UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
[X] EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 3, 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
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(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
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 November 1, 1999
----- ---------------------------------
Common Stock, $1 Par Value 6,392,252
Class B Common Stock, $1 Par Value 2,341,077
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Thousands (Except Share Data)
Oct. 3, Jan. 3, Sept. 27,
1999 1999 1998
------- ------- ---------
ASSETS
Current Assets:
Cash $ 8,381 $ 6,691 $ 5,944
Accounts receivable, trade, less allowance for
doubtful accounts of $1,200, $600 and $529 67,160 57,217 60,839
Accounts receivable from The Coca-Cola Company 10,910 10,091 13,870
Accounts receivable, other 7,823 7,997 6,818
Inventories 47,663 41,010 44,207
Prepaid expenses and other current assets 17,359 15,545 15,463
---------- ---------- ----------
Total current assets 159,296 138,551 147,141
---------- ---------- ----------
Property, plant and equipment, net 451,000 258,329 257,483
Leased property under capital leases, net 11,531
Investment in Piedmont Coca-Cola Bottling Partnership 61,838 62,847 64,047
Other assets 67,376 51,576 50,298
Identifiable intangible assets, less accumulated
amortization of $124,425, $116,015 and $113,303 283,762 253,156 254,977
Excess of cost over fair value of net assets of
businesses acquired, less accumulated
amortization of $32,568, $30,850 and $30,278 59,051 60,769 61,341
---------- ---------- ----------
Total $1,093,854 $ 825,228 $ 835,287
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Thousands (Except Share Data)
Oct. 3, Jan. 3, Sept. 27,
1999 1999 1998
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Portion of long-term debt payable within one year $ 25,530 $ 30,115 $ 30,205
Current portion of obligations under capital leases 4,860
Accounts payable and accrued liabilities 74,022 72,623 78,287
Accounts payable to The Coca-Cola Company 5,028 5,194 5,726
Due to Piedmont Coca-Cola Bottling Partnership 207 435 1,733
Accrued compensation 7,660 10,239 8,090
Accrued interest payable 16,001 15,325 9,295
----------- ----------- -----------
Total current liabilities 133,308 133,931 133,336
Deferred income taxes 119,886 120,659 119,446
Deferred credits 3,195 4,838 5,405
Other liabilities 64,216 58,780 57,281
Obligations under capital leases 5,041
Long-term debt 729,314 491,234 502,898
----------- ----------- -----------
Total liabilities 1,054,960 809,442 818,366
----------- ----------- -----------
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- 9,454,626, 9,086,113 and 10,107,421 shares 9,454 9,086 10,107
Class B Common Stock, $1 par value:
Authorized - 10,000,000 shares;
Issued- 2,969,191, 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 109,936 94,709 96,800
Accumulated deficit (22,211) (29,724) (30,680)
----------- ----------- -----------
100,148 77,040 78,175
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 38,894 15,786 16,921
----------- ----------- -----------
Total $ 1,093,854 $ 825,228 $ 835,287
=========== =========== ===========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands (Except Per Share Data)
Third Quarter First Nine Months
--------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net sales (includes sales to Piedmont of
$19,953, $21,979, $55,263 and $52,881) $ 260,284 $ 248,533 $ 741,584 $ 693,279
Cost of sales, excluding depreciation
shown below (includes $15,592, $17,088,
$45,328 and $41,544 related to sales to
Piedmont) 142,928 143,081 416,430 398,515
--------- --------- --------- ---------
Gross margin 117,356 105,452 325,154 294,764
--------- --------- --------- ---------
Selling expenses, excluding depreciation
shown below 56,148 53,553 163,022 153,299
General and administrative expenses 19,151 17,177 55,360 50,698
Depreciation expense 15,521 9,381 44,435 27,273
Amortization of goodwill and intangibles 3,519 3,246 10,127 9,687
--------- --------- --------- ---------
Income from operations 23,017 22,095 52,210 53,807
Interest expense 12,971 10,723 37,116 29,069
Other income (expense), net (1,082) (611) (3,536) (2,964)
--------- --------- --------- ---------
Income before income taxes 8,964 10,761 11,558 21,774
Federal and state income taxes 3,137 3,766 4,045 7,852
--------- --------- --------- ---------
Net income $ 5,827 $ 6,995 $ 7,513 $ 13,922
========= ========= ========= =========
Basic net income per share $ .67 $ .84 $ .88 $ 1.66
Diluted net income per share $ .66 $ .82 $ .87 $ 1.64
Weighted average number of common
shares outstanding 8,733 8,365 8,539 8,365
Weighted average number of common
shares outstanding-assuming dilution 8,860 8,499 8,662 8,496
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 income 13,922
Cash dividends
paid (6,274)
-------- -------- -------- -------- --------
Balance on
September 27, 1998 $ 10,107 $ 1,948 $ 96,800 $(30,680) $ 61,254
======== ======== ======== ======== ========
Balance on
January 3, 1999 $ 9,086 $ 2,969 $ 94,709 $(29,724) $ 61,254
Net income 7,513
Cash dividends
paid (6,366)
Issuance of Common
Stock 368 21,593
-------- -------- -------- -------- --------
Balance on
October 3, 1999 $ 9,454 $ 2,969 $109,936 $(22,211) $ 61,254
======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
First Nine Months
---------------------
1999 1998
--------- ---------
Cash Flows from Operating Activities
Net income $ 7,513 $ 13,922
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense 44,435 27,273
Amortization of goodwill and intangibles 10,127 9,687
Deferred income taxes 4,045 7,852
Losses on sale of property, plant and equipment 2,120 1,964
Amortization of debt costs 606 445
Amortization of deferred gain related to terminated
interest rate swaps (423) (423)
Undistributed losses (earnings) of Piedmont Coca-Cola
Bottling Partnership 1,009 (721)
Increase in current assets less current liabilities (19,177) (9,889)
Increase in other noncurrent assets (12,298) (7,562)
Increase (decrease) in other noncurrent liabilities (2,042) 494
Other 74 83
--------- ---------
Total adjustments 28,476 29,203
--------- ---------
Net cash provided by operating activities 35,989 43,125
--------- ---------
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt, net 238,081 9,109
Increase (decrease) in current portion of long-term debt (4,585) 18,205
Cash dividends paid (6,366) (6,274)
Payments on capital lease obligations (3,675)
Proceeds from interest rate swap termination 6,480
Debt fees paid (3,228) (41)
Other (897) (438)
--------- ---------
Net cash provided by financing activities 219,330 27,041
--------- ---------
Cash Flows from Investing Activities
Additions to property, plant and equipment (234,743) (34,639)
Proceeds from the sale of property, plant and equipment 130 755
Acquisitions of companies, net of cash acquired (19,016) (34,765)
--------- ---------
Net cash used in investing activities (253,629) (68,649)
--------- ---------
Net increase in cash 1,690 1,517
Cash at beginning of period 6,691 4,427
--------- ---------
Cash at end of period $ 8,381 $ 5,944
========= =========
Significant noncash investing and financing activities:
Issuance of Common Stock for business acquired $ 21,961
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 owns
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:
Third Quarter First Nine Months
---------------------- --------------------------
In Thousands 1999 1998 1999 1998
- --------------------------------------------------------------------------------
Net sales $76,195 $74,415 $214,166 $202,941
Gross margin 35,304 32,552 97,044 88,818
Income from operations 4,336 5,207 7,717 10,850
Net income (loss) 1,072 2,096 (2,018) 1,442
3. Inventories
Inventories are summarized as follows:
Oct. 3, Jan. 3, Sept. 27,
In Thousands 1999 1999 1998
- --------------------------------------------------------------------------------
Finished products $30,229 $26,300 $29,720
Manufacturing materials 12,012 10,382 10,543
Plastic pallets and other 5,422 4,328 3,944
------- ------- -------
Total inventories $47,663 $41,010 $44,207
======= ======= =======
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 $2.8 million on October 3, 1999, January 3, 1999 and September 27,
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:
Oct 3, Jan. 3, Sept. 27, Estimated
In Thousands 1999 1999 1998 Useful Lives
- -------------------------------------------------------------------------------------------------------------
Land $ 11,845 $ 11,781 $ 10,099
Buildings 83,900 81,527 80,652 10-50 years
Machinery and equipment 91,721 84,047 81,909 5-20 years
Transportation equipment 123,340 60,620 60,593 4-10 years
Furniture and fixtures 32,682 26,395 25,180 7-10 years
Vending equipment 283,982 152,163 149,538 6-13 years
Leasehold and land improvements 37,565 33,894 32,342 5-20 years
Construction in progress 20,450 4,532 6,428
- -------------------------------------------------------------------------------------------------------------
Total property, plant and equipment, at cost 685,485 454,959 446,741
Less: Accumulated depreciation 234,485 196,630 189,258
- -------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net $451,000 $258,329 $257,483
- -------------------------------------------------------------------------------------------------------------
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 Oct. 3, 1999 Terms
- ------------------------------------------------------------------
Transportation equipment $13,576 1-4 years
Less: Accumulated amortization 2,045
-------
Leased property under capital leases, net $11,531
=======
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 Oct. 3, Jan. 3, Sept. 27,
In Thousands Maturity Rate (V) Rate Paid 1999 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Lines of Credit 2002 5.61% - V Varies $49,800 $36,400 $48,034
5.65%
Term Loan Agreement 2004 6.20% V Varies 85,000 85,000 85,000
Term Loan Agreement 2005 6.20% V Varies 85,000 85,000 85,000
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
Debentures 2009 6.375% F Semi- 250,000
annually
Other notes payable 1999 - 5.75% - F Varies 12,544 13,864 13,984
2001 10.00% ------- ------- -------
754,844 521,349 533,103
Less: Portion of long-term
debt payable within one year 25,530 30,115 30,205
- --------------------------------------------------------------------------------------------------------------------------------
Long-term debt $729,314 $491,234 $502,898
- --------------------------------------------------------------------------------------------------------------------------------
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. 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 net proceeds from these
issuances were used for refinancing a portion of existing public debt that had
matured with the remainder used to repay other debt.
The Company has guaranteed a portion of the debt for two cooperatives in which
the Company is a member. The amounts guaranteed were $30.3 million, $30.7
million and $31.1 million as of October 3, 1999, January 3, 1999 and September
27, 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 6.8%, 7.3% and 7.0% as of October 3, 1999, January 3, 1999 and
September 27, 1998, respectively. The Company's overall weighted average
interest rate on its long-term debt decreased from an average of 7.0% during the
first nine months of 1998 to an average of 6.6% during the first nine months of
1999. After taking into account the effect of all of the interest rate swap
activities, approximately 31%, 23% and 25% of the total debt portfolio was
subject to changes in short-term interest rates as of October 3, 1999, January
3, 1999 and September 27, 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 nine months of 1999 by
approximately $1.6 million and net income for the nine months ended October 3,
1999 would have decreased by approximately $1.0 million.
Derivative financial instruments were as follows:
October 3, 1999 January 3, 1999 September 27, 1998
------------------------------------------------------------------
Remaining Remaining Remaining
In Thousands Amount Term Amount Term Amount Term
- ------------------------------------------------------------------------------------------------
Interest rate swaps-floating $60,000 4 years $60,000 4.75 years $60,000 5 years
Interest rate swaps-floating 50,000 9.5 years
Interest rate swaps-floating 50,000 9.5 years
Interest rate swaps-fixed 60,000 4 years 60,000 4.75 years 60,000 5 years
Interest rate swaps-fixed 50,000 5.25 years 50,000 6 years 50,000 6.25 years
Interest rate cap 35,000 .75 years 35,000 1.5 years 35,000 1.75 years
The Company entered into 10-year floating interest rate swap agreements for $100
million in April, 1999 related to the 6.375% 10-year debentures issued on April
26, 1999.
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:
October 3, 1999 January 3, 1999 September 27, 1998
--------------- --------------- ------------------
Carrying Fair Carrying Fair Carrying Fair
In Thousands Amount Value Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
Balance Sheet Instruments
Public debt $522,500 $499,554 $301,085 $312,118 $301,085 $330,884
Non-public variable rate
long-term debt 219,800 219,800 206,400 206,400 218,034 218,034
Non-public fixed rate
long-term debt 12,544 12,718 13,864 14,476 13,984 14,944
Off-Balance-Sheet Instruments
Interest rate swaps (6,273) (2,030) (2,551)
Interest rate cap 5 10 4
The fair values of the interest rate swaps at October 3, 1999, January 3, 1999
and September 27, 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 October 3, 1999, January 3, 1999 and September 27, 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 Nine Months
-------------------------
In Thousands 1999 1998
- --------------------------------------------------------------------------------
Accounts receivable, trade, net $ (8,576) $ (4,925)
Accounts receivable, The Coca-Cola Company (819) (9,180)
Accounts receivable, other 282 2,042
Inventories (5,782) (5,247)
Prepaid expenses and other current assets (1,808) (2,696)
Accounts payable and accrued liabilities (177) 6,505
Accounts payable, The Coca-Cola Company (166) 1,618
Accrued compensation (2,579) 2,995
Accrued interest payable 676 (4,743)
Due to (from) Piedmont Coca-Cola Bottling Partnership (228) 3,742
-------- --------
Increase in current assets less current liabilities $(19,177) $ (9,889)
======== ========
9. Acquisition
On May 28, 1999, the Company acquired substantially all of the outstanding
capital stock of Carolina Coca-Cola Bottling Company, Inc. ("Carolina") in
exchange for 368,482 shares of the Company's Common Stock, installment notes and
cash. The purchase price for all of the outstanding capital stock of Carolina
was $36.6 million, as adjusted for required shareholders' equity of Carolina as
of the acquisition date. The Company used its informal lines of credit for the
cash portion of the acquisition. The acquisition has been accounted for under
the purchase method of accounting.
10. Subsequent Event
On October 29, 1999, the Company acquired substantially all of the outstanding
capital stock of Lynchburg Coca-Cola Bottling Company, Inc. ("Lynchburg"). The
purchase price for all of the outstanding capital stock of Lynchburg was $24.6
million, as adjusted for net working capital of Lynchburg as of the acquisition
date. The Company used its informal lines of credit to finance this acquisition.
The acquisition will be accounted for under the purchase method of accounting.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
11. Earnings Per Share
The following table sets forth the computation of basic net income per share and
diluted net income per share:
Third Quarter First Nine Months
------------- -----------------
In Thousands (Except Per Share Data) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic net income and diluted
net income $5,827 $6,995 $7,513 $13,922
Denominator:
Denominator for basic net income per share -
weighted average common shares 8,733 8,365 8,539 8,365
Effect of dilutive securities - stock options 127 134 123 131
-------- -------- -------- --------
Denominator for diluted net income per share -
adjusted weighted average common shares 8,860 8,499 8,662 8,496
======== ======== ======== ========
Basic net income per share $ .67 $ .84 $ .88 $ 1.66
======== ======== ======== ========
Diluted net income per share $ .66 $ .82 $ .87 $ 1.64
======== ======== ======== ========
12. 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.
13. Commitments and Contingencies
The Company is involved in various claims and legal proceedings which have
arisen in the ordinary course of business. The Company believes that the
ultimate disposition of these claims will not have a material adverse effect on
the financial condition, cash flows or results of operations of the Company.
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 third quarter and first nine months of 1999 compared to the
third quarter and first nine months of 1998 and changes in financial condition
from September 27, 1998 and January 3, 1999 to October 3, 1999.
The Company reported net income of $5.8 million or $.67 per share for the third
quarter of 1999 compared with net income of $7.0 million or $.84 per share for
the same period in 1998. For the first nine months of 1999, net income was $7.5
million or $.88 per share compared to net income of $13.9 million or $1.66 per
share for the first nine months of 1998. The third quarter and year-to-date
results in 1999 are highlighted by strong growth in gross margin and increased
net selling prices. Net selling prices increased by almost 3% in the third
quarter of 1999 over the same period in 1998. Net income declined for both the
third quarter and first nine months of 1999 over 1998 periods, due primarily to
increased costs related to the Company's ongoing investment in infrastructure to
support future growth.
The Company's infrastructure investments include additional sales personnel,
vehicles, cold drink equipment and additional support personnel required to
service the cold drink equipment. The Company continues to work on a Value Chain
initiative which will change its core logistics processes related to
manufacturing and transportation of finished products. The Company plans to test
the redesigned processes with a pilot project in the first half of 2000. Despite
strong growth in gross margin, these significant infrastructure investments have
adversely affected short-term operating results.
On November 4, 1999, the Company announced a restructuring in some of its
operating units, which will result in a fourth quarter 1999 after-tax charge of
up to $3 million. The charge relates primarily to severance and other
restructuring costs. Beginning in 1997, the Company significantly increased its
targeted growth rate and outpaced the U.S. soft drink industry in volume growth,
up 8% and 11% in 1997 and 1998, respectively. To support the accelerated growth
rate, the Company increased its investment in cold drink equipment, route
vehicles, additional sales personnel and additional service personnel to
maintain its cold drink equipment. In 1999, the Company planned for another year
of solid volume growth. However, the entire U.S. soft drink industry has been
soft. While the Company's volume growth in 1999 is leading the U.S. industry
average, volume has increased only 4% in the first nine months of 1999 and was
flat in the third quarter of 1999.
The Company acquired Carolina Coca-Cola Bottling Company, a Coca-Cola bottler
with operations in central South Carolina, in May 1999. The Company also
purchased the bottling rights and operating assets of a small Coca-Cola bottler
in central North Carolina in May 1999. The Company acquired substantially all of
the outstanding capital stock of Lynchburg Coca-Cola Bottling Co., Inc., a
Coca-Cola bottler with operations in central Virginia, on October 29, 1999. On
November 5, 1999, the Company signed a letter of intent to acquire The Coca-Cola
Company's
50% interest in Piedmont Coca-Cola Bottling Partnership ("Piedmont"). If the
acquisition of The Coca-Cola Company's interest in Piedmont is completed, the
Company would then own 100% of this partnership. It is the Company's intention
to continue to grow through acquisitions of other Coca-Cola bottlers.
Acquisition related costs including interest expense and non-cash charges such
as amortization of intangible assets may be incurred. To the extent these
expenses are incurred and are not offset by cost savings or increased sales, the
Company's acquisition strategy may depress short-term earnings. The Company
believes that continued growth through acquisitions will enhance long-term
shareholder value.
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 Company experienced strong growth in gross margin for the third quarter and
first nine months of 1999. Excluding the effect of acquisitions, gross margin
increased by 9% for the third quarter and the first nine months of 1999 over the
same periods in 1998. The growth in gross margin for the first nine months of
1999 was attributable to volume growth of approximately 4% and an increase in
net selling price of 1.7%. Net selling prices for the third quarter of 1999
increased by nearly 3% over 1998 net selling prices.
Excluding the effect of acquisitions, net sales for the third quarter and first
nine months increased 2% and 6%, respectively, over the same periods in 1998.
Cost of sales, as a percentage of net sales, declined from approximately 58% in
the third quarter of 1998 to approximately 55% in the third quarter of 1999.
This decline was primarily due to reductions in the cost of sweetener used in
the manufacturing of many of the Company's products.
Volume growth for the first nine months of 1999 was led by Sprite and
non-carbonated beverages including DASANI, The Coca-Cola Company's bottled water
that was introduced in April 1999. Non-carbonated beverage growth was 12% for
the third quarter and 32% for the first nine months of 1999. The growth in
non-carbonated beverages (excluding bottled water), including POWERaDE,
Fruitopia, Minute Maid Juices To Go and Cool from Nestea, is on top of 70%
volume growth for all of 1998. Bottled water sales increased 53% over the first
nine months of 1999. Non-carbonated products, including bottled water, now
account for over 7% of the Company's total sales volume.
Selling expenses for the third quarter and first nine months of 1999 increased
by 4.8% and 6.3%, respectively, from 1998 levels. The increase in selling costs
reflects additional expenses related to the Company's higher sales volume and
sales infrastructure development. Significant components of the increased costs
include employment costs for additional sales personnel, increased commission
costs related to higher sales volume, additional personnel costs for employees
to support the Company's accelerated cold drink program and additional marketing
expenses related to the Company's sales development programs. The Company has
made a significant investment in its sales force and anticipates that over time,
the increases in sales revenue from this investment will outpace the growth in
costs.
During January 1999, the Company purchased $155 million of equipment that had
previously been leased. As a result of this transaction, lease expense for the
third quarter and first nine months of 1999 declined by $3.7 million and $11.4
million, respectively. Additionally, the terms of certain leases that were
previously recorded as operating leases were amended during the first quarter of
1999. Due to the amendments in the terms of the leases, they are now reflected
in the Company's financial statements as capital leases. As of October 3, 1999,
leased property under capital leases, net of accumulated amortization, is $11.5
million.
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 through 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 nine months
of 1999 and 1998 was $41.3 million and $40.2 million, respectively.
General and administrative expenses for the third quarter and first nine months
of 1999 increased by 11% and 9% respectively over 1998 levels. The increase in
general and administrative expenses was due to hiring of additional support
personnel, higher employment costs in certain of the Company's labor markets and
costs related to remediation and testing of Year 2000 issues. The increase in
general and administrative expenses for the third quarter also reflects
additional bad debt reserve costs due to the bankruptcy of a large grocery chain
customer.
Depreciation expense increased 65% and 63% between the third quarter and first
nine months of 1999 and the comparable periods in 1998. This increase was due
primarily to the repurchase of previously leased equipment, as discussed above,
significant investments the Company continues to make in cold drink equipment
and additional manufacturing equipment acquired to produce its new bottled
water, DASANI.
Interest expense during the third quarter increased 21% from the third quarter
of 1998. Interest expense for the first nine months of 1999 increased by 28%
over the first nine months of 1998. The increase in interest expense for both
the third quarter and the first nine months of 1999 is attributable to the
purchase of assets that were previously leased, as discussed above, additional
debt related to acquisitions of other Coca-Cola bottlers during 1998 and 1999
and the significant level of capital expenditures during 1999. The Company's
overall weighted average interest rate decreased from an average of 7.0% during
the first nine months of 1998 to an average of 6.6% during the first nine months
of 1999.
The Company owns a 50% interest in Piedmont. Piedmont's bottling territory
includes parts of eastern North Carolina that were subjected to severe flooding
during Hurricane Floyd in September 1999. Piedmont recorded an accrual in the
third quarter of 1999 for estimated losses of vending equipment and other
related expenses. While Piedmont expects some of its losses to be covered by
insurance, the amount of recovery has not been determined at this time. The
Company has reflected its share of Piedmont's net loss in its third quarter
operating results.
The Company has been advised by The Coca-Cola Company that it intends to
increase concentrate pricing in 2000 significantly higher than the trend in the
past several years. The increase in concentrate pricing in 2000 is expected to
be approximately $8 million higher than the recent historical annual trend. The
Company is actively reviewing opportunities to increase its net selling prices
in 2000 in order to maintain its margins.
CHANGES IN FINANCIAL CONDITION:
Working capital increased $21.4 million from January 3, 1999 and $12.2 million
from September 27, 1998 to October 3, 1999. The increase from January 3, 1999 is
attributable to acquisitions, sales volume growth and seasonal increases in
accounts receivable ($9.9 million) and inventory ($6.7 million).
The working capital increase of $12.2 million from September 27, 1998 to October
3, 1999 is attributable to an increase in trade accounts receivable of $6.3
million, an increase in inventory of $3.5 million, a decrease in the current
portion of long-term debt of $4.7 million and a decrease in accounts payable and
accruals of $4.3 million, partially offset by increases in the current portion
of obligations under capital leases of $4.9 million and accrued interest of $6.7
million. The decrease in the current portion of long-term debt reflects the
refinancing of maturing Medium-Term Notes and other short-term borrowings. The
increase in accounts receivable is due to the higher sales volume the Company
has experienced. The increase in accrued interest expense is due to increased
long-term debt associated with the buyout of leased equipment and acquisitions
of other Coca-Cola bottlers.
Capital expenditures in the first nine months of 1999 were $234.7 million
compared to $34.6 million in the first nine months of 1998. The significant
increase in capital expenditures in the first nine months 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. The Company
leased additions to fleet during 1998.
Long-term debt increased by $226.4 million from September 27, 1998 and $238.1
million from January 3, 1999. The increases from September 27, 1998 and January
3, 1999 are due primarily to the buyout of $155 million of leased equipment
discussed above, and acquisitions of other Coca-Cola bottlers.
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 October 3, 1999, the Company had no amounts outstanding under
the revolving credit facility and $49.8 million outstanding under the informal
lines of credit.
On April 26, 1999 the Company issued $250 million of 10-year debentures at a
fixed 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 on $100
million of the newly issued debentures. The proceeds from the issuance of
debentures were used to refinance borrowings related to the buyout of the
operating leases discussed above, refinance certain Medium-Term Notes that
matured and repay other corporate borrowings.
As of October 3, 1999 the debt portfolio had a weighted average interest rate of
approximately 6.8% and approximately 31% of the total portfolio of $754.8
million was subject to changes in short-term interest rates.
On May 28, 1999 the Company acquired substantially all of the outstanding
capital stock of Carolina Coca-Cola Bottling Company, Inc. ("Carolina") in
exchange for 368,482 shares of the Company's Common Stock, installment notes and
cash. The purchase price for all the capital stock of Carolina was $36.6
million, as adjusted for required shareholders' equity of Carolina as of the
acquisition date. The Company used its informal lines of credit for the cash
portion of the acquisition. The acquisition has been accounted for under the
purchase method of accounting.
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, local area network and wide area network
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, all four phases of the
Year 2000 project have been completed. The Company continues to re-test and
monitor business critical systems and will do so through the end of the year.
Approximately 80% of the internal application development resources were
committed to Year 2000 remediation and testing efforts in 1997 and 1998 and the
first nine months of 1999. The
Company expects that approximately 75% of its internal application development
resources will be committed to re-testing and monitoring of business critical
systems during the fourth quarter of 1999. The Company has also utilized
contract programmers to identify Year 2000 non-compliance 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. Also,
the remediation or replacement of affected systems and equipment phase has been
completed. Testing is approximately 98% complete and will be finished at the end
of November.
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 Company operations. The Company intends to
accumulate additional finished goods inventory in its warehouses as a means of
somewhat mitigating the risk of business interruption due to supplier failures.
The Company has reviewed and evaluated the Year 2000 readiness of its critical
suppliers. As a result of this review and evaluation, the Company believes there
is a low probability of its operations being disrupted as a result of Year 2000
issues with its mission critical suppliers.
The Company is also dependent upon its customers for sales and cash flow. Year
2000 interruptions in the Company's 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 the effects of a single
occurrence.
The Company has developed contingency plans for those areas that are critical to
its business. These contingency plans have been designed to mitigate serious
disruptions to its business flow beyond the end of 1999, where possible.
Contingency plan information will be provided to all key managers in the Company
during November and early December.
It is currently estimated that the aggregate cost of the Company's Year 2000
efforts will be approximately $5.0 million to $5.5 million, of which
approximately $4.7 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. 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
for various components of the program described above are subject to change.
The failure to correct a material Year 2000 issue 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 issue, 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 believed to be
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 10-Q
(a) Exhibits
Exhibit
Number Description
------ -----------
4.1 The Registrant, by signing this report, agrees to
furnish the Securities and Exchange Commission, upon
its request, a copy of any instrument which defines
the rights of holders of long-term debt of the
Registrant and its 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.
10.1 Agreement and Plan of Merger dated as of September
29, 1999, by and among Lynchburg Coca-Cola Bottling
Co., Inc., Coca-Cola Bottling Co. Consolidated, LCCB
Merger Co., Certain Shareholders of Lynchburg
Coca-Cola Bottling Co., Inc. and George M. Lupton,
Jr. as the shareholders' representative.
27 Financial data schedule for period ended October 3,
1999.
(b) Reports on Form 8-K
A current report on Form 8-K was filed on October 22, 1999 related to
the Company's intent to purchase The Coca-Cola Company's 50 percent
interest in Piedmont Coca-Cola Bottling Partnership, a partnership with
bottling territories in much of South Carolina and portions of eastern
North Carolina.
A current report on Form 8-K was filed on November 8, 1999 announcing a
restructuring which will result in a 4th quarter 1999 after-tax charge
of up to $3 million.
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: Novemeber 17,1999 By: /s/ DAVID V. SINGER
--------------------------------
David V. Singer
Principal Financial Officer of the Registrant
and
Vice President - Chief Financial Officer