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 September 27, 1998
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Commission File Number 0-9286
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COCA-COLA BOTTLING CO. CONSOLIDATED
(Exact name of registrant as specified in its charter)
Delaware 56-0950585
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1900 Rexford Road, Charlotte, North Carolina 28211
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(Address of principal executive offices) (Zip Code)
(704) 551-4400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 2, 1998
----- -------------------------------
Common Stock, $1 Par Value 7,045,047
Class B Common Stock, $1 Par Value 1,319,800
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Thousands (Except Share Data)
Sept. 27, Dec. 28, Sept. 28,
1998 1997 1997
ASSETS --------- -------- ---------
Current Assets:
Cash ................................................ $ 5,944 $ 4,427 $ 3,801
Accounts receivable, trade, less allowance for
doubtful accounts of $529, $513 and $418 ........... 60,839 55,258 52,834
Accounts receivable from The Coca-Cola Company ...... 13,870 4,690 12,000
Due from Piedmont Coca-Cola Bottling Partnership .... 2,009 2,903
Accounts receivable, other .......................... 6,818 8,776 8,029
Inventories ......................................... 44,207 38,738 36,772
Prepaid expenses and other current assets ........... 15,463 12,674 10,498
-------- -------- --------
Total current assets .............................. 147,141 126,572 126,837
-------- -------- --------
Property, plant and equipment, less accumulated
depreciation of $189,258, $175,766 and $168,499 .... 257,483 250,904 250,572
Investment in Piedmont Coca-Cola Bottling Partnership 64,047 63,326 64,580
Other assets ........................................ 50,298 43,138 44,434
Identifiable intangible assets, less accumulated
amortization of $113,303, $105,334 and $102,849 .... 254,977 231,034 233,435
Excess of cost over fair value of net assets of
businesses acquired, less accumulated
amortization of $30,278, $28,560 and $27,987 ....... 61,341 63,059 63,631
-------- -------- --------
Total ............................................... $835,287 $778,033 $783,489
======== ======== ========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
In Thousands (Except Share Data)
Sept. 27, Dec. 28, Sept. 28,
1998 1997 1997
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Portion of long-term debt payable within one year $ 30,205 $ 12,000 $ 12,030
Accounts payable and accrued liabilities .......... 78,287 71,583 64,314
Accounts payable to The Coca-Cola Company ......... 5,726 4,108 6,222
Due to Piedmont Coca-Cola Bottling Partnership .... 1,733
Accrued compensation .............................. 8,090 5,075 4,453
Accrued interest payable .......................... 9,295 14,038 8,997
--------- --------- ---------
Total current liabilities ....................... 133,336 106,804 96,016
Deferred income taxes ............................. 119,446 111,594 111,206
Deferred credits .................................. 5,405 7,139 7,933
Other liabilities ................................. 57,281 49,434 47,769
Long-term debt .................................... 502,898 493,789 508,689
--------- --------- ---------
Total liabilities ............................... 818,366 768,760 771,613
--------- --------- ---------
Shareholders' Equity:
Convertible Preferred Stock, $100 par value:
Authorized-50,000 shares; Issued-None
Nonconvertible Preferred Stock, $100 par value:
Authorized-50,000 shares; Issued-None
Preferred Stock, $.01 par value:
Authorized-20,000,000 shares; Issued-None
Common Stock, $1 par value:
Authorized - 30,000,000 shares;
Issued -10,107,421 shares ........................ 10,107 10,107 10,107
Class B Common Stock, $1 par value:
Authorized - 10,000,000 shares;
Issued -1,947,914 shares ......................... 1,948 1,948 1,948
Class C Common Stock, $1 par value:
Authorized-20,000,000 shares; Issued-None
Capital in excess of par value .................... 96,800 103,074 105,165
Accumulated deficit ............................... (30,680) (44,602) (43,986)
Minimum pension liability adjustment .............. (104)
--------- --------- ---------
78,175 70,527 73,130
Less-Treasury stock, at cost:
Common - 3,062,374 shares ........................ 60,845 60,845 60,845
Class B Common-628,114 shares .................... 409 409 409
--------- --------- ---------
Total shareholders' equity ...................... 16,921 9,273 11,876
--------- --------- ---------
Total ............................................. $ 835,287 $ 778,033 $ 783,489
========= ========= =========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
In Thousands (Except Per Share Data)
Third Quarter First Nine Months
----------------- -----------------
1998 1997 1998 1997
---- ----- ----- ----
Net sales (includes sales to Piedmont of
$21,979, $15,638, $52,881 and $41,714) ..... $ 248,533 $ 219,079 $ 693,279 $ 605,648
Cost of products sold, excluding depreciation
shown below (includes $17,088, $11,966,
$41,544 and $31,975 related to sales to
Piedmont) .................................. 143,081 124,966 398,515 338,809
------- ------- ------- -------
Gross margin ................................ 105,452 94,113 294,764 266,839
------- ------ ------- -------
Selling expenses, excluding depreciation
shown below ................................ 53,553 47,465 153,299 134,843
General and administrative expenses ......... 17,177 14,503 50,698 43,283
Depreciation expense ........................ 9,325 8,526 27,121 24,947
Amortization of goodwill and intangibles .... 3,302 3,086 9,839 9,241
------- ------- ------- -------
Income from operations ...................... 22,095 20,533 53,807 54,525
Interest expense ............................ 10,723 9,541 29,069 28,050
Other income (expense), net ................. (611) (440) (2,964) (1,225)
------- ------- ------- -------
Income before income taxes .................. 10,761 10,552 21,774 25,250
Federal and state income taxes .............. 3,766 3,915 7,852 9,368
------- ------- ------- -------
Net income .................................. $ 6,995 $ 6,637 $ 13,922 $ 15,882
======== ======== ======== =========
Basic net income per share .................. $ .84 $ .79 $ 1.66 $ 1.89
Diluted net income per share ................ $ .82 $ .78 $ 1.64 $ 1.87
Weighted average number of common
shares outstanding ......................... 8,365 8,365 8,365 8,422
Weighted average number of common
shares outstanding-assuming dilution ....... 8,499 8,467 8,496 8,514
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
In Thousands
Capital Minimum
Class B in Pension
Common Common Excess of Accumulated Liability Treasury
Stock Stock Par Value Deficit Adjustment Stock
----- ----- --------- ------- ---------- -----
Balance on
December 29, 1996 $ 10,107 $ 1,948 $111,439 $(59,868) $ (104) $ 41,253
Net income ........ 15,882
Cash dividends
paid: Common ..... (6,274)
Purchase of
Common Stock ..... 20,001
-------- -------- -------- -------- -------- --------
Balance on
September 28, 1997 $ 10,107 $ 1,948 $105,165 $(43,986) $ (104) $ 61,254
======== ======== ======== ======== ======== ========
Balance on
December 28, 1997 $ 10,107 $ 1,948 $103,074 $(44,602) $ -- $ 61,254
Net income ........ 13,922
Cash dividends
paid: Common ..... (6,274)
-------- -------- -------- -------- -------- --------
Balance on
September 27, 1998 $ 10,107 $ 1,948 $ 96,800 $(30,680) $ -- $ 61,254
======== ======== ======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
In Thousands
First Nine Months
-----------------
1998 1997
--------- ----------
Cash Flows from Operating Activities
Net income .................................................. $ 13,922 $ 15,882
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation expense ...................................... 27,121 24,947
Amortization of goodwill and intangibles .................. 9,839 9,241
Deferred income taxes ..................................... 7,852 2,803
Losses on sale of property, plant and equipment ........... 1,964 997
Amortization of debt costs ................................ 445 455
Undistributed earnings of Piedmont Coca-Cola .............. (721) (118)
Bottling Partnership
Increase in current assets less current liabilities ....... (9,889) (10,976)
Increase in other noncurrent assets ....................... (7,562) (9,207)
Increase in other noncurrent liabilities .................. 6,113 3,270
Other ..................................................... 83 3,015
-------- --------
Total adjustments ........................................... 35,245 24,427
-------- --------
Net cash provided by operating activities ................... 49,167 40,309
-------- --------
Cash Flows from Financing Activities
Proceeds from issuance of long-term debt .................... 9,139 69,461
Increase in current portion of long-term debt ............... 18,205 11,925
Payments on long-term debt .................................. (30) (226)
Purchase of Common Stock .................................... (20,001)
Cash dividends paid ......................................... (6,274) (6,274)
Other ....................................................... (41) (1,166)
-------- --------
Net cash provided by financing activities ................... 20,999 53,719
-------- --------
Cash Flows from Investing Activities
Additions to property, plant and equipment .................. (34,639) (90,076)
Proceeds from the sale of property, plant and equipment ..... 755 742
Acquisitions of companies, net of cash acquired ............. (34,765) (3,834)
-------- --------
Net cash used in investing activities ....................... (68,649) (93,168)
-------- --------
Net increase in cash ........................................ 1,517 860
Cash at beginning of period ................................. 4,427 2,941
-------- --------
Cash at end of period ....................................... $ 5,944 $ 3,801
======== ========
See Accompanying Notes to Consolidated Financial Statements
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
1. Accounting Policies
The consolidated financial statements include the accounts of Coca-Cola Bottling
Co. Consolidated and its majority owned subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated.
The information contained in the financial statements is unaudited. The
statements reflect all adjustments which, in the opinion of management, are
necessary for a fair statement of the results for the interim periods presented.
All such adjustments are of a normal, recurring nature.
The accounting policies followed in the presentation of interim financial
results are the same as those followed on an annual basis. These policies are
presented in Note 1 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 28, 1997 filed
with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to current year
classifications.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
2. Summarized Income Statement Data of Piedmont Coca-Cola Bottling Partnership
On July 2, 1993, the Company and The Coca-Cola Company formed Piedmont Coca-Cola
Bottling Partnership ("Piedmont") to distribute and market soft drink products
primarily in portions of North Carolina and South Carolina. The Company and The
Coca-Cola Company, through their respective subsidiaries, each beneficially own
a 50% interest in Piedmont. The Company provides a portion of the soft drink
products to Piedmont at cost and receives a fee for managing the business of
Piedmont pursuant to a management agreement. Summarized income statement data
for Piedmont is as follows:
Third Quarter First Nine Months
------------- -----------------
In Thousands 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Net sales $74,415 $65,912 $202,941 $181,780
Gross margin 32,552 27,998 88,818 79,944
Income from operations 5,207 3,105 10,850 9,024
Net income 2,096 362 1,442 236
3. Inventories
Inventories are summarized as follows:
Sept. 27, Dec. 28, Sept. 28,
In Thousands 1998 1997 1997
- --------------------------------------------------------------------------------
Finished products $29,720 $21,542 $21,164
Manufacturing materials 10,543 14,171 9,691
Plastic pallets and other 3,944 3,025 5,917
----- ----- -----
Total inventories $44,207 $38,738 $36,772
======= ======= =======
The amounts included above for inventories valued by the LIFO method were
greater than replacement or current cost by approximately $2.8 million, $2.8
million and $2.1 million on September 27, 1998, December 28, 1997 and September
28, 1997, respectively, as a result of inventory premiums associated with
certain acquisitions.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
4. Long-Term Debt
Long-term debt is summarized as follows:
Fixed(F) or
Interest Variable Interest Sept. 27, Dec. 28, Sept. 28,
In Thousands Maturity Rate (V) Rate Paid 1998 1997 1997
- -----------------------------------------------------------------------------------------------------------------------
Lines of Credit ....................... 2002 5.59% - V Varies $ 48,034 $ 10,300 $ 25,200
5.81%
Term Loan Agreement ................... 2004 6.30% V Varies 85,000 85,000 85,000
Term Loan Agreement ................... 2005 6.30% V Varies 85,000 85,000 85,000
Medium-Term Notes ..................... 1998 6.28% V Quarterly 10,000 10,000
Medium-Term Notes ..................... 1998 10.05% F Semi- 2,000 2,000
annually
Medium-Term Notes ..................... 1999 7.99% F Semi- 28,585 28,585 28,585
annually
Medium-Term Notes ..................... 2000 10.00% F Semi- 25,500 25,500 25,500
annually
Medium-Term Notes ..................... 2002 8.56% F Semi- 47,000 47,000 47,000
annually
Debentures ............................ 2007 6.85% F Semi- 100,000 100,000 100,000
annually
Debentures ............................ 2009 7.20% F Semi- 100,000 100,000 100,000
annually
Other notes payable ................... 1998 - 6.00% - F Varies 13,984 12,404 12,434
2001 10.00%
-------- ------- -------
533,103 505,789 520,719
Less: Portion of long-term
debt payable within one year 30,205 12,000 12,030
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt $502,898 $493,789 $508,689
- -----------------------------------------------------------------------------------------------------------------------
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
4. Long-Term Debt (cont.)
It is the Company's intent to renew its lines of credit and borrowings under
the revolving credit facility as they mature. To the extent that these
borrowings do not exceed the amount available under the Company's $170
million revolving credit facility, they are classified as noncurrent
liabilities.
On October 12, 1994, a $400 million shelf registration for debt and equity
securities filed with the Securities and Exchange Commission became effective
and the securities thereunder became available for issuance. On November 1,
1995, the Company issued $100 million of 6.85% debentures due 2007 pursuant
to such registration. In July 1997, the Company issued $100 million of 7.20%
debentures due 2009. The net proceeds from these issuances were used for
refinancing a portion of existing public debt with the remainder used to
repay other debt.
On November 20, 1995, the Company entered into a $170 million term loan
agreement with $85 million maturing in July 2004 and $85 million maturing in
July 2005. This loan was used to repay two $60 million loans previously
entered into by the Company and other bank debt.
The Company has guaranteed a portion of the debt for two cooperatives in
which the Company is a member. The amounts guaranteed were $31.1 million,
$31.1 million and $31.5 million as of September 27, 1998, December 28, 1997
and September 28, 1997, respectively.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
5. Derivative Financial Instruments
The Company uses derivative financial instruments to modify risk from
interest rate fluctuations in its underlying debt. The Company has
historically altered its fixed/floating interest rate mix based upon
anticipated operating cash flows of the Company relative to its debt level
and the Company's ability to absorb increases in interest rates. These
derivative financial instruments are not used for trading purposes.
The Company had weighted average interest rates for the debt portfolio of
approximately 7.0%, 7.1% and 7.1% as of September 27, 1998, December 28, 1997
and September 28, 1997, respectively. The Company's overall weighted average
interest rate on its long-term debt increased from an average of 6.9% during
the first nine months of 1997 to an average of 7.0% during the first nine
months of 1998. After taking into account the effect of all of the interest
rate swap activities, approximately 25%, 50% and 49% of the total debt
portfolio was subject to changes in short-term interest rates as of September
27, 1998, December 28, 1997 and September 28, 1997, respectively.
A rate increase of 1% on the floating rate component of the Company's debt
would have increased interest expense for the first nine months of 1998 by
approximately $1.5 million and net income for the first nine months ended
September 27, 1998 would have been reduced by approximately $.9 million.
Derivative financial instruments were as follows:
Sept. 27, 1998 Dec. 28, 1997 Sept. 28, 1997
--------------------------------------------------------------------
Remaining Remaining Remaining
In Thousands Amount Term Amount Term Amount Term
- ------------------------------------------------------------------------------------------------------
Interest rate swaps-floating $60,000 5 years $60,000 5.75 years $60,000 6 years
Interest rate swaps-floating 70,000 11.5 years 70,000 11.75 years
Interest rate swaps-floating 30,000 11.5 years 30,000 11.75 years
Interest rate swaps-fixed .. 60,000 5 years 60,000 5.75 years 60,000 6 years
Interest rate swaps-fixed .. 50,000 6.25 years
Interest rate cap .......... 35,000 1.75 years 35,000 2.5 years
In January 1998, the Company terminated two floating rate interest swaps with
a total notional amount of $100 million. The gain of $6.5 million resulting
from this termination will be amortized over 11.5 years, the remaining term
of the initial swap agreements.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
5. Derivative Financial Instruments (cont.)
The carrying amounts and fair values of the Company's balance sheet and
off-balance-sheet instruments were as follows:
Sept. 27, 1998 Dec. 28, 1997 Sept. 28, 1997
-------------- ------------- --------------
Carrying Fair Carrying Fair Carrying Fair
In Thousands Amount Value Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------
Balance Sheet Instruments
- -------------------------
Public debt .................... $ 301,085 $ 330,884 $ 313,085 $ 327,486 $ 313,085 $ 321,559
Non-public variable rate long-term
debt ......................... 218,034 218,034 180,300 180,300 195,200 195,200
Non-public fixed rate long-term
debt ......................... 13,984 14,944 12,404 13,297 12,434 13,314
Off-Balance-Sheet Instruments
- ------------------------------
Interest rate swaps ............ (2,551) 1,854 (1,330)
Interest rate cap .............. 4 80
The fair values of the interest rate swaps at September 27, 1998 and
September 28, 1997 represent the estimated amounts the Company would have had
to pay to terminate these agreements. The fair values of the interest rate
cap and the fair value of the interest rate swap at December 28, 1997
represent the estimated amounts the Company would have received upon
termination of these agreements.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
6. Supplemental Disclosures of Cash Flow Information
Changes in current assets and current liabilities affecting cash, net of effects
from acquisitions, were as follows:
First Nine Months
In Thousands 1998 1997
- --------------------------------------------------------------------------------
Accounts receivable, trade, net ..................... $ (4,925) $ (1,809)
Accounts receivable from The Coca-Cola Company ...... (9,180) (9,089)
Due from Piedmont Coca-Cola Bottling Partnership .... 2,009 2,985
Accounts receivable, other .......................... 2,042 (47)
Inventories ......................................... (5,247) (5,944)
Prepaid expenses and other current assets ........... (2,696) (1,040)
Accounts payable and accrued liabilities ............ 6,505 3,940
Accounts payable to The Coca-Cola Company ........... 1,618 2,973
Due to Piedmont Coca-Cola Bottling Partnership....... 1,733
Accrued compensation ................................ 2,995 (830)
Accrued interest payable ............................ (4,743) (2,115)
------ ------
Increase in current assets less current liabilities . $ (9,889) $(10,976)
======== ========
7. Acquisition
On January 21, 1998, the Company purchased the franchise rights and operating
assets of a Coca-Cola bottler located in Florence, Alabama for $33.6 million.
The bottling territory covers portions of northwest Alabama and south central
Tennessee and is contiguous to the Company's Tennessee bottling territory. The
Company issued notes payable to the seller for approximately $32.1 million and
used the Company's existing lines of credit to fund the cash portion of the
acquisition. The outstanding notes payable balance of $1.5 million is due on
January 31, 1999. The interest rate for the notes payable issued is 6.5%.
The acquisition was accounted for using the purchase method of accounting.
Accordingly, the Company's financial statements reflect the operating results
since the acquisition date. The results of operations for the periods presented
would not have been materially different had this acquisition taken place at the
beginning of the periods.
Coca-Cola Bottling Co. Consolidated
Notes to Consolidated Financial Statements (Unaudited)
8. Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction:
- ------------
The following discussion presents management's analysis of the results of
operations for the third quarter and first nine months of 1998 compared to the
third quarter and first nine months of 1997 and changes in financial condition
from September 28, 1997 and December 28, 1997 to September 27, 1998.
The Company reported net income of $7.0 million or $.84 per share for the third
quarter of 1998 compared with net income of $6.6 million or $.79 per share for
the same period in 1997. For the first nine months of 1998, net income was $13.9
million or $1.66 per share compared to net income of $15.9 million or $1.89 per
share for the first nine months of 1997. The third quarter of 1998 was
highlighted by strong volume growth across all significant market channels and
improved pricing. Franchise bottle/can volume increased by 9% in the third
quarter and was up 11% for the first nine months of 1998.
The Company purchased the franchise rights and operating assets of a Coca-Cola
bottler in Florence, Alabama in January 1998. The Company purchased St. Paul
Coca-Cola Bottling Company, Inc., a small Coca-Cola bottler in southwestern
Virginia, in June 1998.
The results for interim periods are not necessarily indicative of the results to
be expected for the year due to seasonal factors.
Results of Operations:
- ---------------------
The Company continued its trend of strong volume growth in the third quarter
with an increase of approximately 9% in franchise bottle/can volume. Net sales
for the quarter increased 13% over the same period in 1997. Franchise bottle/can
volume for the first nine months of 1998 increased by 11% over 1997. Net sales
for the first nine months of 1998 increased by 14% over the first nine months of
1997. The volume and sales gains for the third quarter and all of 1998 are being
driven by targeted marketing programs with key accounts and the Company's
significant investment in cold drink equipment and infrastructure. Net selling
prices were up almost 2% in the third quarter of 1998 over 1997 reflecting an
improved pricing trend. For the first nine months of 1998, net selling prices
were even with the corresponding period in 1997. Volume growth was strong across
all significant channels. In addition, fountain volume increased 18% for the
third quarter and 18% for the first nine months of 1998.
The Company has enjoyed strong growth in its flagship brand, Coca-Cola classic,
with volume up about 5% for the first nine months of 1998. Volume in the citrus
category (Sprite, Mello Yello and Surge) increased 15% over the first nine
months of the prior year. Surge, a new citrus drink which was introduced during
the first quarter of 1998, now represents nearly 2% of franchise bottle/can
volume. The Company's noncarbonated beverage market continued to show strong
volume growth in the third quarter. Noncarbonated beverage volume grew more than
60% in the first nine months of 1998. Noncarbonated products including POWERaDE,
Fruitopia, Cool from Nestea and bottled water now account for approximately 6%
of the Company's franchise bottle/can volume.
Gross margin increased by 12% and 10% in the third quarter and first nine months
of 1998, respectively. The increase in gross margin resulted primarily from
strong volume growth. Gross margin, as a percentage of net sales, decreased from
44.1% for the first nine months of 1997 to 42.5% for the same period in 1998 as
selling prices did not increase to cover higher raw material costs.
Selling expenses for the third quarter and first nine months of 1998 increased
by 13% and 14%, respectively, from 1997 levels. Increased selling costs resulted
from higher sales volume, employment costs for additional sales personnel, a new
incentive program for certain employees, additional marketing expenses, higher
costs for sales development programs and increased lease expense for cold drink
equipment and vehicles, partially offset by increased marketing funding and
infrastructure support from The Coca-Cola Company. The Company has made a
significant investment in its sales force and anticipates that over time, the
increases in sales revenue from this investment will outpace the growth in
costs. The significant growth in selling expenses reflects the Company's
commitment to accelerated volume growth.
Lease expense increased 21% for the third quarter and 14% for the first nine
months of 1998 over the same periods in 1997. The increased lease expense is due
to the Company's continued investment in cold drink equipment and vehicles to
support accelerated sales growth.
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 advertising expenditures to promote sales in the local territories
served by the Company. The Company also benefits from national advertising
programs conducted by The Coca-Cola Company and other beverage companies.
Certain of the marketing expenditures by The Coca-Cola Company and other
beverage companies are made pursuant to annual arrangements. Although The
Coca-Cola Company has advised the Company that it intends to provide marketing
funding support in 1998, it is not obligated to do so under the Company's Master
Bottle Contract. Also, The Coca-Cola Company has agreed to provide additional
marketing funding under a multi-year program to support the Company's cold drink
infrastructure. Total marketing funding and infrastructure support from The
Coca-Cola Company and other beverage companies in the first nine months of 1998
and 1997 was $40.2 million and $26.6 million, respectively. Total marketing
funding and infrastructure support in the third quarter of 1998 and 1997 was
$14.4 million and $9.3 million, respectively.
General and administrative expenses in the third quarter increased by 18% from
the third quarter of 1997. General and administrative expenses for the first
nine months of 1998 increased by 17% over the same period in 1997. The increase
in general and administrative expenses was due primarily to hiring of additional
support personnel, higher employment costs in certain of the Company's labor
markets and a new incentive program for certain employees. The Company has made
an investment in additional administrative infrastructure to support the
projected accelerated growth of the Company.
Depreciation expense increased 9% between both the third quarter and the first
nine months of 1998 and the comparable periods in 1997. This increase was due to
significant ongoing capital investment including over $100 million in 1997 and
approximately $34.6 million for the first nine months of 1998.
Interest expense for the first nine months of 1998 increased by 4% over the same
period in the prior year due principally to additional borrowings related to
acquisitions and capital expenditures.
The Company's overall weighted average interest rate increased from an average
of 6.9% during the first nine months of 1997 to an average of 7.0% during the
first nine months of 1998 due largely to an increase in fixed rate debt as a
percentage of the total debt portfolio. The fixed rate debt has slightly higher
rates than the floating rate debt.
Other expense for the first nine months of 1998 increased by $1.7 million over
the same period in 1997. The increase is due primarily to losses on the disposal
of cold drink equipment.
Changes in Financial Condition:
- -------------------------------
Working capital decreased $6 million from December 28, 1997 and $17 million from
September 28, 1997 to September 27, 1998. The decrease from December 28, 1997 is
attributable to an increase in the current portion of long-term debt of $18.2
million and a $6.7 million increase in accounts payable and accruals, offset by
increases in trade accounts receivable ($5.6 million), accounts receivable from
The Coca-Cola Company ($9.2 million) and inventory ($5.5 million). The increase
in the current portion of long-term debt is due to the maturing of $28.6 million
of the Company's Medium-Term Notes in the first quarter of 1999 and additional
debt related to the acquisition of a Coca-Cola bottler in northwest Alabama
during the first quarter of 1998. The increase in trade accounts receivable
resulted from the increase in sales over the prior year. The increase in
inventory levels is due to the previously discussed sales increase and a greater
number of products being sold. The increase in accounts receivable from The
Coca-Cola Company is due to higher levels of marketing funding and
infrastructure support in the current year. The decrease in working capital of
$17 million from September 28, 1997 is due to the aforementioned increase in the
current portion of long-term debt, an increase of $14.1 million in accounts
payable and accruals, offset by an increase in trade accounts receivable of $8.0
million and an increase in inventories of $7.4 million.
Capital expenditures in the first nine months of 1998 were $34.6 million as
compared to $90.1 million in the first nine months of 1997. Capital expenditures
for the first nine months of 1997 include $66.3 million of previously leased
equipment that was purchased during the first quarter of 1997.
Long-term debt decreased by $5.8 million from September 28, 1997 and increased
$9.1 million from December 28, 1997. The decrease from September 28, 1997 is
primarily due to the reclassification of $28.6 million of the Company's
Medium-Term Notes to current liabilities as of September 27, 1998, offset by
additional long-term debt for an acquisition of a Coca-Cola bottler during the
first quarter of 1998. The increase from December 28, 1997 is due to the
aforementioned acquisition in the first quarter of 1998. The Company currently
intends to use its informal lines of credit to refinance the Medium-Term Notes
as they come due.
It is the Company's intent to renew any borrowings under its $170 million
revolving credit facility and the informal lines of credit as they mature and,
to the extent that any borrowings under the revolving credit facility and the
informal lines of credit do not exceed the amount available under the Company's
$170 million revolving credit facility, they are classified as noncurrent
liabilities. As of September 27, 1998, the Company had no borrowings outstanding
under the revolving credit facility and had approximately $48.0 million
outstanding under the informal lines of credit.
As of September 27, 1998 the debt portfolio had a weighted average interest rate
of approximately 7.0% and approximately 25% of the total portfolio of $533.1
million was subject to changes in short-term interest rates.
Other liabilities increased from December 28, 1997 to September 27, 1998 by
approximately $7.8 million. This increase is primarily due to a $6.5 million
gain which resulted from the termination of two interest rate swaps in the first
quarter of 1998. The $6.5 million gain will be amortized over 11.5 years, the
remaining term of the initial swap agreements.
Sources of capital for the Company include operating cash flows, bank
borrowings, issuance of public or private debt and the issuance of equity
securities. Management believes that the Company, through these sources, has
sufficient financial resources available to maintain its current operations and
provide for its current capital expenditure and working capital requirements,
scheduled debt payments, interest and income tax liabilities and dividends for
shareholders. The Company considers the acquisition of additional franchise
territories on an ongoing basis.
Year 2000
- ---------
Since many computer systems and other equipment with embedded chips or
processors (collectively, "Business Systems") use only two digits to represent
the year, these business systems may be unable to process accurately certain
data before, during or after the year 2000. As a result, business and
governmental entities are at risk for possible miscalculations or systems
failures causing disruptions in their business operations. This is commonly
known as the Year 2000 issue. The Year 2000 issue can arise at any point in the
Company's supply, manufacturing, distribution and financial chains.
The Company began work on the Year 2000 compliance issue in 1997. The scope of
the project includes: ensuring the compliance of all applications, operating
systems and hardware on mainframe, PC and LAN platforms; addressing issues
related to non-IT embedded software and equipment; and addressing the compliance
of key suppliers and customers. The project has four phases: assessment of
systems and equipment affected by the Year 2000 issue; definition of strategies
to address affected systems and equipment; remediation or replacement of
affected systems and equipment; and testing that each is Year 2000 compliant.
With respect to ensuring the compliance of all applications, operating systems
and hardware on the Company's various computer platforms, the assessment and
definition of strategies phases have been completed. It is estimated that 80% of
the remediation or replacement phase has been completed with the balance of this
phase expected to be completed by mid first quarter 1999. The testing phase has
begun and is expected to be completed by the end of the first quarter of 1999.
Approximately 80% of the internal application development resources were
committed to Year 2000 remediation efforts in 1997 and approximately 95% of
these resources were committed to this effort in 1998. The Company has also
utilized contract programmers to identify Year 2000 noncompliance problems and
modify code.
With respect to addressing issues related to non-IT embedded software and
equipment, which principally exists in the Company's four manufacturing plants,
the assessment and definition of strategies phases have been completed.
Approximately 50% of the remediation or replacement phase has been completed
with the balance of this phase expected to be completed by the end of second
quarter 1999. Testing will begin in 1999 and is expected to be completed by the
end of third quarter 1999.
The Company relies on third party suppliers for raw materials, water, utilities,
transportation and other key services. Interruption of supplier operations due
to Year 2000 issues could affect Company operations. We have initiated efforts
to evaluate the status of our most critical suppliers' progress. This process of
evaluating our critical suppliers is scheduled for completion by mid-1999.
Options to reduce the risks of interruption due to supplier failures include
identification of alternate suppliers and accumulation of inventory to assure
production capability, where feasible or warranted. These activities are
intended to provide a means of managing risk, but cannot eliminate the potential
for disruption due to third party failure.
The Company is also dependent upon our customers for sales and cash flow. Year
2000 interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While these
events are possible, the Company's customer base is broad enough to minimize
somewhat the effects of a single occurrence. The Company is in the assessment
phase with respect to the evaluation of critical customers' progress and is
scheduled for completion by mid-1999.
The Company will develop contingency plans for those areas that are critical to
our business. These contingency plans will be designed to mitigate serious
disruptions to our business flow beyond the end
of 1999, where possible. The major efforts related to contingency planning will
occur in the fourth quarter of 1998 and the first half of 1999.
It is currently estimated that the aggregate cost of the Company's Year 2000
efforts will be approximately $6 million to $7 million, of which approximately
$4 million has been spent to date. These costs are being expensed as they are
incurred and are being funded through operating cash flow. These costs do not
include any costs associated with the implementation of contingency plans, which
are in the process of being developed. The costs associated with the replacement
of computerized systems, hardware or equipment (currently estimated to be $3
million), substantially all of which would be capitalized, are not included in
the above estimates.
The Company's Year 2000 program is an ongoing process and the estimates of costs
and completion dates for various components of the program described above are
subject to change.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
27 Financial data schedule for period ended September 27, 1998.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COCA-COLA BOTTLING CO. CONSOLIDATED
(REGISTRANT)
Date: November 10, 1998 By: /s/ David V. Singer
------------------------
David V. Singer
Principal Financial Officer of the Registrant
and
Vice President - Chief Financial Officer
5
0000317540
COCA-COLA BOTTLING CO. CONSOLIDATED
1,000
U.S. DOLLARS
9-MOS
JAN-03-1999
DEC-29-1997
SEP-27-1998
1
5,944
0
61,368
529
44,207
147,141
446,741
189,258
835,287
133,336
502,898
12,055
0
0
4,866
835,287
693,279
693,279
398,515
398,515
240,957
0
29,069
21,774
7,852
13,922
0
0
0
13,922
1.66
1.64
