due to seasonal factors.
RESULTS OF OPERATIONS:
The first quarter of 1999 was highlighted by a sales volume increase of 6%, a
net selling price increase of 1.5% and 8% growth in gross margin. Net sales for
the first quarter of 1999 increased 8% from the first quarter of 1998 driven by
the volume and selling price increases. The strong volume growth of 6%, on top
of 11% volume growth in 1998, was attributable to focused marketing initiatives
and the additional cold drink equipment the Company has placed.
The sales volume growth was highlighted by continued strong performance from
Sprite, with volume growth of 11% for the quarter. Non-carbonated beverages
experienced outstanding volume growth of 70% from the first quarter of 1998. The
growth in non-carbonated beverages, including POWERaDE, Fruitopia, Cool from
Nestea and bottled water, is on top of 70% volume growth for all of 1998.
Cost of sales on a per case basis increased approximately 2.5% over the same
period in 1998. The increase in cost of sales is primarily due to price
increases for concentrate the Company purchases from The Coca-Cola Company and
other beverage companies.
Gross margin increased by 8% primarily due to the increased volume and net
selling price. Gross margin as a percentage of sales was unchanged from the
first quarter of 1998.
Selling expenses for the first quarter of 1999 decreased 2% over the first
quarter of 1998. The decrease in selling expenses resulted from a reduction in
lease expense and an increase in marketing funding support, offset somewhat by
increased employment costs reflecting additional sales personnel added to
support the Company's growth, higher sales commission costs related to the sales
volume increase, increased marketing costs and increased expenses related to
sales development programs.
During January 1999, the Company purchased $155 million of equipment that had
previously been leased. The Company used a combination of its revolving credit
facility and its informal lines of credit with certain banks to finance this
purchase. As a result of this transaction, lease expense for the first quarter
of 1999 declined by $3.4 million or 57%. Additionally, the terms of certain
leases that were previously recorded as operating leases were changed during the
first quarter of 1999. Due to the changes in the terms of these leases, they are
now accounted for as capital leases.
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 concentrate, syrups and finished products to the Company make
substantial 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 1999, it is not obligated to do so under the Company's Master
Bottle Contract. Also, The Coca-Cola Company has agreed to provide additional
marketing funding under a multi-year program to support the Company's cold drink
infrastructure. Total marketing funding and infrastructure support from The
Coca-Cola Company and other beverage companies in the first quarter of 1999 and
1998 was $12.0 million and $9.6 million, respectively.
General and administrative expenses increased by 18% primarily due to wage
increases necessary to compete in highly competitive labor markets, management
incentive programs that were not in place during the first quarter of 1998 and
costs associated with additional administrative personnel to support the
Company's accelerated growth. The increase in general and administrative
expenses reflects the Company's commitment to ensuring that the appropriate
administrative infrastructure is available to support the Company's accelerated
growth objectives.
Depreciation expense increased by $5.9 million or 67% from the first quarter of
1998 to the first quarter of 1999. This increase was due primarily to the
purchase of previously leased equipment, as discussed above, and to the
significant investments the Company continues to make in cold drink equipment.
Depreciation expense is recognized on a straight-line basis throughout the year
while the revenue generated by these cold drink assets tends to be more
seasonal, with the majority of the revenue realized in the second and third
quarters.
Interest expense of $11.7 million increased by $2.4 million or 26% from the
first quarter of 1998. The increase is due to additional borrowings used
primarily to purchase previously leased equipment and the acquisition of two
Coca-Cola bottlers during 1998. The Company's overall weighted average interest
rate decreased from an average of 7.1% during the first quarter of 1998 to an
average of 6.5% during the first quarter of 1999.
CHANGES IN FINANCIAL CONDITION:
Working capital decreased $73.5 million from January 3, 1999 and decreased $41.0
million from March 29, 1998 to April 4, 1999. The decrease from January 3, 1999
is primarily attributable to increases in the current portion of long-term debt
of $87.4 million and the current portion of obligations under capital leases of
$4.2 million, offset by a decrease in accounts payable and accrued liabilities
of $3.5 million, a decrease in accrued compensation of $4.3 million and a
decrease in accrued interest of $5.6 million. The change in accrued compensation
relates primarily to the timing of management incentive payments. The change in
accrued interest relates to the timing of interest payments on the Company's
long-term debt.
Working capital decreased by $41.0 million from March 29, 1998 due to increases
in the current portion of long-term debt of $44.8 million, the current portion
of obligations under capital leases of $4.2 million and in accounts payable and
accrued liabilities of $3.5 million. The decrease in working capital from March
29, 1998 is offset somewhat by increases in trade accounts receivable of $5.8
million and an increase in prepaid expenses and other current assets of $3.8
million. The increase in trade accounts receivable is due to the sales volume
growth over the prior year. The increase in prepaid expenses and other current
assets is due to the timing of advance rental payments, higher estimated federal
income tax payments and an increase of marketing merchandise.
Capital expenditures in the first quarter of 1999 were $186.1 million compared
to $8.9 million in the first quarter of 1998. The significant increase in
capital expenditures in the first quarter of 1999 relates primarily to the
purchase of $155 million of previously leased equipment. In addition, the
Company is purchasing its fleet requirements in 1999, whereas in 1998, the
Company leased its additional fleet requirements.
Long-term debt increased by $124.1 million from March 29, 1998 and $108.1
million from January 3, 1999. The increases from March 29,1998 and January 3,
1999 are primarily due to the purchase of $155 million of leased equipment
previously discussed.
It is the Company's intent to renew any borrowings under its $170 million
revolving credit facility and the informal lines of credit as they mature and,
to the extent that any borrowings under the revolving credit facility and the
informal lines of credit do not exceed the amount available under the Company's
$170 million revolving credit facility, they are classified as noncurrent
liabilities. As of April 4, 1999, the Company had $85.0 million outstanding
under the revolving credit facility and $177.0 million outstanding under the
informal lines of credit. Since the amounts outstanding under the revolving
credit facility and the informal lines of credit exceed $170 million, the excess
amount of $92.0 million is classified as a current liability.
On April 26, 1999 the Company issued $250 million of 10-year debentures at a
fixed interest rate of 6.375% under the Company's $800 million shelf
registration filed in January 1999. The Company subsequently entered into
10-year floating interest rate swap agreements for $100 million. The proceeds
from the issuance of these debentures were used to reduce the amounts
outstanding under the revolving credit facility and the informal lines of
credit.
As of April 4, 1999 the debt portfolio had a weighted average interest rate of
approximately 6.4% and approximately 48% of the total portfolio of $716.9
million was subject to changes in short-term interest rates. On April 26, 1999
after the Company issued $250 million of 10-year debentures, approximately 27%
of the total debt portfolio was subject to changes in short-term interest rates.
Management believes that the Company, through the generation of cash flow from
operations and the utilization of unused borrowing capacity, has sufficient
financial resources available to maintain its current operations and provide for
its current capital expenditure requirements. The Company considers the
acquisition of additional bottling territories on an ongoing basis.
YEAR 2000
Since many computer systems and other equipment with embedded chips or
processors (collectively, "business systems") use only two digits to represent
the year, these business systems may be unable to process accurately certain
data before, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 issue. The Year 2000 issue can arise at any point in the
Company's supply, manufacturing, distribution and financial chains.
The Company began work on the Year 2000 compliance issue in 1997. The scope of
the project includes: ensuring the compliance of all applications, operating
systems and hardware on mainframe, PC and LAN platforms; addressing issues
related to non-IT embedded software and equipment and addressing the compliance
of key suppliers and customers. The project has four phases: assessment of
systems and equipment affected by the Year 2000 issue; definition of strategies
to address affected systems and equipment; remediation or replacement of
affected systems and equipment and testing that each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating systems
and hardware on the Company's various computer platforms, the assessment and
definition of strategies phases have been completed. It is estimated that 90% of
the remediation or replacement phase has been completed with the balance of this
phase expected to be completed by the end of August 1999. The testing phase has
begun and is expected to be completed by the end of the third quarter of 1999.
Approximately 80% of the internal application development resources were
committed to Year 2000 remediation efforts in 1997, 1998 and the first quarter
of 1999. The Company expects that approximately 70% of its internal application
development resources will be committed to this effort in the second quarter of
1999. The Company has also utilized contract programmers to identify Year 2000
noncompliance problems and modify code.
With respect to addressing issues related to non-IT embedded software and
equipment, which principally exists in the Company's four manufacturing plants,
the assessment and definition of strategies phases have been completed.
Approximately 80% of the remediation or replacement phase has been completed
with the balance of this phase expected to be completed by the middle of the
third quarter of 1999. Testing is expected to be completed by the end of third
quarter of 1999.
The Company relies on third party suppliers for raw materials, water, utilities,
transportation and other key services. Interruption of supplier operations due
to Year 2000 issues could affect the Company operations. We have initiated
efforts to evaluate the status of our most critical suppliers' progress. This
process of evaluating our critical suppliers is scheduled for completion by
mid-1999. Options to reduce the risks of interruption due to supplier failures
include identification of alternate suppliers and accumulation of inventory to
assure production capability, where feasible or warranted. These activities are
intended to provide a means of managing risk, but cannot eliminate the potential
for disruption due to third party failure.
The Company is also dependent upon our customers for sales and cash flow. Year
2000 interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels, increased bad debt write-offs and cash
flow reductions. While these events are possible, the Company's customer base is
broad enough to minimize somewhat the effects of a single occurrence. The
Company's evaluation of
critical customers' progress toward mitigating Year 2000 exposures is ongoing.
However, the Company expects to complete its evaluation of the majority of its
critical customers by mid-1999.
The Company has begun the process of developing contingency plans for those
areas that are critical to our business. These contingency plans will be
designed to mitigate serious disruptions to our business flow beyond the end of
1999, where possible. The major efforts related to contingency planning will
occur in the first nine months of 1999.
It is currently estimated that the aggregate cost of the Company's Year 2000
efforts will be approximately $4.5 million to $5.5 million, of which
approximately $4.0 million has been spent to date. These costs are being
expensed as they are incurred and are being funded through operating cash flow.
These costs do not include any costs associated with the implementation of
contingency plans, which are in the process of being developed. The costs
associated with the replacement of computerized systems, hardware or equipment
(currently estimated to be $4.5 million), substantially all of which would be
capitalized, are not included in the above estimates.
The Company's Year 2000 program is an ongoing process and the estimates of costs
and completion dates for various components of the program described above are
subject to change.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, as well as information included in, or
incorporated by reference from, 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, certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Such "forward- looking statements"
include information relating to, among other matters, the Company's future
prospects, developments and business strategies for its operations. These
forward-looking statements are identified by their use of terms and phrases such
as "expect", "estimate", "project", "believe" and similar terms and phrases.
Such forward-looking statements are contained in various sections of this
Quarterly Report.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and perception of historical trends, current
conditions, expected future developments and other factors they believe are
appropriate under the circumstances, and involve risks and uncertainties that
may cause actual future activities and results of operations to be materially
different from that suggested or described in this Quarterly Report or in such
other documents. These risks include, but are not limited to (A) risks
associated with any changes in the historical level of marketing funding support
which the Company receives from The Coca-Cola Company, (B) risks associated with
interruptions in the Company's business operations as a result of any failure to
adequately correct the Year 2000 computer problem in any systems or equipment of
the Company or one of its major suppliers or customers and (C) other risks
detailed from time to time in the Company's filings with the Securities and
Exchange Commission. You are cautioned that any such statements are not
guarantees of future performance. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary from those expected, estimated or projected.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
1.1 Underwriting Agreement dated April 21, 1999, among the
Company, Salomon Smith Barney Inc. and other parties named
within.
4.1 Form of the Company's 6.375% Debentures due 2009.
27 Financial data schedule for period ended April 4, 1999.
(b) Reports on Form 8-K
A current report on Form 8-K was filed on February 19, 1999 related to
the Company's purchase of equipment previously leased under various
operating lease agreements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COCA-COLA BOTTLING CO. CONSOLIDATED
(REGISTRANT)
Date: May 11, 1999 By: /s/ David V. Singer
----------------------------------------
David V. Singer
Principal Financial Officer of the Registrant
and
Vice President - Chief Financial Officer