XNAS:COKE Coca-Cola Bottling Co Consolidated Quarterly Report 10-Q Filing - 7/1/2012

Effective Date 7/1/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 1, 2012

Commission File Number 0-9286

 

 

COCA-COLA BOTTLING CO. CONSOLIDATED

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   56-0950585

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4100 Coca-Cola Plaza, Charlotte, North Carolina 28211

(Address of principal executive offices) (Zip Code)

(704) 557-4400

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 31, 2012

Common Stock, $1.00 Par Value   7,141,447
Class B Common Stock, $1.00 Par Value   2,088,842

 

 

 


Table of Contents

COCA-COLA BOTTLING CO. CONSOLIDATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JULY 1, 2012

INDEX

 

          Page  
   PART I – FINANCIAL INFORMATION   

Item 1.

  

Financial Statements (Unaudited)

  
  

Consolidated Statements of Operations

     2   
  

Consolidated Statements of Comprehensive Income

     3   
  

Consolidated Balance Sheets

     4   
  

Consolidated Statements of Changes in Equity

     6   
  

Consolidated Statements of Cash Flows

     7   
  

Notes to Consolidated Financial Statements

     8   

Item 2.

  

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

     34   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     57   

Item 4.

  

Controls and Procedures

     58   
   PART II – OTHER INFORMATION   

Item 1A.

  

Risk Factors

     59   

Item 6.

  

Exhibits

     60   
  

Signatures

     61   


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

In Thousands (Except Per Share Data)

 

     Second Quarter      First Half  
     2012      2011      2012      2011  

Net sales

   $ 430,693       $ 422,893       $ 807,878       $ 782,522   

Cost of sales

     257,280         257,320         478,871         467,788   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

     173,413         165,573         329,007         314,734   

Selling, delivery and administrative expenses

     144,864         137,153         281,825         267,135   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     28,549         28,420         47,182         47,599   

Interest expense, net

     9,079         9,042         18,150         17,811   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     19,470         19,378         29,032         29,788   

Income tax expense

     7,570         7,394         12,037         11,335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     11,900         11,984         16,995         18,453   

Less: Net income attributable to noncontrolling interest

     1,153         883         1,683         1,439   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Coca-Cola Bottling Co. Consolidated

   $ 10,747       $ 11,101       $ 15,312       $ 17,014   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Common Stock

   $ 1.16       $ 1.21       $ 1.66       $ 1.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding

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

Class B Common Stock

   $ 1.16       $ 1.21       $ 1.66       $ 1.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Class B Common Stock shares outstanding

     2,089         2,067         2,081         2,059   

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

           

Common Stock

   $ 1.16       $ 1.20       $ 1.65       $ 1.84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding – assuming dilution

     9,270         9,248         9,262         9,240   

Class B Common Stock

   $ 1.16       $ 1.20       $ 1.65       $ 1.83   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     2,129         2,107         2,121         2,099   

Cash dividends per share:

           

Common Stock

   $ .25       $ .25       $ .50       $ .50   

Class B Common Stock

   $ .25       $ .25       $ .50       $ .50   

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

In Thousands

 

     Second Quarter     First Half  
     2012     2011     2012     2011  

Net income

   $ 11,900      $ 11,984      $ 16,995      $ 18,453   

Other comprehensive income, net of tax

        

Foreign currency translation adjustment

     1        (1     0        (5

Defined benefit plans amortization included in pension costs:

        

Actuarial loss

     421        314        841        628   

Prior service costs

     3        3        6        5   

Postretirement benefits amortization included in benefits costs:

        

Actuarial loss

     371        321        743        642   

Prior service costs

     (229     (260     (459     (520

Transition asset

     0        (3     0        (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     567        374        1,131        744   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     12,467        12,358        18,126        19,197   

Less: Comprehensive income attributable to noncontrolling interest

     1,153        883        1,683        1,439   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Coca-Cola Bottling Co. Consolidated

   $ 11,314      $ 11,475      $ 16,443      $ 17,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In Thousands (Except Share Data)

 

     July 1,      Jan. 1,      July 3,  
     2012      2012      2011  

ASSETS

        

Current Assets:

        

Cash and cash equivalents

   $ 78,328       $ 90,758       $ 26,169   

Restricted cash

     0         3,000         3,000   

Accounts receivable, trade, less allowance for doubtful accounts of $1,543, $1,521 and $1,576, respectively

     120,706         105,515         126,228   

Accounts receivable from The Coca-Cola Company

     22,301         8,439         26,153   

Accounts receivable, other

     11,427         15,874         9,390   

Inventories

     76,776         66,158         75,157   

Prepaid expenses and other current assets

     21,832         22,069         24,822   
  

 

 

    

 

 

    

 

 

 

Total current assets

     331,370         311,813         290,919   
  

 

 

    

 

 

    

 

 

 

Property, plant and equipment, net

     305,342         312,789         319,121   

Leased property under capital leases, net

     57,052         59,804         62,796   

Other assets

     54,020         49,604         52,316   

Franchise rights

     520,672         520,672         520,672   

Goodwill

     102,049         102,049         102,049   

Other identifiable intangible assets, net

     4,231         4,439         4,645   
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,374,736       $ 1,361,170       $ 1,352,518   
  

 

 

    

 

 

    

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

In Thousands (Except Share Data)

 

     July 1,     Jan. 1,     July 3,  
     2012     2012     2011  

LIABILITIES AND EQUITY

      

Current Liabilities:

      

Current portion of debt

   $ 120,000      $ 120,000      $ 0   

Current portion of obligations under capital leases

     4,975        4,574        4,174   

Accounts payable, trade

     43,039        42,203        46,546   

Accounts payable to The Coca-Cola Company

     48,777        34,150        48,990   

Other accrued liabilities

     77,042        66,922        65,488   

Accrued compensation

     20,460        29,218        20,955   

Accrued interest payable

     5,107        5,448        5,529   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     319,400        302,515        191,682   

Deferred income taxes

     141,436        142,260        141,253   

Pension and postretirement benefit obligations

     122,254        138,156        111,737   

Other liabilities

     115,143        114,302        112,537   

Obligations under capital leases

     67,027        69,480        71,828   

Long-term debt

     403,301        403,219        523,139   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     1,168,561        1,169,932        1,152,176   
  

 

 

   

 

 

   

 

 

 

Commitments and Contingencies (Note 14)

      

Equity:

      

Common Stock, $1.00 par value:

      

Authorized – 30,000,000 shares;

      

Issued – 10,203,821 shares

     10,204        10,204        10,204   

Class B Common Stock, $1.00 par value:

      

Authorized – 10,000,000 shares;

      

Issued – 2,716,956, 2,694,636 and 2,694,636 shares, respectively

     2,715        2,693        2,693   

Capital in excess of par value

     107,600        106,201        106,140   

Retained earnings

     164,979        154,277        147,287   

Accumulated other comprehensive loss

     (79,689     (80,820     (62,689
  

 

 

   

 

 

   

 

 

 
     205,809        192,555        203,635   

Less-Treasury stock, at cost:

      

Common – 3,062,374 shares

     60,845        60,845        60,845   

Class B Common – 628,114 shares

     409        409        409   
  

 

 

   

 

 

   

 

 

 

Total equity of Coca-Cola Bottling Co. Consolidated

     144,555        131,301        142,381   

Noncontrolling interest

     61,620        59,937        57,961   
  

 

 

   

 

 

   

 

 

 

Total equity

     206,175        191,238        200,342   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,374,736      $ 1,361,170      $ 1,352,518   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (UNAUDITED)

In Thousands (Except Share Data)

 

                Capital           Accumulated                          
          Class B     in           Other           Total              
    Common     Common     Excess of     Retained     Comprehensive     Treasury     Equity     Noncontrolling     Total  
    Stock     Stock     Par Value     Earnings     Loss     Stock     of CCBCC     Interest     Equity  

Balance on Jan. 2, 2011

  $ 10,204      $ 2,671      $ 104,835      $ 134,872      $ (63,433   $ (61,254   $ 127,895      $ 56,522      $ 184,417   

Net income

          17,014            17,014        1,439        18,453   

Other comprehensive income, net of tax

            744          744          744   

Cash dividends paid

                 

Common ($.50 per share)

          (3,571         (3,571       (3,571

Class B Common ($.50 per share)

          (1,028         (1,028       (1,028

Issuance of 22,320 shares of Class B Common Stock

      22        1,305              1,327          1,327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on July 3, 2011

  $ 10,204      $ 2,693      $ 106,140      $ 147,287      $ (62,689   $ (61,254   $ 142,381      $ 57,961      $ 200,342   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on Jan. 1, 2012

  $ 10,204      $ 2,693      $ 106,201      $ 154,277      $ (80,820   $ (61,254   $ 131,301      $ 59,937      $ 191,238   

Net income

          15,312            15,312        1,683        16,995   

Other comprehensive income, net of tax

            1,131          1,131          1,131   

Cash dividends paid

                 

Common ($.50 per share)

          (3,571         (3,571       (3,571

Class B Common ($.50 per share)

          (1,039         (1,039       (1,039

Issuance of 22,320 shares of Class B Common Stock

      22        1,399              1,421          1,421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on July 1, 2012

  $ 10,204      $ 2,715      $ 107,600      $ 164,979      $ (79,689   $ (61,254   $ 144,555      $ 61,620      $ 206,175   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

In Thousands

 

     First Half  
     2012     2011  

Cash Flows from Operating Activities

    

Net income

   $ 16,995      $ 18,453   

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

    

Depreciation expense

     30,841        30,096   

Amortization of intangibles

     208        226   

Deferred income taxes

     2,196        160   

Loss on sale of property, plant and equipment

     392        451   

Amortization of debt costs

     1,154        1,141   

Amortization of deferred gain related to terminated interest rate agreements

     (615     (609

Stock compensation expense

     1,286        1,347   

Increase in current assets less current liabilities

     (14,062     (24,493

Increase in other noncurrent assets

     (5,231     (6,925

Decrease in other noncurrent liabilities

     (16,336     (1,279

Other

     0        (8
  

 

 

   

 

 

 

Total adjustments

     (167     107   
  

 

 

   

 

 

 

Net cash provided by operating activities

     16,828        18,560   
  

 

 

   

 

 

 

Cash Flows from Investing Activities

    

Additions to property, plant and equipment

     (25,483     (32,187

Proceeds from the sale of property, plant and equipment

     153        53   

Change in restricted cash

     3,000        500   
  

 

 

   

 

 

 

Net cash used in investing activities

     (22,330     (31,634
  

 

 

   

 

 

 

Cash Flows from Financing Activities

    

Cash dividends paid

     (4,610     (4,599

Principal payments on capital lease obligations

     (2,260     (1,904

Other

     (58     (126
  

 

 

   

 

 

 

Net cash used in financing activities

     (6,928     (6,629
  

 

 

   

 

 

 

Net decrease in cash

     (12,430     (19,703

Cash at beginning of period

     90,758        45,872   
  

 

 

   

 

 

 

Cash at end of period

   $ 78,328      $ 26,169   
  

 

 

   

 

 

 

Significant non-cash investing and financing activities:

    

Issuance of Class B Common Stock in connection with stock award

   $ 1,421      $ 1,327   

Capital lease obligations incurred

     209        18,644   

See Accompanying Notes to Consolidated Financial Statements.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

1. Significant Accounting Policies

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

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

The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2012 filed with the United States Securities and Exchange Commission.

 

2. Seasonality of Business

Historically, operating results for the second quarter of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters versus the first and fourth quarters of the fiscal year. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

 

3. Piedmont Coca-Cola Bottling Partnership

On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont Coca-Cola Bottling Partnership (“Piedmont”) to distribute and market nonalcoholic beverages primarily in portions of North Carolina and South Carolina. The Company provides a portion of the nonalcoholic beverage products to Piedmont at cost and receives a fee for managing the operations of Piedmont pursuant to a management agreement. These intercompany transactions are eliminated in the consolidated financial statements.

Noncontrolling interest as of July 1, 2012, January 1, 2012 and July 3, 2011 primarily represents the portion of Piedmont owned by The Coca-Cola Company. The Coca-Cola Company’s interest in Piedmont was 22.7% for all periods presented.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

4. Inventories

 

Inventories were summarized as follows:

 

     July 1,      Jan. 1,      July 3,  

In Thousands

   2012      2012      2011  

Finished products

   $ 45,958       $ 33,394       $ 46,398   

Manufacturing materials

     11,285         14,061         10,777   

Plastic shells, plastic pallets and other inventories

     19,533         18,703         17,982   
  

 

 

    

 

 

    

 

 

 

Total inventories

   $ 76,776       $ 66,158       $ 75,157   
  

 

 

    

 

 

    

 

 

 

 

5. Property, Plant and Equipment

 

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

 

     July 1,      Jan. 1,      July 3,      Estimated  

In Thousands

   2012      2012      2011      Useful Lives  

Land

   $ 12,537       $ 12,537       $ 12,751      

Buildings

     118,713         118,603         120,473         8-50 years   

Machinery and equipment

     136,781         138,268         138,057         5-20 years   

Transportation equipment

     157,980         153,252         152,139         4-17 years   

Furniture and fixtures

     39,622         41,170         39,271         3-10 years   

Cold drink dispensing equipment

     317,694         312,221         315,607         5-15 years   

Leasehold and land improvements

     76,214         74,500         72,901         5-20 years   

Software for internal use

     72,434         70,648         70,212         3-10 years   

Construction in progress

     2,497         3,796         5,662      
  

 

 

    

 

 

    

 

 

    

Total property, plant and equipment, at cost

     934,472         924,995         927,073      

Less: Accumulated depreciation and amortization

     629,130         612,206         607,952      
  

 

 

    

 

 

    

 

 

    

Property, plant and equipment, net

   $ 305,342       $ 312,789       $ 319,121      
  

 

 

    

 

 

    

 

 

    

Depreciation and amortization expense was $15.3 million in both the second quarter of 2012 (“Q2 2012”) and the second quarter of 2011 (“Q2 2011”). Depreciation and amortization expense was $30.8 million and $30.1 million in the first half of 2012 (“YTD 2012”) and the first half of 2011 (“YTD 2011”), respectively. These amounts included amortization expense for leased property under capital leases.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

6. Leased Property Under Capital Leases

 

Leased property under capital leases was summarized as follows:

 

     July 1,      Jan. 1,      July 3,      Estimated  

In Thousands

   2012      2012      2011      Useful Lives  

Leased property under capital leases

   $ 94,180       $ 95,509       $ 95,521         3-20 years   

Less: Accumulated amortization

     37,128         35,705         32,725      
  

 

 

    

 

 

    

 

 

    

Leased property under capital leases, net

   $ 57,052       $ 59,804       $ 62,796      
  

 

 

    

 

 

    

 

 

    

As of July 1, 2012, real estate represented $56.8 million of the leased property under capital leases and $38.7 million of this real estate is leased from related parties as described in Note 19 to the consolidated financial statements.

The Company’s outstanding obligations for capital leases were $72.0 million, $74.1 million and $76.0 million as of July 1, 2012, January 1, 2012 and July 3, 2011, respectively.

 

7. Franchise Rights and Goodwill

There were no changes in the carrying amounts of franchise rights and goodwill in the periods presented. The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During YTD 2012, the Company did not experience any triggering events or changes in circumstances that indicated the carrying amounts of the Company’s franchise rights or goodwill exceeded fair values. As such, the Company has not recognized any impairments of franchise rights or goodwill.

 

8. Other Identifiable Intangible Assets

 

Other identifiable intangible assets were summarized as follows:

 

     July 1,      Jan. 1,      July 3,      Estimated  

In Thousands

   2012      2012      2011      Useful Lives  

Other identifiable intangible assets

   $ 8,557       $ 8,557       $ 8,675         1-20 years   

Less: Accumulated amortization

     4,326         4,118         4,030      
  

 

 

    

 

 

    

 

 

    

Other identifiable intangible assets, net

   $ 4,231       $ 4,439       $ 4,645      
  

 

 

    

 

 

    

 

 

    

Other identifiable intangible assets primarily represent customer relationships and distribution rights.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

9. Other Accrued Liabilities

 

Other accrued liabilities were summarized as follows:

 

     July 1,      Jan. 1,      July 3,  

In Thousands

   2012      2012      2011  

Accrued marketing costs

   $ 14,546       $ 16,743       $ 14,069   

Accrued insurance costs

     19,589         18,880         18,465   

Accrued taxes (other than income taxes)

     2,955         1,636         2,928   

Accrued income taxes

     5,000         0         9,922   

Employee benefit plan accruals

     14,092         12,348         11,246   

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

     13,821         8,608         0   

All other accrued liabilities

     7,039         8,707         8,858   
  

 

 

    

 

 

    

 

 

 

Total other accrued liabilities

   $ 77,042       $ 66,922       $ 65,488   
  

 

 

    

 

 

    

 

 

 

 

10. Debt

 

Debt was summarized as follows:

 

          Interest     Interest    July 1,     Jan.1,     July 3,  

In Thousands

   Maturity    Rate     Paid    2012     2012     2011  

Senior Notes

   2012      5.00   Semi-annually    $ 150,000      $ 150,000      $ 150,000   

Senior Notes

   2015      5.30   Semi-annually      100,000        100,000        100,000   

Senior Notes

   2016      5.00   Semi-annually      164,757        164,757        164,757   

Senior Notes

   2019      7.00   Semi-annually      110,000        110,000        110,000   

Unamortized discount on Senior Notes

   2019           (1,456     (1,538     (1,618
          

 

 

   

 

 

   

 

 

 
             523,301        523,219        523,139   

Less: Current portion of debt

             120,000        120,000        0   
          

 

 

   

 

 

   

 

 

 

Long-term debt

           $ 403,301      $ 403,219      $ 523,139   
          

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

10. Debt

 

On September 21, 2011, the Company entered into a new $200 million five-year unsecured revolving credit agreement (“$200 million facility”) replacing the existing $200 million five-year unsecured revolving credit facility, dated March 8, 2007 scheduled to mature in March 2012. The new $200 million facility has a scheduled maturity date of September 21, 2016 and up to $25 million is available for the issuance of letters of credit. Borrowings under the agreement will bear interest at a floating base rate or a floating Eurodollar rate plus an interest rate spread, dependent on the Company’s credit rating at the time of borrowing. The Company must pay an annual facility fee of .175% of the lenders’ aggregate commitments under the facility. The $200 million facility contains two financial covenants: a cash flow/fixed charges ratio (“fixed charges coverage ratio”) and a funded indebtedness/cash flow ratio (“operating cash flow ratio”), each as defined in the credit agreement. The fixed charges coverage ratio requires the Company to maintain a consolidated cash flow to fixed charges ratio of 1.5 to 1.0 or higher. The operating cash flow ratio requires the Company to maintain a debt to operating cash flow ratio of 6.0 to 1.0 or lower. The Company is currently in compliance with these covenants. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources. On July 1, 2012, January 1, 2012 and July 3, 2011, the Company had no outstanding borrowings on either $200 million facility.

On February 10, 2010, the Company entered into an agreement for an uncommitted line of credit. Under this agreement, the Company may borrow up to a total of $20 million for periods of 7 days, 30 days, 60 days or 90 days at the discretion of the participating bank. On July 1, 2012, January 1, 2012 and July 3, 2011, the Company had no outstanding borrowings under the uncommitted line of credit.

The Company has $150 million of senior notes which mature in November 2012. The Company expects to use a combination of available cash on hand, borrowings on the $20 million uncommitted line of credit and borrowings under the $200 million facility to repay these notes when due. The Company has classified $30 million of these senior notes due November 2012 as long-term, representing the portion the Company expects to be paid from borrowings under the $200 million facility.

As of July 1, 2012, January 1, 2012 and July 3, 2011, the Company had a weighted average interest rate of 5.9% for its outstanding debt and capital lease obligations. The Company’s overall weighted average interest rate on its debt and capital lease obligations was 6.1% for YTD 2012 compared to 6.0% for YTD 2011. As of July 1, 2012, none of the Company’s debt and capital lease obligations of $595.3 million were subject to changes in short-term interest rates.

The Company’s public debt is not subject to financial covenants but does limit the incurrence of certain liens and encumbrances as well as the incurrence of indebtedness by the Company’s subsidiaries in excess of certain amounts.

All of the outstanding long-term debt has been issued by the Company with none being issued by any of the Company’s subsidiaries. There are no guarantees of the Company’s debt.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Derivative Financial Instruments

Interest

As of July 1, 2012, the Company has $1.0 million in gains from terminated interest rate swap agreements to be amortized ($.3 million over the next 5 months and $.7 million over the next 33 months).

During both YTD 2012 and YTD 2011, the Company amortized deferred gains related to terminated interest rate swap agreements and forward interest rate agreements, which reduced interest expense by $.6 million.

The Company had no interest rate swap agreements outstanding at July 1, 2012, January 1, 2012 and July 3, 2011.

Commodities

The Company is subject to the risk of loss arising from adverse changes in commodity prices. In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivative instruments. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recorded at fair value as either assets or liabilities in the Company’s consolidated balance sheets. These derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage commodity price risk. Derivative instruments are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. Settlements of derivative agreements are included in cash flows from operating activities on the Company’s consolidated statements of cash flows. The Company suspended the use of derivative instruments to hedge its projected diesel fuel, unleaded gasoline and aluminum purchase requirements at the end of 2011.

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company is exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these parties.

The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions.

The Company used derivative instruments to hedge all of the Company’s projected diesel fuel and unleaded gasoline purchases for the second, third and fourth quarters of 2011. These derivative instruments related to diesel fuel and unleaded gasoline used by the Company’s delivery fleet and other vehicles. The Company used derivative instruments to hedge approximately 75% of the Company’s aluminum purchase requirements in 2011.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Derivative Financial Instruments

 

 

The following table summarizes Q2 2012 and Q2 2011 net gains and losses on the Company’s fuel and aluminum derivative financial instruments and the classification, either as cost of sales or selling, delivery and administrative (“S,D&A”) expenses, of such net gains and losses in the consolidated statements of operations:

 

        Second Quarter  

In Thousands

 

Classification of Gain (Loss)

  2012     2011  

Fuel hedges – contract premium and contract settlement

  S,D&A expenses   $ 0      $ (105

Fuel hedges – mark-to-market adjustment

  S,D&A expenses     0        (25

Aluminum hedges – contract premium and contract settlement

  Cost of sales     0        783   

Aluminum hedges – mark-to-market adjustment

  Cost of sales     0        (1,708
   

 

 

   

 

 

 

Total Net Gain (Loss)

    $ 0      $ (1,055
   

 

 

   

 

 

 

The following table summarizes YTD 2012 and YTD 2011 net gains and losses on the Company’s fuel and aluminum derivative financial instruments and the classification, either as cost of sales or selling, delivery and administrative (“S,D&A”) expenses, of such net gains and losses in the consolidated statements of operations:

 

        First Half  

In Thousands

 

Classification of Gain (Loss)

  2012     2011  

Fuel hedges – contract premium and contract settlement

  S,D&A expenses   $ 0      $ 66   

Fuel hedges – mark-to-market adjustment

  S,D&A expenses     0        (171

Aluminum hedges – contract premium and contract settlement

  Cost of sales     0        1,304   

Aluminum hedges – mark-to-market adjustment

  Cost of sales     0        (2,216
   

 

 

   

 

 

 

Total Net Gain (Loss)

    $ 0      $ (1,017
   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

11. Derivative Financial Instruments

 

 

The following table summarizes the fair values and classification in the consolidated balance sheets of derivative instruments held by the Company as of July 1, 2012, January 1, 2012 and July 3, 2011:

 

    Balance Sheet   July 1,     Jan. 1,     July 3,  

In Thousands

 

Classification

  2012     2012     2011  

Unamortized cost of fuel hedging agreements

 

Prepaid expenses and other current assets

  $ 0      $ 0      $ 526   

Aluminum hedges at fair market value

 

Prepaid expenses and other current assets

    0        0        4,450   

Unamortized cost of aluminum hedging agreements

 

Prepaid expenses and other current assets

    0        0        1,316   
   

 

 

   

 

 

   

 

 

 

Total

    $ 0      $ 0      $ 6,292   

 

12. Fair Value of Financial Instruments

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

Cash and Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable

The fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate carrying values due to the short maturity of these items.

Public Debt Securities

The fair values of the Company’s public debt securities are based on estimated current market prices.

Non-Public Variable Rate Debt

The carrying amounts of the Company’s variable rate borrowings approximate their fair values.

Deferred Compensation Plan Assets/Liabilities

The fair values of deferred compensation plan assets and liabilities, which are held in mutual funds, are based upon the quoted market value of the securities held within the mutual funds.

Derivative Financial Instruments

The fair values for the Company’s fuel hedging and aluminum hedging agreements are based on current settlement values. The fair values of the fuel hedging and aluminum hedging agreements at each balance sheet date represent the estimated amounts the Company would have received or paid upon termination of these agreements. Credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair value of derivative financial instruments.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

12. Fair Value of Financial Instruments

 

 

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

 

     July 1, 2012     Jan. 1, 2012     July 3, 2011  
     Carrying     Fair     Carrying     Fair     Carrying     Fair  

In Thousands

   Amount     Value     Amount     Value     Amount     Value  

Public debt securities

   $ (523,301   $ (579,386   $ (523,219   $ (576,127   $ (523,139   $ (569,324

Deferred compensation plan assets

     12,164        12,164        10,709        10,709        11,133        11,133   

Deferred compensation plan liabilities

     (12,164     (12,164     (10,709     (10,709     (11,133     (11,133

Aluminum hedging agreements

     0        0        0        0        4,450        4,450   

GAAP requires that assets and liabilities carried at fair value be classified and disclosed in one of the following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

 

The following table summarizes, by assets and liabilities, the valuation of the Company’s debt, deferred compensation plan, fuel hedging agreements and aluminum hedging agreements:

 

     July 1, 2012      Jan. 1, 2012      July 3, 2011  

In Thousands

   Level 1      Level 2      Level 1      Level 2      Level 1      Level 2  

Assets

                 

Deferred compensation plan assets

   $ 12,164          $ 10,709          $ 11,133      

Aluminum hedging agreements

      $ 0          $ 0          $ 4,450   

Liabilities

                 

Public debt securities

     579,386            576,127            569,324      

Deferred compensation plan liabilities

     12,164            10,709            11,133      

The Company maintains a non-qualified deferred compensation plan for certain executives and other highly compensated employees. The investment assets are held in mutual funds. The fair value of the mutual funds is based on the quoted market value of the securities held within the funds (Level 1). The related deferred compensation liability represents the fair value of the investment assets.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

12. Fair Value of Financial Instruments

 

The Company’s aluminum hedging agreements were based upon LME rates that are observable and quoted periodically over the full term of the agreement and are considered Level 2 items.

The Company does not have Level 3 assets or liabilities. Also, there were no transfers of assets or liabilities between Level 1 and Level 2 for any of the periods presented.

 

13. Other Liabilities

 

Other liabilities were summarized as follows:

 

     July 1,      Jan. 1,      July 3,  

In Thousands

   2012      2012      2011  

Accruals for executive benefit plans

   $ 97,634       $ 96,242       $ 93,423   

Other

     17,509         18,060         19,114   
  

 

 

    

 

 

    

 

 

 

Total other liabilities

   $ 115,143       $ 114,302       $ 112,537   
  

 

 

    

 

 

    

 

 

 

 

14. Commitments and Contingencies

The Company is a member of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative from which it is obligated to purchase 17.5 million cases of finished product on an annual basis through May 2014. The Company is also a member of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative from which it is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. See Note 19 to the consolidated financial statements for additional information concerning SAC and Southeastern.

The Company guarantees a portion of SAC’s and Southeastern’s debt. The amounts guaranteed were $37.8 million, $38.3 million and $41.1 million as of July 1, 2012, January 1, 2012 and July 3, 2011, respectively. The Company holds no assets as collateral against these guarantees, the fair value of which was immaterial. The guarantees relate to the debt of SAC and Southeastern, which resulted primarily from the purchase of production equipment and facilities. These guarantees expire at various dates through 2021. The members of both cooperatives consist solely of Coca-Cola bottlers. The Company does not anticipate either of these cooperatives will fail to fulfill its commitments. The Company further believes each of these cooperatives has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantees. In the event either of these cooperatives fails to fulfill its commitments under the related debt, the Company would be responsible for payments to the lenders up to the level of the guarantees. If these cooperatives had borrowed up to their aggregate borrowing capacity, the Company’s maximum exposure under these guarantees on July 1, 2012 would have been $23.9 million for SAC and $25.3 million for Southeastern and the Company’s maximum total exposure, including its equity investment, would have been $28.0 million for SAC and $44.8 million for Southeastern.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

14. Commitments and Contingencies

 

The Company has been purchasing plastic bottles from Southeastern and finished products from SAC for more than ten years and has never had to pay against these guarantees.

The Company has an equity ownership in each of the entities in addition to the guarantees of certain indebtedness and records its investment in each under the equity method. As of July 1, 2012, SAC had total assets of approximately $44 million and total debt of approximately $26 million. SAC had total revenues for YTD 2012 of approximately $91 million. As of July 1, 2012, Southeastern had total assets of approximately $371 million and total debt of approximately $167 million. Southeastern had total revenue for YTD 2012 of approximately $363 million.

The Company has standby letters of credit, primarily related to its property and casualty insurance programs. On July 1, 2012, these letters of credit totaled $20.8 million. The Company was required to maintain $4.5 million of restricted cash for letters of credit beginning in the second quarter of 2009 which was reduced to $3.5 million in the second quarter of 2010 and to $3.0 million in Q2 2011. The requirement to maintain restricted cash for these letters of credit was eliminated in the first quarter of 2012.

The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. The future payments related to these contractual arrangements as of July 1, 2012 amounted to $23.3 million and expire at various dates through 2020.

The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes the ultimate disposition of these matters will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.

The Company is subject to audit by tax authorities in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolved with the tax authorities or potentially through the courts. Management believes the Company has adequately provided for any assessments that are likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the consolidated financial statements.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

15. Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for YTD 2012 and YTD 2011 was 41.5% and 38.1%, respectively. The Company’s effective tax rate, as calculated by dividing income tax expense by the difference of income before income taxes minus net income attributable to noncontrolling interest, for YTD 2012 and YTD 2011 was 44.0% and 40.0%, respectively.

 

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

 

     First Half  

In Thousands

   2012     2011  

Statutory expense

   $ 10,161      $ 10,479   

State income taxes, net of federal effect

     1,257        1,305   

Valuation allowance adjustment

     774        0   

Noncontrolling interest – Piedmont

     (788     (626

Manufacturing deduction benefit

     (852     (867

Meals and entertainment

     602        442   

Adjustment for uncertain tax positions

     358        363   

Other, net

     525        239   
  

 

 

   

 

 

 

Income tax expense

   $ 12,037      $ 11,335   
  

 

 

   

 

 

 

As of July 1, 2012, the Company had $5.1 million of uncertain tax positions, including accrued interest, of which $2.6 million would affect the Company’s effective tax rate if recognized. As of January 1, 2012, the Company had $4.7 million of uncertain tax positions, including accrued interest, of which $2.3 million would affect the Company’s effective tax rate if recognized. As of July 3, 2011, the Company had $5.2 million of uncertain tax positions, including accrued interest, of which $2.8 million would affect the Company’s effective tax rate if recognized. While it is expected that the amount of uncertain tax positions may change in the next 12 months, the Company does not expect any change to have a significant impact on the consolidated financial statements.

The Company recognizes potential interest and penalties related to uncertain tax positions in income tax expense. As of July 1, 2012, January 1, 2012, and July 3, 2011, the Company had $.5 million, $.4 million and $.5 million, respectively, of accrued interest related to uncertain tax positions. Income tax expense included interest expense of approximately $.1 million in both YTD 2012 and YTD 2011.

Tax years from 2008 remain open to examination by the Internal Revenue Service, and various tax years from 1993 remain open to examination by certain state tax jurisdictions to which the Company is subject due to loss carryforwards.

The Company’s income tax assets and liabilities are subject to adjustment in future periods based on the Company’s ongoing evaluations of such assets and liabilities and new information that becomes available to the Company.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

16. Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of adjustments relative to the Company’s pension and postretirement medical benefit plans and foreign currency translation adjustments required for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.

 

A summary of accumulated other comprehensive loss for Q2 2012 and Q2 2011 is as follows:

 

     April 1,     Pre-tax     Tax     July 1,  

In Thousands

   2012     Activity     Effect     2012  

Net pension activity:

        

Actuarial loss

   $ (64,369   $ 694      $ (273   $ (63,948

Prior service costs

     (41     5        (2     (38

Net postretirement benefits activity:

        

Actuarial loss

     (20,872     612        (241     (20,501

Prior service costs

     5,021        (379     150        4,792   

Foreign currency translation adjustment

     5        2        (1     6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (80,256   $ 934      $ (367   $ (79,689
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     April 3,     Pre-tax     Tax     July 3,  

In Thousands

   2011     Activity     Effect     2011  

Net pension activity:

        

Actuarial loss

   $ (51,508   $ 518      $ (204   $ (51,194

Prior service costs

     (41     4        (1     (38

Net postretirement benefits activity:

        

Actuarial loss

     (17,554     530        (209     (17,233

Prior service costs

     6,032        (429     169        5,772   

Transition asset

     8        (5     2        5   

Foreign currency translation adjustment

     0        (2     1        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (63,063   $ 616      $ (242   $ (62,689
  

 

 

   

 

 

   

 

 

   

 

 

 

A summary of accumulated other comprehensive loss for YTD 2012 and YTD 2011 is as follows:

 

     Jan. 1,     Pre-tax     Tax     July 1,  

In Thousands

   2012     Activity     Effect     2012  

Net pension activity:

        

Actuarial loss

   $ (64,789   $ 1,387      $ (546   $ (63,948

Prior service costs

     (44     10        (4     (38

Net postretirement benefits activity:

        

Actuarial loss

     (21,244     1,225        (482     (20,501

Prior service costs

     5,251        (758     299        4,792   

Foreign currency translation adjustment

     6        0        0        6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (80,820   $ 1,864      $ (733   $ (79,689
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

16. Accumulated Other Comprehensive Loss

 

     Jan. 2,     Pre-tax     Tax     July 3,  

In Thousands

   2011     Activity     Effect     2011  

Net pension activity:

        

Actuarial loss

   $ (51,822   $ 1,036      $ (408   $ (51,194

Prior service costs

     (43     8        (3     (38

Net postretirement benefits activity:

        

Actuarial loss

     (17,875     1,060        (418     (17,233

Prior service costs

     6,292        (858     338        5,772   

Transition asset

     11        (10     4        5   

Foreign currency translation adjustment

     4        (8     3        (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (63,433   $ 1,228      $ (484   $ (62,689
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17. Capital Transactions

The Company has two classes of common stock outstanding, Common Stock and Class B Common Stock. The Common Stock is traded on the NASDAQ Global Select Marketsm under the symbol COKE. There is no established public trading market for the Class B Common Stock. Shares of the Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock at any time at the option of the holders of Class B Common Stock.

No cash dividend or dividend of property or stock other than stock of the Company, as specifically described in the Company’s certificate of incorporation, may be declared and paid on the Class B Common Stock unless an equal or greater dividend is declared and paid on the Common Stock. During YTD 2012 and YTD 2011, dividends of $.50 per share were declared and paid on both the Common Stock and Class B Common Stock.

Each share of Common Stock is entitled to one vote per share and each share of Class B Common Stock is entitled to 20 votes per share at all meetings of stockholders. Except as otherwise required by law, holders of the Common Stock and Class B Common Stock vote together as a single class on all matters brought before the Company’s stockholders. In the event of liquidation, there is no preference between the two classes of common stock.

On April 29, 2008, the stockholders of the Company approved a Performance Unit Award Agreement for J. Frank Harrison, III, the Company’s Chairman of the Board of Directors and Chief Executive Officer, consisting of 400,000 performance units (“Units”). Each Unit represents the right to receive one share of the Company’s Class B Common Stock, subject to certain terms and conditions. The Units are subject to vesting in annual increments over a ten-year period starting in fiscal year 2009. The number of Units that vest each year equals the product of 40,000 multiplied by the overall goal achievement factor (not to exceed 100%) under the Company’s Annual Bonus Plan.

Each annual 40,000 Unit tranche has an independent performance requirement as it is not established until the Company’s Annual Bonus Plan targets are approved each year by the Compensation Committee of the Board

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

17. Capital Transactions

 

of Directors. As a result, each 40,000 Unit tranche is considered to have its own service inception date, grant-date and requisite service period. The Company’s Annual Bonus Plan targets, which establish the performance requirements for the Performance Unit Award Agreement, are approved by the Compensation Committee of the Board of Directors in the first quarter of each year. The Performance Unit Award Agreement does not entitle Mr. Harrison, III to participate in dividends or voting rights until each installment has vested and the shares are issued. Mr. Harrison, III may satisfy tax withholding requirements in whole or in part by requiring the Company to settle in cash such number of Units otherwise payable in Class B Common Stock to meet the maximum statutory tax withholding requirements.

Compensation expense for the Performance Unit Award Agreement recognized in YTD 2012 was $1.3 million, which was based upon a share price of $64.28 on June 29, 2012. Compensation expense for the Performance Unit Award Agreement recognized in YTD 2011 was $1.3 million, which was based upon a share price of $67.33 on July 1, 2011.

On March 6, 2012 and March 8, 2011, the Compensation Committee determined that 40,000 shares of the Company’s Class B Common Stock should be issued in each year pursuant to a Performance Unit Award Agreement to J. Frank Harrison, III, in connection with his services in 2011 and 2010, respectively, as Chairman of the Board of Directors and Chief Executive Officer of the Company. As permitted under the terms of the Performance Unit Award Agreement, 17,680 of such shares were settled in cash in each year to satisfy tax withholding obligations in connection with the vesting of the performance units.

The increase in the total number of shares outstanding in YTD 2012 and YTD 2011 was due to the issuance of the 22,320 shares of Class B Common Stock related to the Performance Unit Award Agreement in each year.

 

18. Benefit Plans

Pension Plans

Retirement benefits under the two Company-sponsored pension plans are based on the employee’s length of service, average compensation over the five consecutive years that give the highest average compensation and average Social Security taxable wage base during the 35-year period before reaching Social Security retirement age. Contributions to the plans are based on the projected unit credit actuarial funding method and are limited to the amounts currently deductible for income tax purposes. On February 22, 2006, the Board of Directors of the Company approved an amendment to the principal Company-sponsored pension plan to cease further benefit accruals under the plan effective June 30, 2006.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

18. Benefit Plans

 

 

The components of net periodic pension cost were as follows:

 

     Second Quarter     First Half  

In Thousands

   2012     2011     2012     2011  

Service cost

   $ 27      $ 25      $ 55      $ 50   

Interest cost

     3,123        3,085        6,247        6,170   

Expected return on plan assets

     (2,972     (2,922     (5,945     (5,844

Amortization of prior service cost

     5        4        10        8   

Recognized net actuarial loss

     694        518        1,387        1,036   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 877      $ 710      $ 1,754      $ 1,420   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $15.7 million to its Company-sponsored pension plans during YTD 2012. The Company has made additional payments of $2.1 million subsequent to the end of Q2 2012.

Postretirement Benefits

The Company provides postretirement benefits for a portion of its current employees. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service. The Company does not pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.

 

The components of net periodic postretirement benefit cost were as follows:

 

     Second Quarter     First Half  

In Thousands

   2012     2011     2012     2011  

Service cost

   $ 316      $ 242      $ 632      $ 484   

Interest cost

     782        708        1,563        1,416   

Amortization of unrecognized transitional assets

     0        (5     0        (10

Recognized net actuarial loss

     612        530        1,225        1,060   

Amortization of prior service cost

     (379     (429     (758     (858
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic postretirement benefit cost

   $ 1,331      $ 1,046      $ 2,662      $ 2,092   
  

 

 

   

 

 

   

 

 

   

 

 

 

401(k) Savings Plan

The Company provides a 401(k) Savings Plan for substantially all of its full-time employees who are not part of collective bargaining agreements. The Company matched the first 3% of participants’ contributions for 2011. Based on the Company’s financial results, the Company decided to increase the matching contributions an additional 2% for the entire year of 2011. The Company made this additional contribution payment accrued in 2011 in the first quarter of 2012.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

18. Benefit Plans

 

During the first quarter of 2012, the Company decided to change the Company’s matching from fixed to discretionary and no longer automatically matches the first 3% of participants’ contributions. The Company maintains the option to make matching contributions for eligible participants of up to 5% based on the Company’s financial results for 2012 and future years.

The total expense for this benefit, using the Company’s best estimate of the 5% matching contributions in YTD 2012, was $4.3 million in both YTD 2012 and YTD 2011.

Multi-Employer Benefits

The Company entered into a new agreement in the third quarter of 2008 after one of its collective bargaining contracts expired in July 2008. The new agreement allowed the Company to freeze its liability to Southeast and Southwest Areas Pension Plan (“Central States”), a multi-employer defined benefit pension fund, while preserving the pension benefits previously earned by the employees. As a result of freezing the Company’s liability to Central States, the Company recorded a charge of $13.6 million in 2008. The Company paid $3.0 million in 2008 to the Southern States Savings and Retirement Plan (“Southern States”) under the agreement to freeze the Central States liability. The remaining $10.6 million was the present value amount, using a discount rate of 7% that will be paid to Central States over the next 20 years and was recorded in other liabilities. Including the $3.0 million paid to Southern States in 2008, the Company has paid $6.4 million from the fourth quarter of 2008 through Q2 2012 and will pay approximately $1 million annually over the next 17 years.

 

19. Related Party Transactions

The Company’s business consists primarily of the production, marketing and distribution of nonalcoholic beverages of The Coca-Cola Company, which is the sole owner of the secret formulas under which the primary components (either concentrate or syrup) of its soft drink products are manufactured. As of July 1, 2012, The Coca-Cola Company had a 26.9% interest in the Company’s total outstanding Common Stock, representing 5.1% of the total voting power of the Company’s Common Stock and Class B Common Stock voting together as a single class. The Coca-Cola Company does not own any shares of the Company’s Class B Common Stock.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

19. Related Party Transactions

 

 

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

 

    First Half  

In Millions

  2012     2011  

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

  $ 209.5      $ 201.8   

Marketing funding support payments to the Company

    (21.5     (23.0
 

 

 

   

 

 

 

Payments by the Company net of marketing funding support

  $ 188.0      $ 178.8   

Payments by the Company for customer marketing programs

  $ 29.4      $ 25.5   

Payments by the Company for cold drink equipment parts

    4.9        4.4   

Fountain delivery and equipment repair fees paid to the Company

    6.1        5.6   

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

    1.8        2.0   

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

    1.5        1.0   

The Company has a production arrangement with Coca-Cola Refreshments USA Inc. (“CCR”) to buy and sell finished products at cost. CCR is a wholly-owned subsidiary of The Coca-Cola Company. Sales to CCR under this arrangement were $33.6 million and $28.8 million in YTD 2012 and YTD 2011, respectively. Purchases from CCR under this arrangement were $15.0 million and $11.4 million in YTD 2012 and YTD 2011, respectively. In addition, CCR distributes one of the Company’s own brands (Tum-E Yummies). Total sales to CCR for this brand were $12.0 million and $8.1 million in YTD 2012 and YTD 2011, respectively.

Along with all other Coca-Cola bottlers in the United States, the Company is a member in Coca-Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”), which was formed in 2003 for the purposes of facilitating various procurement functions and distributing certain specified beverage products of The Coca-Cola Company with the intention of enhancing the efficiency and competitiveness of the Coca-Cola bottling system in the United States. CCBSS negotiates the procurement for the majority of the Company’s raw materials (excluding concentrate). The Company pays an administrative fee to CCBSS for its services. Administrative fees to CCBSS for its services were $.2 million in both YTD 2012 and YTD 2011. Amounts due from CCBSS for rebates on raw materials were $3.5 million, $5.2 million and $4.6 million as of July 1, 2012, January 1, 2012 and July 3, 2011, respectively. CCR is also a member of CCBSS.

The Company is a member of SAC, a manufacturing cooperative. SAC sells finished products to the Company and Piedmont at cost. Purchases from SAC by the Company and Piedmont for finished products were $70.8 million and $68.7 million in YTD 2012 and YTD 2011, respectively. The Company also manages the operations of SAC pursuant to a management agreement. Management fees earned from SAC were $.8 million in both YTD 2012 and YTD 2011. The Company has also guaranteed a portion of debt for SAC. Such guarantee amounted to $23.9 million as of July 1, 2012. The Company’s equity investment in SAC was $4.1 million, $4.1 million and $6.8 million as of July 1, 2012, January 1, 2012 and July 3, 2011, respectively.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

19. Related Party Transactions

 

The Company is a shareholder in two entities from which it purchases substantially all its requirements for plastic bottles. Net purchases from these entities were $42.1 million in YTD 2012 and $41.2 million in YTD 2011. In connection with its participation in one of these entities, Southeastern, the Company has guaranteed a portion of the entity’s debt. Such guarantee amounted to $13.9 million as of July 1, 2012. The Company’s equity investment in one of these entities, Southeastern, was $19.5 million, $17.9 million and $17.9 million as of July 1, 2012, January 1, 2012 and July 3, 2011, respectively.

The Company holds no assets as collateral against SAC or Southeastern guarantees, the fair value of which is immaterial.

The Company monitors its investments in cooperatives and would be required to write down its investment if an impairment is identified and the Company determined it to be other than temporary. No impairment of the Company’s investments in cooperatives has been identified as of July 1, 2012 nor was there any impairment in 2011.

The Company leases from Harrison Limited Partnership One (“HLP”) the Snyder Production Center (“SPC”) and an adjacent sales facility, which are located in Charlotte, North Carolina. HLP is directly and indirectly owned by trusts of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, and Deborah H. Everhart, a director of the Company, are trustees and beneficiaries. Morgan H. Everett, a director of the Company, is a permissible, discretionary beneficiary of the trusts that directly or indirectly own HLP. The lease expires on December 31, 2020. The principal balance outstanding under this capital lease as of July 1, 2012 was $25.0 million. Rental payments related to this lease were $1.7 million in both YTD 2012 and YTD 2011.

The Company leases from Beacon Investment Corporation (“Beacon”) the Company’s headquarters office facility and an adjacent office facility. The lease expires on December 31, 2021. Beacon’s sole shareholder is J. Frank Harrison, III. The principal balance outstanding under this capital lease as of July 1, 2012 was $26.1 million. Rental payments related to the lease were $2.0 million in both YTD 2012 and YTD 2011.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

20. Net Sales by Product Category

 

Net sales by product category were as follows:

 

     Second Quarter      First Half  

In Thousands

   2012      2011      2012      2011  

Bottle/can sales:

           

Sparkling beverages (including energy products)

   $ 281,644       $ 281,058       $ 538,361       $ 524,086   

Still beverages

     66,907         64,068         117,811         112,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bottle/can sales

     348,551         345,126         656,172         636,427   

Other sales:

           

Sales to other Coca-Cola bottlers

     39,230         41,998         72,695         78,098   

Post-mix and other

     42,912         35,769         79,011         67,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other sales

     82,142         77,767         151,706         146,095   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 430,693       $ 422,893       $ 807,878       $ 782,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

21. Net Income Per Share

 

The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method:

 

    Second Quarter     First Half  

In Thousands (Except Per Share Data)

  2012     2011     2012     2011  

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

       

Net income attributable to Coca-Cola Bottling Co. Consolidated

  $ 10,747      $ 11,101      $ 15,312      $ 17,014   

Less dividends:

       

Common Stock

    1,785        1,785        3,571        3,571   

Class B Common Stock

    522        517        1,039        1,028   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total undistributed earnings

  $ 8,440      $ 8,799      $ 10,702      $ 12,415   
 

 

 

   

 

 

   

 

 

   

 

 

 

Common Stock undistributed earnings – basic

  $ 6,530      $ 6,824      $ 8,287      $ 9,636   

Class B Common Stock undistributed earnings – basic

    1,910        1,975        2,415        2,779   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total undistributed earnings – basic

  $ 8,440      $ 8,799      $ 10,702      $ 12,415   
 

 

 

   

 

 

   

 

 

   

 

 

 

Common Stock undistributed earnings – diluted

  $ 6,502      $ 6,794      $ 8,251      $ 9,595   

Class B Common Stock undistributed earnings – diluted

    1,938        2,005        2,451        2,820   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total undistributed earnings – diluted

  $ 8,440      $ 8,799      $ 10,702      $ 12,415   
 

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for basic net income per Common Stock share:

       

Dividends on Common Stock

  $ 1,785      $ 1,785      $ 3,571      $ 3,571   

Common Stock undistributed earnings – basic

    6,530        6,824        8,287        9,636   
 

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for basic net income per Common Stock share

  $ 8,315      $ 8,609      $ 11,858      $ 13,207   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Dividends on Class B Common Stock

  $ 522      $ 517      $ 1,039      $ 1,028   

Class B Common Stock undistributed earnings – basic

    1,910        1,975        2,415        2,779   
 

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for basic net income per Class B Common Stock share

  $ 2,432      $ 2,492      $ 3,454      $ 3,807   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

21. Net Income Per Share

 

    Second Quarter     First Half  

In Thousands (Except Per Share Data)

  2012     2011     2012     2011  

Numerator for diluted net income per Common Stock share:

       

Dividends on Common Stock

  $ 1,785      $ 1,785      $ 3,571      $ 3,571   

Dividends on Class B Common Stock assumed converted to Common Stock

    522        517        1,039        1,028   

Common Stock undistributed earnings – diluted

    8,440        8,799        10,702        12,415   
 

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for diluted net income per Common Stock share

  $ 10,747      $ 11,101      $ 15,312      $ 17,014   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Dividends on Class B Common Stock

  $ 522      $ 517      $ 1,039      $ 1,028   

Class B Common Stock undistributed earnings – diluted

    1,938        2,005        2,451        2,820   
 

 

 

   

 

 

   

 

 

   

 

 

 

Numerator for diluted net income per Class B Common Stock share

  $ 2,460      $ 2,522      $ 3,490      $ 3,848   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

21. Net Income Per Share

 

    Second Quarter     First Half  

In Thousands (Except Per Share Data)

  2012     2011     2012     2011  

Denominator for basic net income per Common Stock and Class B Common Stock share:

       

Common Stock weighted average shares outstanding – basic

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

Class B Common Stock weighted average shares outstanding – basic

    2,089        2,067        2,081        2,059   

Denominator for diluted net income per Common Stock and Class B Common Stock share:

       

Common Stock weighted average shares outstanding – diluted (assumes conversion of Class B Common Stock to Common Stock)

    9,270        9,248        9,262        9,240   

Class B Common Stock weighted average shares outstanding – diluted

    2,129        2,107        2,121        2,099   

Basic net income per share:

       

Common Stock

  $ 1.16      $ 1.21      $ 1.66      $ 1.85   
 

 

 

   

 

 

   

 

 

   

 

 

 

Class B Common Stock

  $ 1.16      $ 1.21      $ 1.66      $ 1.85   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share:

       

Common Stock

  $ 1.16      $ 1.20      $ 1.65      $ 1.84   
 

 

 

   

 

 

   

 

 

   

 

 

 

Class B Common Stock

  $ 1.16      $ 1.20      $ 1.65      $ 1.83   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

NOTES TO TABLE

 

(1) For purposes of the diluted net income per share computation for Common Stock, all shares of Class B Common Stock are assumed to be converted; therefore, 100% of undistributed earnings is allocated to Common Stock.
(2) For purposes of the diluted net income per share computation for Class B Common Stock, weighted average shares of Class B Common Stock are assumed to be outstanding for the entire period and not converted.
(3) Denominator for diluted net income per share for Common Stock and Class B Common Stock includes the dilutive effect of shares relative to the Performance Unit Award.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

22. Risks and Uncertainties

Approximately 88% of the Company’s YTD 2012 bottle/can volume to retail customers are products of The Coca-Cola Company, which is the sole supplier of these products or of the concentrates or syrups required to manufacture these products. The remaining 12% of the Company’s YTD 2012 bottle/can volume to retail customers are products of other beverage companies and the Company. The Company has beverage agreements under which it has various requirements to meet. Failure to meet the requirements of these beverage agreements could result in the loss of distribution rights for the respective product.

The Company’s products are sold and distributed directly by its employees to retail stores and other outlets. During YTD 2012 and YTD 2011, approximately 68% and 69%, respectively, of the Company’s bottle/can volume to retail customers was sold for future consumption, while the remaining bottle/can volume to retail customers of approximately 32% and 31%, respectively, was sold for immediate consumption. The Company’s largest customers, Wal-Mart Stores, Inc. and Food Lion, LLC, accounted for approximately 22% and 8%, respectively, of the Company’s total bottle/can volume to retail customers in YTD 2012; and accounted for approximately 21% and 9%, respectively, of the Company’s total bottle/can volume to retail customers in YTD 2011. Wal-Mart Stores, Inc. accounted for approximately 15% of the Company’s total net sales during both YTD 2012 and YTD 2011.

The Company obtains all of its aluminum cans from two domestic suppliers. The Company currently obtains all of its plastic bottles from two domestic entities. See Note 14 and Note 19 to the consolidated financial statements for additional information.

The Company is exposed to price risk on such commodities as aluminum, corn and resin which affects the cost of raw materials used in the production of finished products. The Company both produces and procures these finished products. Examples of the raw materials affected are aluminum cans and plastic bottles used for packaging and high fructose corn syrup used as a product ingredient. Further, the Company is exposed to commodity price risk on crude oil which impacts the Company’s cost of fuel used in the movement and delivery of the Company’s products. The Company participates in commodity hedging and risk mitigation programs administered both by CCBSS and by the Company. In addition, there is no limit on the price The Coca-Cola Company and other beverage companies can charge for concentrate.

Certain liabilities of the Company are subject to risk due to changes in both long-term and short-term interest rates. These liabilities include floating rate debt, retirement benefit obligations and the Company’s pension liability.

Approximately 7% of the Company’s labor force is covered by collective bargaining agreements. Two collective bargaining agreements covering approximately 6% of the Company’s employees expired during 2011 and the Company entered into new agreements in 2011. One collective bargaining agreement covering approximately .4% of the Company’s employees expired in July 2012 and the Company entered into a new agreement during the third quarter of 2012. No additional collective bargaining agreements will expire the remainder of 2012.

 

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Table of Contents

Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

23. Supplemental Disclosures of Cash Flow Information

 

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

 

     First Half  

In Thousands

   2012     2011  

Accounts receivable, trade, net

   $ (15,191   $ (29,441

Accounts receivable from The Coca-Cola Company

     (13,862     (14,072

Accounts receivable, other

     4,447        6,439   

Inventories

     (10,618     (10,287

Prepaid expenses and other current assets

     38        940   

Accounts payable, trade

     5,341        11,981   

Accounts payable to The Coca-Cola Company

     14,627        23,932   

Other accrued liabilities

     10,120        (3,983

Accrued compensation

     (8,623     (10,008

Accrued interest payable

     (341     6   
  

 

 

   

 

 

 

Increase in current assets less current liabilities

   $ (14,062   $ (24,493
  

 

 

   

 

 

 

Non-cash activity

Additions to property, plant and equipment of $1.7 million and $3.1 million have been accrued but not paid and are recorded in accounts payable, trade as of July 1, 2012 and July 3, 2011, respectively.

 

24. New Accounting Pronouncements

 

Recently Adopted Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance relative to the test for goodwill impairment. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the requirements of this new guidance to have a material impact on the Company’s consolidated financial statements.

 

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Coca-Cola Bottling Co. Consolidated

Notes to Consolidated Financial Statements (Unaudited)

 

24. New Accounting Pronouncements

 

Recently Issued Pronouncements

In December 2011, the FASB issued new guidance that is intended to enhance current disclosures on offsetting financial assets and liabilities. The new guidance requires an entity to disclose both gross and net information about financial instruments eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new guidance are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not expect the requirements of this new guidance to have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued new guidance relative to the test for indefinite-lived intangibles impairment. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The new guidance is effective for annual and interim indefinite-lived intangibles impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

 

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“M,D&A”) of Coca-Cola Bottling Co. Consolidated (the “Company”) should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes to the consolidated financial statements. M,D&A includes the following sections:

 

   

Our Business and the Nonalcoholic Beverage Industry – a general description of the Company’s business and the nonalcoholic beverage industry.

 

   

Areas of Emphasis – a summary of the Company’s key priorities.

 

   

Overview of Operations and Financial Condition – a summary of key information and trends concerning the financial results for the second quarter of 2012 (“Q2 2012”) and the first half of 2012 (“YTD 2012”) and changes from the second quarter of 2011 (“Q2 2011”) and the first half of 2011 (“YTD 2011”).

 

   

Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements – a discussion of accounting policies that are most important to the portrayal of the Company’s financial condition and results of operations and that require critical judgments and estimates and the expected impact of new accounting pronouncements.

 

   

Results of Operations – an analysis of the Company’s results of operations for Q2 2012 and YTD 2012 compared to Q2 2011 and YTD 2011, respectively.

 

   

Financial Condition – an analysis of the Company’s financial condition as of the end of Q2 2012 compared to year-end 2011 and the end of Q2 2011 as presented in the consolidated financial statements.

 

   

Liquidity and Capital Resources – an analysis of capital resources, cash sources and uses, investing activities, financing activities, off-balance sheet arrangements, aggregate contractual obligations and hedging activities.

 

   

Cautionary Information Regarding Forward-Looking Statements.

The consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries including Piedmont Coca-Cola Bottling Partnership (“Piedmont”). The noncontrolling interest primarily consists of The Coca-Cola Company’s interest in Piedmont, which was 22.7% for all periods presented.

Our Business and the Nonalcoholic Beverage Industry

The Company produces, markets and distributes nonalcoholic beverages, primarily products of The Coca-Cola Company, which include some of the most recognized and popular beverage brands in the world. The Company is the largest independent bottler of products of The Coca-Cola Company in the United States, distributing these products in eleven states primarily in the Southeast. The Company also distributes several other beverage brands. These product offerings include both sparkling and still beverages. Sparkling beverages are carbonated beverages including energy products. Still beverages are noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks. The Company had full year net sales of $1.6 billion in 2011.

 

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The nonalcoholic beverage market is highly competitive. The Company’s competitors include bottlers and distributors of nationally and regionally advertised and marketed products and private label products. In each region in which the Company operates, between 85% and 95% of sparkling beverage sales in bottles, cans and other containers are accounted for by the Company and its principal competitors, which in each region includes the local bottler of Pepsi-Cola and, in some regions, the local bottler of Dr Pepper, Royal Crown and/or 7-Up products. The sparkling beverage category (including energy products) represents 82% of the Company’s YTD 2012 bottle/can net sales.

The principal methods of competition in the nonalcoholic beverage industry are point-of-sale merchandising, new product introductions, new vending and dispensing equipment, packaging changes, pricing, price promotions, product quality, retail space management, customer service, frequency of distribution and advertising. The Company believes it is competitive in its territories with respect to each of these methods.

Historically, operating results for the second quarter and the first half of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters versus the first and fourth quarters of the fiscal year. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During YTD 2012, the Company did not experience any triggering events or changes in circumstances that indicated the carrying amounts of the Company’s franchise rights or goodwill exceeded fair values. As such, the Company has not recognized any impairments of franchise rights or goodwill.

Net sales by product category were as follows:

 

     Second Quarter      First Half  

In Thousands

   2012      2011      2012      2011  

Bottle/can sales:

           

Sparkling beverages (including energy products)

   $ 281,644       $ 281,058       $ 538,361       $ 524,086   

Still beverages

     66,907         64,068         117,811         112,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bottle/can sales

     348,551         345,126         656,172         636,427   

Other sales:

           

Sales to other Coca-Cola bottlers

     39,230         41,998         72,695         78,098   

Post-mix and other

     42,912         35,769         79,011         67,997   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other sales

     82,142         77,767         151,706         146,095   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 430,693       $ 422,893       $ 807,878       $ 782,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Areas of Emphasis

Key priorities for the Company include revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity.

Revenue Management

Revenue management requires a strategy which reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based decision-making. Revenue management has been and continues to be a key performance driver which has significant impact on the Company’s results of operations.

Product Innovation and Beverage Portfolio Expansion

Innovation of both new brands and packages has been and will continue to be critical to the Company’s overall revenue. During 2008, the Company tested the 16-ounce bottle/24-ounce bottle package for many of the Company’s sparkling beverages in select convenience stores and introduced it companywide in 2009. New packaging introductions included the 1.25-liter bottle in 2011, the 7.5-ounce sleek can in 2010 and the 2-liter contour bottle for Coca-Cola products during 2009.

The Company has invested in its own brand portfolio with products such as Tum-E Yummies, a vitamin C enhanced flavored drink, Country Breeze tea, Bean & Body coffee beverages and Fuel in a Bottle power shots. These brands enable the Company to participate in strong growth categories and capitalize on distribution channels that may include the Company’s traditional Coca-Cola franchise territory as well as third party distributors outside the Company’s traditional Coca-Cola franchise territory. While the growth prospects of Company-owned or exclusively licensed brands appear promising, the cost of developing, marketing and distributing these brands is anticipated to be significant as well.

Distribution Cost Management

Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs amounted to $100.1 million and $95.5 million in YTD 2012 and YTD 2011, respectively. Over the past several years, the Company has focused on converting its distribution system from a conventional routing system to a predictive system. This conversion to a predictive system has allowed the Company to more efficiently handle an increasing number of products and packages. In addition, the Company has closed a number of smaller sales distribution centers over the past several years reducing its fixed warehouse-related costs.

The Company has three primary delivery systems for its current business:

 

   

bulk delivery for large supermarkets, mass merchandisers and club stores;

 

   

advanced sales delivery for convenience stores, drug stores, small supermarkets and certain on-premise accounts; and

 

   

full service delivery for its full service vending customers.

Distribution cost management will continue to be a key area of emphasis for the Company.

 

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Productivity

A key driver in the Company’s selling, delivery and administrative (“S,D&A”) expense management relates to ongoing improvements in labor productivity and asset productivity.

Overview of Operations and Financial Condition

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

Q2 2012 and YTD 2012

 

   

a $.1 million and a $.8 million additional income tax expense to increase the valuation allowance for certain deferred tax assets of the Company in Q2 2012 and YTD 2012, respectively.

Q2 2011 and YTD 2011

 

   

a $25,000 and a $.2 million pre-tax unfavorable mark-to-market adjustment to S,D&A expenses related to the Company’s 2011 fuel hedging program in Q2 2011 and YTD 2011, respectively; and

 

   

a $1.7 million and a $2.2 million pre-tax unfavorable mark-to-market adjustment to cost of sales related to the Company’s 2011 aluminum hedging program in Q2 2011 and YTD 2011.

The following overview provides a summary of key information concerning the Company’s financial results for Q2 2012 and YTD 2012 compared to Q2 2011 and YTD 2011.

 

     Second Quarter            %  

In Thousands (Except Per Share Data)

   2012      2011      Change     Change  

Net sales

   $ 430,693       $ 422,893       $ 7,800        1.8   

Cost of sales

     257,280         257,320         (40     —     

Gross margin

     173,413         165,573         7,840        4.7   

S,D&A expenses

     144,864         137,153         7,711        5.6   

Income from operations

     28,549         28,420         129        0.5   

Interest expense, net

     9,079         9,042         37        0.4   

Income before taxes

     19,470         19,378         92        0.5   

Income tax expense

     7,570         7,394         176        2.4   

Net income

     11,900         11,984         (84     (0.7

Net income attributable to the Company

     10,747         11,101         (354     (3.2

Basic net income per share:

          

Common Stock

   $ 1.16       $ 1.21       $ (.05     (4.1

Class B Common Stock

   $ 1.16       $ 1.21       $ (.05     (4.1

Diluted net income per share:

          

Common Stock

   $ 1.16       $ 1.20       $ (.04     (3.3

Class B Common Stock

   $ 1.16       $ 1.20       $ (.04     (3.3

 

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     First Half            %  

In Thousands (Except Per Share Data)

   2012      2011      Change     Change  

Net sales

   $ 807,878       $ 782,522       $ 25,356        3.2   

Cost of sales

     478,871         467,788         11,083        2.4   

Gross margin

     329,007         314,734         14,273        4.5   

S,D&A expenses

     281,825         267,135         14,690        5.5   

Income from operations

     47,182         47,599         (417     (0.9

Interest expense, net

     18,150         17,811         339        1.9   

Income before taxes

     29,032         29,788         (756     (2.5

Income tax expense

     12,037         11,335         702        6.2   

Net income

     16,995         18,453         (1,458     (7.9

Net income attributable to the Company

     15,312         17,014         (1,702     (10.0

Basic net income per share:

          

Common Stock

   $ 1.66       $ 1.85       $ (.19     (10.3

Class B Common Stock

   $ 1.66       $ 1.85       $ (.19     (10.3

Diluted net income per share:

          

Common Stock

   $ 1.65       $ 1.84       $ (.19     (10.3

Class B Common Stock

   $ 1.65       $ 1.83       $ (.18     (9.8

The Company’s net sales increased 1.8% in Q2 2012 compared to Q2 2011. The Company’s net sales increased 3.2% in YTD 2012 compared to YTD 2011. The increases in net sales were primarily due to a 3.6% and a 2.3% increase in bottle/can sales price per unit in Q2 2012 and YTD 2012 compared to Q2 2011 and YTD 2011, respectively. The Q2 2012 increase in bottle/can sales price per unit was primarily due to increases in sales price per unit in all products except water products. The YTD 2012 increase in bottle/can sales price per unit was primarily due to increases in sales price in sparkling beverages except energy products. The increases in bottle/can sales price per unit were partially offset by decreases in sales volume to other Coca-Cola bottlers and a 2.6% decrease in bottle/can sales volume in Q2 2012 compared to Q2 2011. The decrease in bottle/can volume in Q2 2012 was primarily due to a volume decrease in sparkling beverages except energy products. Bottle/can volume increased .7% in YTD 2012 compared to YTD 2011.

Gross margin dollars increased 4.7% in Q2 2012 compared to Q2 2011. The Company’s gross margin percentage increased to 40.3% in Q2 2012 from 39.2% in Q2 2011. Gross margin dollars increased 4.5% in YTD 2012 compared to YTD 2011. The Company’s gross margin percentage increased to 40.7% in YTD 2012 from 40.2% in YTD 2011. The increases in gross margin percentage were primarily due to higher sales price per unit for bottle/can volume and lower sales volume to other Coca-Cola bottlers which have a lower gross margin percentage partially offset by higher costs of raw materials and increased purchases of full goods.

The following inputs represent a substantial portion of the Company’s total cost of goods sold: (1) sweeteners, (2) packaging materials, including plastic bottles and aluminum cans, and (3) full goods purchased from other vendors. The Company anticipates that the costs of some of the underlying commodities related to these inputs, particularly corn, will continue to face upward pressure and gross margins on all categories of products will be lower throughout the remainder of 2012 compared to 2011, unless rising commodity costs can be offset with price increases.

S,D&A expenses increased 5.6% in Q2 2012 from Q2 2011. The increase in S,D&A expenses in Q2 2012 from Q2 2011 was attributable to increased employee payroll costs including benefit costs and increased marketing expense. S,D&A expenses increased 5.5% in YTD 2012 from YTD 2011. The increase in S,D&A expenses in YTD 2012 from YTD 2011 was attributable to increased employee payroll costs including benefit costs, increased fuel costs and increased marketing expense.

 

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Net interest expense increased 1.9% in YTD 2012 compared to YTD 2011. The increase was primarily due to the Company entering into two new capital leases in the first quarter of 2011. Net interest expense was unchanged from Q2 2011 to Q2 2012. The Company’s overall weighted average interest rate on its debt and capital lease obligations increased to 6.1% during YTD 2012 from 6.0% during YTD 2011.

Net debt and capital lease obligations were summarized as follows:

 

     July 1,      Jan. 1,      July 3,  

In Thousands

   2012      2012      2011  

Debt

   $ 523,301       $ 523,219       $ 523,139   

Capital lease obligations

     72,002         74,054         76,002   
  

 

 

    

 

 

    

 

 

 

Total debt and capital lease obligations

     595,303         597,273         599,141   

Less: Cash and cash equivalents

     78,328         93,758         29,169   
  

 

 

    

 

 

    

 

 

 

Total net debt and capital lease obligations (1)

   $ 516,975       $ 503,515       $ 569,972   
  

 

 

    

 

 

    

 

 

 

 

(1)

The non-GAAP measure “Total net debt and capital lease obligations” is used to provide investors with additional information which management believes is helpful in the evaluation of the Company’s capital structure and financial leverage. This non-GAAP financial information is not presented elsewhere in this report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements

Critical Accounting Policies and Estimates

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for the year ended January 1, 2012 a discussion of the Company’s most critical accounting policies, which are those most important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

The Company did not make changes in any critical accounting policies during YTD 2012. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is made.

New Accounting Pronouncements

Recently Adopted Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance relative to the test for goodwill impairment. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying

 

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amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the requirements of this new guidance to have a material impact on the Company’s consolidated financial statements.

Recently Issued Pronouncements

In December 2011, the FASB issued new guidance that is intended to enhance current disclosures on offsetting financial assets and liabilities. The new guidance requires an entity to disclose both gross and net information about financial instruments eligible for offset on the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. The provisions of the new guidance are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not expect the requirements of this new guidance to have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued new guidance relative to the test for indefinite-lived intangibles impairment. The new guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. The new guidance is effective for annual and interim indefinite-lived intangibles impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is currently evaluating the impact of adoption on its consolidated financial statements.

Results of Operations

Q2 2012 Compared to Q2 2011 and YTD 2012 Compared to YTD 2011

Net Sales

Net sales increased $7.8 million, or 1.8%, to $430.7 million in Q2 2012 compared to $422.9 million in Q2 2011. Net sales increased $25.4 million, or 3.2%, to $807.9 million in YTD 2012 compared to $782.5 million in YTD 2011.

 

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The increase in net sales for Q2 2012 compared to Q2 2011 was principally attributable to the following:

 

Q2 2012

   

Attributable to:

(In Millions)      
$ 12.3     

3.6% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in all products except water products

  (8.8  

2.6% decrease in bottle/can volume to retail customers primarily due to a volume decrease in sparkling beverages, except energy products, partially offset by a volume increase in still beverages

  (6.4  

15.2% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages

  3.6     

10.1% increase in sale price per unit of sales to other Coca-Cola bottlers primarily due to an increase in sales price per unit in all product categories

  3.4     

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

  0.8     

3.8% increase in post-mix sales price per unit

  0.8     

Increase in data analysis and consulting services

  0.6     

Increase in supply chain and logistics solutions consulting

  0.6     

2.9% increase in post-mix sales volume

  0.9     

Other

 

 

   
$ 7.8     

Total increase in net sales

 

 

   

The increase in net sales for YTD 2012 compared to YTD 2011 was principally attributable to the following:

 

YTD 2012

   

Attributable to:

(In Millions)      
$ 15.0     

2.3% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products

  (10.4  

13.3% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages

  5.0     

7.3% increase in sale price per unit of sales to other Coca-Cola bottlers primarily due to an increase in sales price per unit in all product categories

  4.7     

.7% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages partially offset by a volume decrease in sparkling beverages

  4.3     

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

  1.6     

3.8% increase in post-mix sales price per unit

  1.3     

Increase in data analysis and consulting services

  1.3     

Increase in supply chain and logistics solutions consulting

  1.2     

2.9% increase in post-mix sales volume

  1.4     

Other

 

 

   
$ 25.4     

Total increase in net sales

 

 

   

In YTD 2012, the Company’s bottle/can sales to retail customers accounted for 81.2% of the Company’s total net sales. Bottle/can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the volume generated in each package and the channels in which those packages are sold.

 

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Product category sales volume in Q2 2012 and Q2 2011 and YTD 2012 and YTD 2011 as a percentage of total bottle/can sales volume and the percentage change by product category was as follows:

 

     Bottle/Can Sales Volume     Bottle/Can Sales Volume  

Product Category

   Q2 2012     Q2 2011     % Increase/Decrease  

Sparkling beverages (including energy
products)

     81.4     82.9     (4.3

Still beverages

     18.6     17.1     6.1   
  

 

 

   

 

 

   

Total bottle/can sales volume

     100.0     100.0     (2.6
  

 

 

   

 

 

   

 

     Bottle/Can Sales Volume     Bottle/Can Sales Volume  

Product Category

   YTD 2012     YTD 2011     % Increase/Decrease  

Sparkling beverages (including energy products)

     83.0     83.9     (0.4

Still beverages

     17.0     16.1     6.5   
  

 

 

   

 

 

   

Total bottle/can sales volume

     100.0     100.0     0.7   
  

 

 

   

 

 

   

The Company’s products are sold and distributed through various channels. They include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During YTD 2012, approximately 68% of the Company’s bottle/can volume was sold for future consumption, while the remaining bottle/can volume of approximately 32% was sold for immediate consumption. During YTD 2011, approximately 69% of the Company’s bottle/can volume was sold for future consumption, while the remaining bottle/can volume of approximately 31% was sold for immediate consumption. The Company’s largest customer, Wal-Mart Stores, Inc., accounted for approximately 22% of the Company’s total bottle/can volume during YTD 2012. Wal-Mart Stores, Inc. accounted for approximately 21% of the Company’s total bottle/can volume during YTD 2011. The Company’s second largest customer, Food Lion, LLC, accounted for approximately 8% of the Company’s total bottle/can volume during YTD 2012. Food Lion, LLC accounted for approximately 9% of the Company’s total bottle/can volume during YTD 2011. All of the Company’s beverage sales are to customers in the United States.

The Company recorded delivery fees in net sales of $3.5 million and $3.6 million in YTD 2012 and YTD 2011, respectively. These fees are used to offset a portion of the Company’s delivery and handling costs.

Cost of Sales

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

Cost of sales was unchanged at $257.3 million in Q2 2012 and Q2 2011. Cost of sales increased 2.4%, or $11.1 million, to $478.9 million in YTD 2012 compared to $467.8 million in YTD 2011.

 

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The changes in cost of sales for Q2 2012 compared to Q2 2011 were principally attributable to the following:

 

Q2 2012

   

Attributable to:

(In Millions)      
$ 10.0     

Increase in raw material costs and increased purchases of full goods

  (6.3  

15.2% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages

  (5.2  

2.6% decrease in bottle/can volume to retail customers primarily due to a volume decrease in sparkling beverages, except energy products, partially offset by a volume increase in still beverages

  1.6     

Decrease in marketing funding support received primarily from The Coca-Cola Company

  1.2     

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

  (0.9  

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

  0.4     

2.9% increase in post-mix sales volume

  (0.8  

Other

 

 

   
$ 0.0     

Total increase in cost of sales

 

 

   

The increase in cost of sales for YTD 2012 compared to YTD 2011 was principally attributable to the following:

 

YTD 2012

   

Attributable to:

(In Millions)      
$ 15.0     

Increase in raw material costs and increased purchases of full goods

  (10.1  

13.3% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages

  2.8     

.7% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages partially offset by a volume decrease in sparkling beverages

  1.8     

Decrease in marketing funding support received primarily from The Coca-Cola Company

  1.8     

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

  (0.9  

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

  0.8     

2.9% increase in post-mix sales volume

  (0.1  

Other

 

 

   
$ 11.1     

Total increase in cost of sales

 

 

   

The following inputs represent a substantial portion of the Company’s total cost of goods sold: (1) sweeteners, (2) packaging materials, including plastic bottles and aluminum cans, and (3) full goods purchased from other vendors. The Company anticipates that the costs of some of the underlying commodities related to these inputs, particularly corn, will continue to face upward pressure and gross margins on all categories of products will be lower throughout the remainder of 2012 compared to 2011, unless rising commodity costs can be offset with price increases.

The Company entered into an agreement (the “Incidence Pricing Agreement”) in 2008 with The Coca-Cola Company to test an incidence-based concentrate pricing model for 2008 for all Coca-Cola Trademark Beverages and Allied Beverages for which the Company purchases concentrate from The Coca-Cola Company. During the term of the Incidence Pricing Agreement, the pricing of the concentrates for the Coca-Cola Trademark Beverages and Allied Beverages is governed by the Incidence Pricing Agreement rather than the Cola and Allied Beverage Agreements. The concentrate price The Coca-Cola Company charges under the Incidence Pricing Agreement is impacted by a number of factors including the Company’s pricing of finished products, the channels in which the finished products are sold and package mix. The Coca-Cola Company must give the Company at least 90 days written notice before changing the price the Company pays for the concentrate. The Incidence Pricing Agreement has been extended twice and will remain in effect for the purchase of concentrate through December 31, 2013.

 

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The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca-Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the local territories served by the Company. The Company also benefits from national advertising programs conducted by The Coca-Cola Company and other beverage companies. Certain of the marketing expenditures by The Coca-Cola Company and other beverage companies are made pursuant to annual arrangements.

Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to customers for marketing programs, was $13.9 million for Q2 2012 compared to $15.5 million for Q2 2011. Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to customers for marketing programs, was $26.3 million for YTD 2012 compared to $28.1 million for YTD 2011.

Gross Margin

Gross margin dollars increased 4.7%, or $7.8 million, to $173.4 million in Q2 2012 compared to $165.6 million in Q2 2011. Gross margin as a percentage of net sales increased to 40.3% for Q2 2012 from 39.2% for Q2 2011. Gross margin dollars increased 4.5%, or $14.3 million, to $329.0 million in YTD 2012 compared to $314.7 million in YTD 2011. Gross margin as a percentage of net sales increased to 40.7% for YTD 2012 from 40.2% for YTD 2011.

 

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The increase in gross margin dollars for Q2 2012 compared to Q2 2011 was principally attributable to the following:

 

Q2 2012

   

Attributable to:

(In Millions)      
$ 12.3     

3.6% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in all products except water products

  (10.0  

Increase in raw material costs and increased purchases of full goods

  3.6     

10.1% increase in sales price per unit of sales to other Coca-Cola bottlers primarily due to an increase in sales price per unit in all product categories

  (3.6  

2.6% decrease in bottle/can volume to retail customers primarily due to a volume decrease in sparkling beverages, except energy products, partially offset by a volume increase in still beverages

  2.2     

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

  (1.6  

Decrease in marketing funding support received primarily from The Coca-Cola Company

  0.9     

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

  0.8     

3.8% increase in post-mix sales price per unit

  0.8     

Increase in data analysis and consulting services

  0.6     

Increase in supply chain and logistics solutions consulting

  0.2     

2.9% increase in post-mix sales volume

  (0.1  

15.2% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages

  1.7     

Other

 

 

   
$ 7.8     

Total increase in gross margin

 

 

   

The increase in gross margin dollars for YTD 2012 compared to YTD 2011 was principally attributable to the following:

 

YTD 2012

   

Attributable to:

(In Millions)      
$ 15.0     

2.3% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products

  (15.0  

Increase in raw material costs and increased purchases of full goods

  5.0     

7.3% increase in sales price per unit of sales to other Coca-Cola bottlers primarily due to an increase in sales price per unit in all product categories

  2.5     

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

  (1.8  

Decrease in marketing funding support received primarily from The Coca-Cola Company

  1.9     

.7% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages partially offset by a volume decrease in sparkling beverages

  1.6     

3.8% increase in post-mix sales price per unit

  1.3     

Increase in data analysis and consulting services

  1.3     

Increase in supply chain and logistics solutions consulting

  0.9     

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

  0.4     

2.9% increase in post-mix sales volume

  (0.3  

13.3% decrease in sales volume to other Coca-Cola bottler primarily due to volume decreases in sparkling beverages

  1.5     

Other

 

 

   
$ 14.3     

Total increase in gross margin

 

 

   

 

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The increases in gross margin percentage were primarily due to higher sales price per unit for bottle/can volume and lower sales volume to other Coca-Cola bottlers which have a lower gross margin percentage partially offset by higher costs of raw materials and increased purchases of full goods.

The Company’s gross margins may not be comparable to other peer companies, since some of them include all costs related to their distribution network in cost of sales. The Company includes a portion of these costs in S,D&A expenses.

S,D&A Expenses

S,D&A expenses include the following: sales management labor costs, distribution costs from sales distribution centers to customer locations, sales distribution center warehouse costs, depreciation expense related to sales centers, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangibles and administrative support labor and operating costs such as treasury, legal, information services, accounting, internal control services, human resources and executive management costs.

S,D&A expenses increased by $7.7 million, or 5.6%, to $144.9 million in Q2 2012 from $137.2 million in Q2 2011. S,D&A expenses as a percentage of net sales increased from 32.4% in Q2 2011 to 33.6% in Q2 2012. S,D&A expenses increased by $14.7 million, or 5.5%, to $281.8 million in YTD 2012 from $267.1 million in YTD 2011. S,D&A expenses as a percentage of net sales increased from 34.1% in YTD 2011 to 34.9% in YTD 2012.

The increase in S,D&A expenses for Q2 2012 compared to Q2 2011 was principally attributable to the following:

 

Q2 2012

   

Attributable to:

(In Millions)      
$ 2.9     

Increase in employee salaries and wages including bonus and incentive expense

  1.5     

Increase in marketing expense primarily due to various marketing programs

  1.2     

Increase in employee benefit costs primarily due to increased medical insurance expense (active and retiree)

  (0.9  

Decrease in property and casualty (auto, general and workers’ compensation) insurance

  0.7     

Increase in professional fees

  2.3     

Other

 

 

   
$ 7.7     

Total increase in S,D&A expenses

 

 

   

 

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The increase in S,D&A expenses for YTD 2012 compared to YTD 2011 was principally attributable to the following:

 

YTD 2012

   

Attributable to:

(In Millions)      
$ 5.0     

Increase in employee salaries and wages including bonus and incentive expense

  2.8     

Increase in marketing expense primarily due to various marketing programs

  2.3     

Increase in employee benefit costs

  0.9     

Increase in depreciation expense primarily due to increased capital spending (software for internal use)

  (0.7  

Decrease in property and casualty (auto, general and workers’ compensation) insurance

  0.6     

Increase in professional fees

  0.4     

Increase in fuel costs

  3.4     

Other

 

 

   
$ 14.7     

Total increase in S,D&A expenses

 

 

   

Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations are included in S,D&A expenses and totaled $100.1 million and $95.5 million in YTD 2012 and YTD 2011, respectively.

The Company’s expense recorded in S,D&A expenses related to the two Company-sponsored pension plans increased by $.1 million from $.6 million in Q2 2011 to $.7 million in Q2 2012 and by $.3 million from $1.2 million in YTD 2011 to $1.5 million in YTD 2012.

The Company provides a 401(k) Savings Plan for substantially all of the Company’s full-time employees who are not part of collective bargaining agreements. The Company matched the first 3% of its employees’ contributions for 2011. The Company maintained the option to increase the matching contributions an additional 2%, for a total of 5%, based on the financial results for 2011. The 2% matching contributions were accrued in each quarter during 2011 for a total expense of $2.8 million. Based on the Company’s financial results, the Company decided to increase the matching contributions for the additional 2% for the entire year of 2011. The Company made this additional contribution payment for 2011 in the first quarter of 2012.

During the first quarter of 2012, the Company decided to change the Company’s matching from fixed to discretionary and no longer automatically matches the first 3% of participants’ contributions. The Company maintains the option to make matching contributions for eligible participants of up to 5% based on the Company’s financial results for 2012 and future years. The total costs for this benefit in YTD 2012 and YTD 2011, using the Company’s best estimate of 5% matching contributions in YTD 2012, were $3.8 million and $3.7 million, respectively.

Interest Expense

Net interest expense was unchanged from Q2 2011 to Q2 2012. Net interest expense increased 1.9% in YTD 2012 compared to YTD 2011. The increase was primarily due to the Company entering into two new capital leases in the first quarter of 2011. The Company’s overall weighted average interest rate on its debt and capital lease obligations increased to 6.1% during YTD 2012 from 6.0% during YTD 2011.

 

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Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for YTD 2012 and YTD 2011 was 41.5% and 38.1%, respectively. The Company’s effective tax rate, as calculated by dividing income tax expense by the difference of income before income taxes minus net income attributable to the noncontrolling interest, for YTD 2012 and YTD 2011 was 44.0% and 40.0%, respectively.

In the first quarter of 2012, the Company increased its valuation allowance by $.7 million. The net effect of the adjustment was an increase to income tax expense. The increase of the valuation allowance was due mainly to the Company’s assessment of its ability to use certain net operating loss carryforwards. The increase in the valuation allowance in 2012 is the primary driver of the increase in the effective tax rate in 2012 as compared to 2011. The Company’s effective tax rate for the remainder of 2012 is dependent upon the results of operations and may change if the results in 2012 are different from current expectations.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $1.7 million in YTD 2012 compared to $1.4 million in YTD 2011 primarily related to the portion of Piedmont owned by The Coca-Cola Company.

Financial Condition

Total assets increased to $1.37 billion at July 1, 2012, from $1.36 billion at January 1, 2012 primarily due to increases in accounts receivables and inventories offset by a decrease in cash and cash equivalents.

Net working capital, defined as current assets less current liabilities, increased by $2.7 million to $12.0 million at July 1, 2012 from January 1, 2012 and decreased by $87.3 million at July 1, 2012 from July 3, 2011.

Significant changes in net working capital from January 1, 2012 were as follows:

 

 

A decrease in cash and cash equivalents of $12.4 million due to pension payments, bonus payments and other incentive payments.

 

 

An increase in accounts receivable, trade of $15.2 million primarily due to normal seasonal increase in sales.

 

 

An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $13.9 million and $14.6 million, respectively, primarily due to the timing of payments.

 

 

An increase in inventories of $10.6 million primarily due to normal seasonal increase in sales.

 

 

An increase in other accrued liabilities of $10.1 million primarily due to the timing of payments and an increase in income tax payable.

 

 

A decrease in accrued compensation of $8.8 million primarily due to the payment of bonuses in March 2012 and a lower bonus accrual in 2012.

Significant changes in net working capital from July 3, 2011 were as follows:

 

 

An increase in cash and cash equivalents of $52.2 million primarily due to funds from operations and the timing of payments.

 

 

A decrease in accounts receivable, trade of $5.5 million primarily due to decreased sales volume to other Coca-Cola bottlers and the timing of payments from customers.

 

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A decrease in accounts receivable from and a decrease in accounts payable to The Coca-Cola Company of $3.9 million and $.2 million, respectively, primarily due to the timing of payments.

 

 

An increase in current portion of long-term debt of $120.0 million due to the reclassification of current maturities of long-term debt of $120 million from long-term debt. This is the portion of the $150 million of Senior Notes due November 2012 which is expected to be paid from available cash plus amounts to be borrowed from the uncommitted line of credit. The remaining $30 million of Senior Notes due 2012 is expected to be paid from amounts to be borrowed on the $200 million five-year unsecured revolving credit facility discussed below.

 

 

A decrease in accounts payable, trade of $3.5 million due to timing of payments.

 

 

An increase in other accrued liabilities of $11.6 million primarily due to the timing of payments.

Debt and capital lease obligations were $595.3 million as of July 1, 2012 compared to $597.3 million as of January 1, 2012 and $599.1 million as of July 3, 2011. Debt and capital lease obligations as of July 1, 2012 included $72.0 million of capital lease obligations related primarily to Company facilities.

Liquidity and Capital Resources

Capital Resources

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

As of July 1, 2012, the Company had all $200 million available under a new $200 million five-year unsecured revolving credit facility (“$200 million facility”) to meet its cash requirements. The $200 million facility has a scheduled maturity date of September 21, 2016 and up to $25 million is available for the issuance of letters of credit. Borrowings will bear interest at a floating base rate or a floating Eurodollar rate plus an interest rate spread, dependent on the Company’s credit rating at the time of borrowing. The Company must pay an annual facility fee of .175% of the lenders’ aggregate commitments under the facility. The $200 million facility contains two financial covenants: a cash flow/fixed charges ratio (“fixed charges coverage ratio”) and funded indebtedness/cash flow ratio (“operating cash flow ratio”), each as defined in the credit agreement. The fixed charges coverage ratio requires the Company to maintain a consolidated cash flow to fixed charges ratio of 1.5 to 1.0 or higher. The operating cash flow ratio requires the Company to maintain a debt to operating cash flow ratio of 6.0 to 1.0 or lower. The Company is currently in compliance with these covenants. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources. The Company currently believes that all of the banks participating in the $200 million facility have the ability to and will meet any funding requests from the Company.

The Company has $150 million of senior notes outstanding that mature in November 2012. The Company expects to use a combination of available cash on hand, borrowings on a $20 million uncommitted line of credit (described below) and borrowings under the $200 million facility to repay these notes when due. The Company has classified $30 million of these senior notes due November 2012 as long-term, representing the portion the Company expects to be paid from borrowings under the $200 million facility.

 

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The Company has obtained the majority of its long-term financing, other than capital leases, from public markets. As of July 1, 2012, $523.3 million of the Company’s total outstanding balance of debt and capital lease obligations of $595.3 million was financed through publicly offered debt. The Company had capital lease obligations of $72.0 million as of July 1, 2012. There were no amounts outstanding on either the new $200 million facility or on the Company’s $20 million uncommitted line of credit (described below) as of July 1, 2012.

Cash Sources and Uses

The primary sources of cash for the Company have been cash provided by operating activities. The primary uses of cash have been for capital expenditures, the payment of debt and capital lease obligations, dividend payments, income tax payments and pension payments.

A summary of activity for YTD 2012 and YTD 2011 follows:

 

     First Half  

In Millions

   2012     2011  

Cash Sources

    

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

   $ 36.8      $ 30.2   

Proceeds from the reduction of restricted cash

     3.0        .5   

Proceeds from the sale of property, plant and equipment

     .2        .1   
  

 

 

   

 

 

 

Total cash sources

   $ 40.0      $ 30.8   
  

 

 

   

 

 

 

Cash Uses

    

Capital expenditures

   $ 25.5      $ 32.2   

Payment of debt and capital lease obligations

     2.3        1.9   

Dividends

     4.6        4.6   

Income tax payments

     4.3        9.2   

Pension payments

     15.7        2.5   

Other

     —          .1   
  

 

 

   

 

 

 

Total cash uses

   $ 52.4      $ 50.5   
  

 

 

   

 

 

 

Decrease in cash

   $ (12.4   $ (19.7
  

 

 

   

 

 

 

Investing Activities

Additions to property, plant and equipment during YTD 2012 were $21.0 million of which $1.7 million were accrued in accounts payable, trade as unpaid. This compared to $24.9 million in total additions to property, plant and equipment during YTD 2011 of which $3.1 million were accrued in accounts payable, trade as unpaid. Capital expenditures during YTD 2012 were funded with cash flows from operations. The Company anticipates total additions to property, plant and equipment in fiscal year 2012 will be in the range of $60 million to $70 million. Leasing is used for certain capital additions when considered cost effective relative to other sources of capital. The Company currently leases its corporate headquarters, two production facilities and several sales distribution facilities and administrative facilities.

Financing Activities

As of July 1, 2012, the Company had all $200 million available under the $200 million facility to meet its short-term borrowing requirements. The $200 million facility has a scheduled maturity date of September 21, 2016 and up to $25 million is available for the issuance of letters of credit. Borrowings under the

 

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agreement will bear interest at a floating base rate or a floating Eurodollar rate plus an interest rate spread, dependent on the Company’s credit rating at the time of borrowing. The Company must pay an annual facility fee of .175% of the lenders’ aggregate commitments under the facility. The $200 million facility contains two financial covenants: a cash flow/fixed charges ratio (“fixed charges coverage ratio”) and a funded indebtedness/cash flow ratio (“operating cash flow ratio”), each as defined in the credit agreement. The fixed charges coverage ratio requires the Company to maintain a consolidated cash flow to fixed charges ratio of 1.5 to 1.0 or higher. The operating cash flow ratio requires the Company to maintain a debt to operating cash flow ratio of 6.0 to 1.0 or lower. The Company is currently in compliance with these covenants. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources. The Company currently believes that all of the banks participating in the Company’s new $200 million facility have the ability to and will meet any funding requests from the Company. On July 1, 2012, January 1, 2012 and July 3, 2011, the Company had no outstanding borrowings on either $200 million facility.

The Company has $150 million of senior notes which mature in November 2012. The Company expects to use a combination of available cash on hand, borrowings on the $20 million uncommitted line of credit and borrowings under the $200 million facility to repay the notes when due. The Company has classified $30 million of these senior notes due November 2012 as long-term, representing the portion the Company expects to be paid using the $200 million facility. The Company’s next maturity of outstanding long-term debt is $100 million of senior notes due April 2015.

On February 10, 2010, the Company entered into an agreement for an uncommitted line of credit. Under this agreement, the Company may borrow up to a total of $20 million for periods of 7 days, 30 days, 60 days or 90 days at the discretion of the participating bank. The Company had no outstanding borrowings under the uncommitted line of credit on July 1, 2012, January 1, 2012 and July 3, 2011.

All of the outstanding debt on the Company’s balance sheet has been issued by the Company with none having been issued by any of the Company’s subsidiaries. There are no guarantees of the Company’s debt. The Company or its subsidiaries have entered into seven capital leases.

At July 1, 2012, the Company’s credit ratings were as follows:

 

     Long-Term Debt

Standard & Poor’s

   BBB

Moody’s

   Baa2

The Company’s credit ratings are reviewed periodically by the respective rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material impact on the Company’s financial position or results of operations. There were no changes in these credit ratings from the prior year and the credit ratings are currently stable.

The indentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts.

 

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Off-Balance Sheet Arrangements

The Company is a member of two manufacturing cooperatives and has guaranteed $37.8 million of debt for these entities as of July 1, 2012. In addition, the Company has an equity ownership in each of the entities. The members of both cooperatives consist solely of Coca-Cola bottlers. The Company does not anticipate either of these cooperatives will fail to fulfill their commitments. The Company further believes each of these cooperatives has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss from the Company’s guarantees. As of July 1, 2012, the Company’s maximum exposure, if the entities borrowed up to their borrowing capacity, would have been $72.8 million including the Company’s equity interests. See Note 14 and Note 19 to the consolidated financial statements for additional information about these entities.

Aggregate Contractual Obligations

The following table summarizes the Company’s contractual obligations and commercial commitments as of July 1, 2012:

 

     Payments Due by Period  
            July 2012-      July 2013-      July 2015-      After  

In Thousands

   Total      June 2013      June 2015      June 2017      June 2017  

Contractual obligations:

              

Total debt, net of interest

   $ 523,301       $ 150,000       $ 100,000       $ 164,757       $ 108,544   

Capital lease obligations, net of interest

     72,002         4,975         11,447         13,553         42,027   

Estimated interest on long-term debt and capital lease obligations (1)

     130,471         29,125         49,558         30,024         21,764   

Purchase obligations (2)

     183,176         95,570         87,606         —           —     

Other long-term liabilities (3)

     121,363         11,378         16,649         12,451         80,885   

Operating leases

     29,384         4,542         6,794         4,764         13,284   

Long-term contractual arrangements (4)

     23,289         7,485         10,739         3,500         1,565   

Postretirement obligations

     65,167         3,966         6,412         7,376         47,413   

Purchase orders (5)

     37,481         37,481         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 1,185,634       $ 344,522       $ 289,205       $ 236,425       $ 315,482   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes interest payments based on contractual terms and current interest rates for variable rate debt.
(2) Represents an estimate of the Company’s obligation to purchase 17.5 million cases of finished product on an annual basis through May 2014 from South Atlantic Canners, a manufacturing cooperative.
(3) Includes obligations under executive benefit plans, the liability to exit from a multi-employer pension plan and other long-term liabilities.
(4) Includes contractual arrangements with certain prestige properties, athletics venues and other locations, and other long-term marketing commitments.
(5) Purchase orders include commitments in which a written purchase order has been issued to a vendor, but the goods have not been received or the services have not been performed.

The Company has $5.1 million of uncertain tax positions including accrued interest, as of July 1, 2012 (excluded from other long-term liabilities in the table above because the Company is uncertain as to if or when such amounts will be recognized) of which $2.6 million would affect the Company’s effective tax rate if recognized. While it is expected that the amount of uncertain tax positions may change in the next 12 months, the Company does not expect any change to have a significant impact on the consolidated financial statements. See Note 15 to the consolidated financial statements for additional information.

 

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The Company is a member of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative, from which the Company i