10-K 1 d444889d10k.htm FORM 10-K Form 10-K
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 30, 2012

Commission file number 0-9286

 

LOGO

(Exact name of registrant as specified in its charter)

 

 

Delaware   56-0950585
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification Number)

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)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $1.00 Par Value   The NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨    No  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  þ

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   þ    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   þ    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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  þ                       Non-accelerated filer  ¨                        Smaller reporting company   ¨
    (Do not check if a 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  þ

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

     Market Value as of
June 29, 2012
 

Common Stock, $l.00 Par Value

   $ 299,362,116   

Class B Common Stock, $l.00 Par Value

     *   

 

* No market exists for the shares of Class B Common Stock, which is neither registered under Section 12 of the Act nor subject to Section 15(d) of the Act. The Class B Common Stock is convertible into Common Stock on a share-for-share basis at the option of the holder.

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

 

Class

   Outstanding as of
March 1, 2013
 

Common Stock, $1.00 Par Value

     7,141,447   

Class B Common Stock, $1.00 Par Value

     2,088,842   

Documents Incorporated by Reference

 

Portions of Proxy Statement to be filed pursuant to Section 14 of the Exchange Act with respect to the 2013 Annual Meeting of Stockholders

     Part III, Items 10-14   

 

 

 


Table of Contents

Table of Contents

 

         Page  

Part I

  

Item 1.

  Business      1   

Item 1A.

  Risk Factors      11   

Item 1B.

  Unresolved Staff Comments      18   

Item 2.

  Properties      18   

Item 3.

  Legal Proceedings      20   

Item 4.

  Mine Safety Disclosures      20   
  Executive Officers of the Company      20   

Part II

  

Item 5.

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      22   

Item 6.

  Selected Financial Data      24   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      25   

Item 7A.

  Quantitative and Qualitative Disclosures about Market Risk      55   

Item 8.

  Financial Statements and Supplementary Data      56   

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      105   

Item 9A.

  Controls and Procedures      105   

Item 9B.

  Other Information      105   

Part III

  

Item 10.

  Directors, Executive Officers and Corporate Governance      106   

Item 11.

  Executive Compensation      106   

Item 12.

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      106   

Item 13.

  Certain Relationships and Related Transactions, and Director Independence      106   

Item 14.

  Principal Accountant Fees and Services      106   

Part IV

  

Item 15.

  Exhibits and Financial Statement Schedules      107   
  Signatures      115   


Table of Contents

PART I

 

Item 1. Business

Introduction

Coca-Cola Bottling Co. Consolidated, a Delaware corporation (together with its majority-owned subsidiaries, the “Company”), produces, markets and distributes nonalcoholic beverages, primarily products of The Coca-Cola Company, Atlanta, Georgia (“The Coca-Cola Company”), which include some of the most recognized and popular beverage brands in the world. The Company, which was incorporated in 1980, and its predecessors have been in the nonalcoholic beverage manufacturing and distribution business since 1902. The Company is the largest independent Coca-Cola bottler in the United States.

As of December 30, 2012, The Coca-Cola Company had a 34.8% interest in the Company’s 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 Class B Common Stock of the Company. J. Frank Harrison, III, the Company’s Chairman of the Board and Chief Executive Officer, currently owns or controls approximately 85% of the combined voting power of the Company’s outstanding Common Stock and Class B Common Stock.

General

Nonalcoholic beverage products can be broken down into two categories:

 

   

Sparkling beverages – beverages with carbonation, including energy drinks; and

 

   

Still beverages – beverages without carbonation, including bottled water, tea, ready-to-drink coffee, enhanced water, juices and sports drinks.

Sales of sparkling beverages were approximately 82%, 83% and 83% of total net sales for fiscal 2012 (“2012”), fiscal 2011 (“2011”) and fiscal 2010 (“2010”), respectively. Sales of still beverages were approximately 18%, 17% and 17% of total net sales for 2012, 2011 and 2010, respectively.

The Company holds Cola Beverage Agreements and Allied Beverage Agreements under which it produces, distributes and markets, in certain regions, sparkling beverages of The Coca-Cola Company. The Company also holds Still Beverage Agreements under which it distributes and markets in certain regions still beverages of The Coca-Cola Company such as POWERade, vitaminwater and Minute Maid Juices To Go and produces, distributes and markets Dasani water products.

The Company holds agreements to produce, distribute and market Dr Pepper in some of its regions. The Company also distributes and markets various other products, including Monster Energy products and Sundrop, in one or more of the Company’s regions under agreements with the companies that hold and license the use of their trademarks for these beverages. In addition, the Company produces beverages for other Coca-Cola bottlers. In some instances, the Company distributes beverages without a written agreement.

The Company’s principal sparkling beverage is Coca-Cola. In each of the last three fiscal years, sales of products bearing the “Coca-Cola” or “Coke” trademark have accounted for more than half of the Company’s bottle/can volume to retail customers. In total, products of The Coca-Cola Company accounted for approximately 88% of the Company’s bottle/can volume to retail customers during 2012, 2011 and 2010.

The Company offers a range of flavors designed to meet the demands of the Company’s consumers. The main packaging materials for the Company’s beverages are plastic bottles and aluminum cans. In addition, the Company provides restaurants and other immediate consumption outlets with fountain products (“post-mix”). Fountain products are dispensed through equipment that mixes the fountain syrup with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.

In recent years, the Company has developed and begun to market and distribute certain products which it owns. These products include Country Breeze tea, Tum-E Yummies, a vitamin-C enhanced flavored drink and Fuel in a Bottle power shots. The Company markets and sells these products nationally.

 

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The Coca-Cola Company acquired Coca-Cola Enterprises Inc. (“CCE”) on October 2, 2010. In connection with the transaction, CCE changed its name to Coca-Cola Refreshments USA, Inc. (“CCR”) and transferred its beverage operations outside of North America to an independent third party. As a result of the transaction, the North American operations of CCE are now included in CCR. CCE began distributing Tum-E Yummies in the first quarter of 2010 and CCR is continuing to do so nationally. Certain other Coca-Cola franchise bottlers are also distributing Tum-E Yummies. References to “CCR” refer to CCR and CCE as it existed prior to the acquisition by The Coca-Cola Company.

The following table sets forth some of the Company’s most important products, including both products that The Coca-Cola Company and other beverage companies have licensed to the Company and products that the Company owns.

 

The Coca-Cola Company

         

Sparkling Beverages
(including Energy
Products)

  

Still Beverages

   Products Licensed
by Other Beverage
Companies
   Company Owned
Products

Coca-Cola

   glacéau smartwater    Dr Pepper    Tum-E Yummies

Diet Coke

   glacéau vitaminwater    Diet Dr Pepper    Country Breeze tea

Coca-Cola Zero

   Dasani    Sundrop    Fuel in a Bottle

Sprite

   Dasani Flavors    Monster Energy   

Fanta Flavors

   Powerade        products   

Sprite Zero

   Powerade Zero      

Mello Yello

   Minute Maid Adult      

Cherry Coke

       Refreshments      

Seagrams Ginger Ale

   Minute Maid Juices      

Cherry Coke Zero

       To Go      

Diet Coke Splenda®

   Nestea      

Fresca

   Gold Peak tea      

Pibb Xtra

   FUZE      

Barqs Root Beer

   V8 juice products      

TAB

       from Campbell      

Full Throttle

        

NOS®

        

Beverage Agreements

The Company holds contracts with The Coca-Cola Company which entitle the Company to produce, market and distribute in its exclusive territory The Coca-Cola Company’s nonalcoholic beverages in bottles, cans and five gallon pressurized pre-mix containers. The Company has similar arrangements with Dr Pepper Snapple Group, Inc. and other beverage companies.

Cola and Allied Beverage Agreements with The Coca-Cola Company.

The Company purchases concentrates from The Coca-Cola Company and produces, markets and distributes its principal sparkling beverages within its territories under two basic forms of beverage agreements with The Coca-Cola Company: (i) beverage agreements that cover sparkling beverages bearing the trademark “Coca-Cola” or “Coke” (the “Coca-Cola Trademark Beverages” and “Cola Beverage Agreements”), and (ii) beverage agreements that cover other sparkling beverages of The Coca-Cola Company (the “Allied Beverages” and “Allied Beverage Agreements”) (referred to collectively in this report as the “Cola and Allied Beverage Agreements”), although in some instances the Company distributes sparkling beverages without a written agreement. The Company is a party to Cola Beverage Agreements and Allied Beverage Agreements for various specified territories.

Cola Beverage Agreements with The Coca-Cola Company.

Exclusivity.    The Cola Beverage Agreements provide that the Company will purchase its entire requirements of concentrates or syrups for Coca-Cola Trademark Beverages from The Coca-Cola Company at

 

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prices, terms of payment, and other terms and conditions of supply determined from time-to-time by The Coca-Cola Company at its sole discretion. The Company may not produce, distribute, or handle cola products other than those of The Coca-Cola Company. The Company has the exclusive right to manufacture and distribute Coca-Cola Trademark Beverages for sale in authorized containers within its territories. The Coca-Cola Company may determine, at its sole discretion, what types of containers are authorized for use with products of The Coca-Cola Company. The Company may not sell Coca-Cola Trademark Beverages outside its territories.

Company Obligations.    The Company is obligated to:

 

   

maintain such plant and equipment, staff and distribution and vending facilities that are capable of manufacturing, packaging, and distributing Coca-Cola Trademark Beverages in accordance with the Cola Beverage Agreements and in sufficient quantities to satisfy fully the demand for these beverages in its territories;

 

   

undertake adequate quality control measures and maintain sanitation standards prescribed by The Coca-Cola Company;

 

   

develop, stimulate and satisfy fully the demand for Coca-Cola Trademark Beverages in its territories;

 

   

use all approved means and spend such funds on advertising and other forms of marketing as may be reasonably required to satisfy that objective; and

 

   

maintain such sound financial capacity as may be reasonably necessary to ensure its performance of its obligations to The Coca-Cola Company.

The Company is required to meet annually with The Coca-Cola Company to present its marketing, management, and advertising plans for the Coca-Cola Trademark Beverages for the upcoming year, including financial plans showing that the Company has the consolidated financial capacity to perform its duties and obligations to The Coca-Cola Company. The Coca-Cola Company may not unreasonably withhold approval of such plans. If the Company carries out its plans in all material respects, the Company will be deemed to have satisfied its obligations to develop, stimulate, and satisfy fully the demand for the Coca-Cola Trademark Beverages and to maintain the requisite financial capacity. Failure to carry out such plans in all material respects would constitute an event of default that if not cured within 120 days of written notice of the failure would give The Coca-Cola Company the right to terminate the Cola Beverage Agreements. If the Company, at any time, fails to carry out a plan in all material respects in any geographic segment of its territory, as defined by The Coca-Cola Company, and if such failure is not cured within six months of written notice of the failure, The Coca-Cola Company may reduce the territory covered by that Cola Beverage Agreement by eliminating the portion of the territory in which such failure has occurred.

The Coca-Cola Company has no obligation under the Cola Beverage Agreements to participate with the Company in expenditures for advertising and marketing. As it has in the past, The Coca-Cola Company may contribute to such expenditures and undertake independent advertising and marketing activities, as well as advertising and sales promotion programs which require mutual cooperation and financial support of the Company. The future levels of marketing funding support and promotional funds provided by The Coca-Cola Company may vary materially from the levels provided during the periods covered by the information included in this report.

Acquisition of Other Bottlers.    If the Company acquires control, directly or indirectly, of any bottler of Coca-Cola Trademark Beverages, or any party controlling a bottler of Coca-Cola Trademark Beverages, the Company must cause the acquired bottler to amend its agreement for the Coca-Cola Trademark Beverages to conform to the terms of the Cola Beverage Agreements.

Term and Termination.    The Cola Beverage Agreements are perpetual, but they are subject to termination by The Coca-Cola Company upon the occurrence of an event of default by the Company. Events of default with respect to each Cola Beverage Agreement include:

 

   

production, sale or ownership in any entity which produces or sells any cola product not authorized by The Coca-Cola Company or a cola product that might be confused with or is an imitation of the trade dress, trademark, tradename or authorized container of a cola product of The Coca-Cola Company;

 

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insolvency, bankruptcy, dissolution, receivership, or the like;

 

   

any disposition by the Company of any voting securities of any bottling company subsidiary without the consent of The Coca-Cola Company; and

 

   

any material breach of any of its obligations under that Cola Beverage Agreement that remains unresolved for 120 days after written notice by The Coca-Cola Company.

If any Cola Beverage Agreement is terminated because of an event of default, The Coca-Cola Company has the right to terminate all other Cola Beverage Agreements the Company holds.

No Assignments.    The Company is prohibited from assigning, transferring or pledging its Cola Beverage Agreements or any interest therein, whether voluntarily or by operation of law, without the prior consent of The Coca-Cola Company.

Allied Beverage Agreements with The Coca-Cola Company.

The Allied Beverages are beverages of The Coca-Cola Company or its subsidiaries that are sparkling beverages, but not Coca-Cola Trademark Beverages. The Allied Beverage Agreements contain provisions that are similar to those of the Cola Beverage Agreements with respect to the sale of beverages outside its territories, authorized containers, planning, quality control, transfer restrictions, and related matters but have certain significant differences from the Cola Beverage Agreements.

Exclusivity.    Under the Allied Beverage Agreements, the Company has exclusive rights to distribute the Allied Beverages in authorized containers in specified territories. Like the Cola Beverage Agreements, the Company has advertising, marketing, and promotional obligations, but without restriction for most brands as to the marketing of products with similar flavors, as long as there is no manufacturing or handling of other products that would imitate, infringe upon, or cause confusion with, the products of The Coca-Cola Company. The Coca-Cola Company has the right to discontinue any or all Allied Beverages, and the Company has a right, but not an obligation, under the Allied Beverage Agreements to elect to market any new beverage introduced by The Coca-Cola Company under the trademarks covered by the respective Allied Beverage Agreements.

Term and Termination.    Allied Beverage Agreements have a term of 10 years and are renewable by the Company for an additional 10 years at the end of each term. Renewal is at the Company’s option. The Company currently intends to renew substantially all of the Allied Beverage Agreements as they expire. The Allied Beverage Agreements are subject to termination in the event of default by the Company. The Coca-Cola Company may terminate an Allied Beverage Agreement in the event of:

 

   

insolvency, bankruptcy, dissolution, receivership, or the like;

 

   

termination of a Cola Beverage Agreement by either party for any reason; or

 

   

any material breach of any of the Company’s obligations under that Allied Beverage Agreement that remains unresolved for 120 days after required prior written notice by The Coca-Cola Company.

Supplementary Agreement Relating to Cola and Allied Beverage Agreements with The Coca-Cola Company.

The Company and The Coca-Cola Company are also parties to a Letter Agreement (the “Supplementary Agreement”) that modifies some of the provisions of the Cola and Allied Beverage Agreements. The Supplementary Agreement provides that The Coca-Cola Company will:

 

   

exercise good faith and fair dealing in its relationship with the Company under the Cola and Allied Beverage Agreements;

 

   

offer marketing funding support and exercise its rights under the Cola and Allied Beverage Agreements in a manner consistent with its dealings with comparable bottlers;

 

   

offer to the Company any written amendment to the Cola and Allied Beverage Agreements (except amendments dealing with transfer of ownership) which it offers to any other bottler in the United States; and

 

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subject to certain limited exceptions, sell syrups and concentrates to the Company at prices no greater than those charged to other bottlers which are parties to contracts substantially similar to the Cola and Allied Beverage Agreements.

The Supplementary Agreement permits transfers of the Company’s capital stock that would otherwise be limited by the Cola and Allied Beverage Agreements.

Pricing of Coca-Cola Trademark Beverages and Allied Beverages.

Pursuant to the Cola and Allied Beverage Agreements, except as provided in the Supplementary Agreement and the Incidence Pricing Agreement (described below), The Coca-Cola Company establishes the prices charged to the Company for concentrates of Coca-Cola Trademark Beverages and Allied Beverages. The Coca-Cola Company has no rights under the beverage agreements to establish the resale prices at which the Company sells its products.

The Company entered into an agreement (the “Incidence Pricing Agreement”) 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 through December 31, 2013 under the same terms that were in effect for 2009 through 2012.

Still Beverage Agreements with The Coca-Cola Company.

The Company purchases and distributes certain still beverages such as sports drinks and juice drinks from The Coca-Cola Company, or its designees or joint ventures, and produces, markets and distributes Dasani water products, pursuant to the terms of marketing and distribution agreements (the “Still Beverage Agreements”). In some instances the Company distributes certain still beverages without a written agreement. The Still Beverage Agreements contain provisions that are similar to the Cola and Allied Beverage Agreements with respect to authorized containers, planning, quality control, transfer restrictions, and related matters but have certain significant differences from the Cola and Allied Beverage Agreements.

Exclusivity.    Unlike the Cola and Allied Beverage Agreements, which grant the Company exclusivity in the distribution of the covered beverages in its territory, the Still Beverage Agreements grant exclusivity but permit The Coca-Cola Company to test-market the still beverage products in its territory, subject to the Company’s right of first refusal, and to sell the still beverages to commissaries for delivery to retail outlets in the territory where still beverages are consumed on-premises, such as restaurants. The Coca-Cola Company must pay the Company certain fees for lost volume, delivery, and taxes in the event of such commissary sales. Approved alternative route to market projects undertaken by the Company, The Coca-Cola Company, and other bottlers of Coca-Cola products would, in some instances, permit delivery of certain products of The Coca-Cola Company into the territories of almost all bottlers, in exchange for compensation in most circumstances, despite the terms of the beverage agreements making such territories exclusive. Also, under the Still Beverage Agreements, the Company may not sell other beverages in the same product category.

Pricing.    The Coca-Cola Company, at its sole discretion, establishes the prices the Company must pay for the still beverages or, in the case of Dasani, the concentrate or finished goods, but has agreed, under certain circumstances for some products, to give the benefit of more favorable pricing if such pricing is offered to other bottlers of Coca-Cola products.

Term.    Each of the Still Beverage Agreements has a term of 10 or 15 years and is renewable by the Company for an additional 10 years at the end of each term. The Company currently intends to renew substantially all of the Still Beverage Agreements as they expire.

 

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Other Beverage Agreements with The Coca-Cola Company.

The Company has entered into a distribution agreement with Energy Brands, Inc. (“Energy Brands”), a wholly owned subsidiary of The Coca-Cola Company. Energy Brands, also known as glacéau, is a producer and distributor of branded enhanced water products including vitaminwater and smartwater. The agreement has a term of 10 years, and will automatically renew for succeeding 10-year terms, subject to a 12-month nonrenewal notification by the Company. The agreement covers most of the Company’s territories, requires the Company to distribute Energy Brands enhanced water products exclusively, and permits Energy Brands to distribute the products in some channels within the Company’s territories.

The Company is distributing fruit and vegetable juice beverages of the Campbell Soup Company (“Campbell”) under an interim subdistribution agreement with The Coca-Cola Company. The Campbell interim subdistribution agreement may be terminated by either party upon 30 days written notice. The interim agreement covers all of the Company’s territories, and permits Campbell and certain other sellers of Campbell beverages to continue distribution in the Company’s territories. The Company purchases Campbell beverages from a subsidiary of Campbell under a separate purchase agreement.

The Company also sells Coca-Cola and other post-mix products of The Coca-Cola Company on a non-exclusive basis. The Coca-Cola Company establishes the prices charged to the Company for post-mix products of The Coca-Cola Company. In addition, the Company produces some products for sale to other Coca-Cola bottlers and CCR. These sales have lower margins but allow the Company to achieve higher utilization of its production equipment and facilities.

The Company entered into an agreement with The Coca-Cola Company regarding brand innovation and distribution collaboration. Under the agreement, the Company grants The Coca-Cola Company the option to purchase any nonalcoholic beverage brands owned by the Company. The option is exercisable as to each brand at a formula-based price during the two-year period that begins after that brand has achieved a specified level of net operating revenue or, if earlier, beginning five years after the introduction of that brand into the market with a minimum level of net operating revenue, with the exception that with respect to brands owned at the date of the letter agreement, the five-year period does not begin earlier than the date of the letter agreement.

Beverage Agreements with Other Licensors.

The Company has beverage agreements with Dr Pepper Snapple Group, Inc. for Dr Pepper and Sundrop brands which are similar to those for the Cola and Allied Beverage Agreements. These beverage agreements are perpetual in nature but may be terminated by the Company upon 90 days’ notice. The price the beverage companies may charge for syrup or concentrate is set by the beverage companies from time to time. These beverage agreements also contain similar restrictions on the use of trademarks, approved bottles, cans and labels and sale of imitations or substitutes as well as termination for cause provisions. The Company also sells post-mix products of Dr Pepper Snapple Group, Inc.

The Company is distributing Monster brand energy drinks under a distribution agreement with Hansen Beverage Company, including Monster and Java Monster. The agreement contains provisions that are similar to the Cola and Allied Beverage Agreements with respect to pricing, promotion, planning, territory and trademark restrictions, transfer restrictions, and related matters as well as termination for cause provisions. The agreement has a 20 year term and will renew automatically. The agreement may be terminated without cause by either party. However, any such termination by Hansen Beverage Company requires compensation in the form of severance payments to the Company under the terms of the agreement.

The territories covered by beverage agreements with other licensors are not always aligned with the territories covered by the Cola and Allied Beverage Agreements but are generally within those territory boundaries. Sales of beverages by the Company under these other agreements represented approximately 12% of the Company’s bottle/can volume to retail customers for 2012, 2011 and 2010.

 

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Markets and Production and Distribution Facilities

The Company currently holds bottling rights from The Coca-Cola Company covering the majority of North Carolina, South Carolina and West Virginia, and portions of Alabama, Mississippi, Tennessee, Kentucky, Virginia, Pennsylvania, Georgia and Florida. The total population within the Company’s bottling territory is approximately 20 million.

The Company currently operates in seven principal geographic markets. Certain information regarding each of these markets follows:

1. North Carolina. This region includes the majority of North Carolina, including Raleigh, Greensboro, Winston-Salem, High Point, Hickory, Asheville, Fayetteville, Wilmington, Charlotte and the surrounding areas. The region has a population of approximately 9 million. A production/distribution facility is located in Charlotte and 12 sales distribution facilities are located in the region.

2. South Carolina. This region includes the majority of South Carolina, including Charleston, Columbia, Greenville, Myrtle Beach and the surrounding areas. The region has a population of approximately 4 million. There are 6 sales distribution facilities in the region.

3. South Alabama. This region includes a portion of southwestern Alabama, including Mobile and surrounding areas, and a portion of southeastern Mississippi. The region has a population of approximately 1 million. A production/distribution facility is located in Mobile and 4 sales distribution facilities are located in the region.

4. South Georgia. This region includes a small portion of eastern Alabama, a portion of southwestern Georgia including Columbus and surrounding areas and a portion of the Florida Panhandle. This region has a population of approximately 1 million. There are 4 sales distribution facilities located in the region.

5. Middle Tennessee. This region includes a portion of central Tennessee, including Nashville and surrounding areas, a small portion of southern Kentucky and a small portion of northwest Alabama. The region has a population of approximately 2 million. A production/distribution facility is located in Nashville and 3 sales distribution facilities are located in the region.

6. Western Virginia. This region includes most of southwestern Virginia, including Roanoke and surrounding areas, a portion of the southern piedmont of Virginia, a portion of northeastern Tennessee and a portion of southeastern West Virginia. The region has a population of approximately 2 million. A production/distribution facility is located in Roanoke and 4 sales distribution facilities are located in the region.

7. West Virginia. This region includes most of the state of West Virginia and a portion of southwestern Pennsylvania. The region has a population of approximately 1 million. There are 8 sales distribution facilities located in the region.

The Company is a member of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative located in Bishopville, South Carolina. All eight members of SAC are Coca-Cola bottlers and each member has equal voting rights. The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Management fees earned from SAC were $1.5 million, $1.6 million and $1.5 million in 2012, 2011 and 2010, respectively. SAC’s bottling lines supply a portion of the Company’s volume requirements for finished products. The Company has a commitment with SAC that requires minimum annual purchases of 17.5 million cases of finished products through May 2014. Purchases from SAC by the Company for finished products were $141 million, $134 million and $131 million in 2012, 2011 and 2010, respectively, or 27.5 million cases, 26.2 million cases and 26.1 million cases of finished product, respectively.

Raw Materials

In addition to concentrates obtained from The Coca-Cola Company and other beverage companies for use in its beverage manufacturing, the Company also purchases sweetener, carbon dioxide, plastic bottles, cans, closures and other packaging materials as well as equipment for the production, distribution and marketing of nonalcoholic beverages.

 

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The Company purchases substantially all of its plastic bottles (12-ounce, 16-ounce, 20-ounce, 24-ounce, half-liter, 1-liter, 1.25-liter, 2-liter and 300 ml sizes) from manufacturing plants owned and operated by Southeastern Container and Western Container, two entities owned by various Coca-Cola bottlers including the Company. The Company currently obtains all of its aluminum cans (7.5-ounce, 12-ounce and 16-ounce sizes) from two domestic suppliers.

None of the materials or supplies used by the Company are currently in short supply, although the supply of specific materials (including plastic bottles, which are formulated using petroleum-based products) could be adversely affected by strikes, weather conditions, governmental controls or international or domestic geopolitical or other events affecting or threatening to affect the supply of petroleum.

Along with all the 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 has negotiated the procurement for the majority of the Company’s raw materials (excluding concentrate) since 2004.

The Company is exposed to price risk on commodities such as aluminum, corn, PET resin (a petroleum-based product) and fuel 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 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 itself. In addition, there is no limit on the price The Coca-Cola Company and other beverage companies can charge for concentrate, although, under the Incidence Pricing Agreement, The Coca-Cola Company must give the Company at least 90 days written notice of a pricing change.

Customers and Marketing

The Company’s products are sold and distributed directly to retail stores and other outlets, including food markets, institutional accounts and vending machine outlets. During 2012, approximately 68% of the Company’s bottle/can volume to retail customers was sold for future consumption. The remaining bottle/can volume to retail customers of approximately 32% was sold for immediate consumption, primarily through dispensing machines owned either by the Company, retail outlets or third party vending companies. The Company’s largest customer, Wal-Mart Stores, Inc., accounted for approximately 22% of the Company’s total bottle/can volume to retail customers and the second largest customer, Food Lion, LLC, accounted for approximately 8% of the Company’s total bottle/can volume to retail customers. Wal-Mart Stores, Inc. and Food Lion, LLC accounted for approximately 15% and 6% of the Company’s total net sales, respectively. The loss of either Wal-Mart Stores, Inc. or Food Lion, LLC as customers would have a material adverse effect on the Company. All of the Company’s beverage sales are to customers in the United States.

New product introductions, packaging changes and sales promotions have been the primary sales and marketing practices in the nonalcoholic beverage industry in recent years and have required and are expected to continue to require substantial expenditures. Brand introductions from The Coca-Cola Company in recent years include Coca-Cola Zero, Dasani flavors, Full Throttle and Gold Peak tea products. In 2007, the Company began distribution of its own products, Country Breeze tea and Tum-E Yummies. In 2011, the Company began distribution of Fuel in a Bottle Energy Shot and Fuel in a Bottle Protein Shot. In addition, the Company also began distribution of NOS® products (energy drinks from FUZE, a subsidiary of The Coca-Cola Company), juice products from FUZE and V8 products from Campbell during 2007. In the fourth quarter of 2007, the Company began distribution of glacéau products, a wholly-owned subsidiary of The Coca-Cola Company that produces branded enhanced beverages including vitaminwater and smartwater. The Company entered into a distribution agreement in October 2008 with subsidiaries of Hansen Natural Corporation, the developer, marketer, seller and distributor of Monster Energy drinks, the leading volume brand in the U.S. energy drink category. Under this

 

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agreement, the Company began distributing Monster Energy drinks in certain of the Company’s territories in November 2008. New packaging introductions include the 1.25-liter bottle in 2011, the 7.5-ounce sleek can during 2010, the 2-liter contour bottle for Coca-Cola products during 2009 and the 20-ounce “grip” bottle during 2007. During 2008, the Company tested the 16-ounce bottle/24-ounce bottle package in select convenience stores and introduced it companywide in 2009. New product and packaging introductions have resulted in increased operating costs for the Company due to special marketing efforts, obsolescence of replaced items and, in some cases, higher raw material costs.

The Company sells its products primarily in nonrefillable bottles and cans, in varying proportions from market to market. For example, there may be as many as 24 different packages for Diet Coke within a single geographic area. Bottle/can volume to retail customers during 2012 was approximately 46% cans, 53% bottles and 1% other containers.

Advertising in various media, primarily television and radio, is relied upon extensively in the marketing of the Company’s products. The Coca-Cola Company and Dr Pepper Snapple Group, Inc. (the “Beverage Companies”) make substantial expenditures on advertising in the Company’s territories. The Company has also benefited from national advertising programs conducted by the Beverage Companies. In addition, the Company expends substantial funds on its own behalf for extensive local sales promotions of the Company’s products. Historically, these expenses have been partially offset by marketing funding support which the Beverage Companies provide to the Company in support of a variety of marketing programs, such as point-of-sale displays and merchandising programs. However, the Beverage Companies are under no obligation to provide the Company with marketing funding support in the future.

The substantial outlays which the Company makes for marketing and merchandising programs are generally regarded as necessary to maintain or increase revenue, and any significant curtailment of marketing funding support provided by the Beverage Companies for marketing programs which benefit the Company could have a material adverse effect on the operating and financial results of the Company.

Seasonality

Sales of the Company’s products are seasonal with the highest sales volume occurring in May, June, July and August. The Company has adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. See “Item 2. Properties” for information relating to utilization of the Company’s production facilities. Sales volume can be impacted by weather conditions.

Competition

The nonalcoholic beverage market is highly competitive. The Company’s competitors include bottlers and distributors of nationally advertised and marketed products, regionally advertised and marketed products, as well as bottlers and distributors of private label beverages in supermarket stores. The sparkling beverage market (including energy products) comprised 83% of the Company’s bottle/can volume to retail customers in 2012. 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 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 these methods of competition.

Government Regulation

The production and marketing of beverages are subject to the rules and regulations of the United States Food and Drug Administration (“FDA”) and other federal, state and local health agencies. The FDA also

 

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regulates the labeling of containers. In February 2013, health advocates and public health officials from major cities in the United States submitted a petition requesting the FDA to regulate the amount of caloric sweeteners in sparkling and other beverages. The FDA has not responded to the petition.

As a manufacturer, distributor and seller of beverage products of The Coca-Cola Company and other soft drink manufacturers in exclusive territories, the Company is subject to antitrust laws of general applicability. However, pursuant to the United States Soft Drink Interbrand Competition Act, soft drink bottlers such as the Company may have an exclusive right to manufacture, distribute and sell a soft drink product in a defined geographic territory if that soft drink product is in substantial and effective competition with other products of the same general class in the market. The Company believes such competition exists in each of the exclusive geographic territories in the United States in which the Company operates.

From time to time, legislation has been proposed in Congress and by certain state and local governments which would prohibit the sale of soft drink products in nonrefillable bottles and cans or require a mandatory deposit as a means of encouraging the return of such containers in an attempt to reduce solid waste and litter. The Company is currently not impacted by this type of proposed legislation.

Soft drink and similar-type taxes have been in place in West Virginia and Tennessee for several years. Proposals have been introduced by members of Congress and certain state governments that would impose excise and other special taxes on certain beverages that the Company sells. The Company cannot predict whether any such legislation will be enacted.

Some states and localities have also proposed barring the use of food stamps by recipients in their jurisdictions to purchase some of the products the Company manufactures. The United States Department of Agriculture rejected such a proposal by a major American city as recently as 2011.

The Company has experienced public policy challenges regarding the sale of soft drinks in schools, particularly elementary, middle and high schools. At December 30, 2012, a number of states had regulations restricting the sale of soft drinks and other foods in schools. Many of these restrictions have existed for several years in connection with subsidized meal programs in schools. The focus has more recently turned to the growing health, nutrition and obesity concerns of today’s youth. Restrictive legislation, if widely enacted, could have an adverse impact on the Company’s products, image and reputation.

The Company is subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolved with the 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.

Environmental Remediation

The Company does not currently have any material capital expenditure commitments for environmental compliance or environmental remediation for any of its properties. The Company does not believe compliance with federal, state and local provisions that have been enacted or adopted regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, will have a material effect on its capital expenditures, earnings or competitive position.

Employees

As of February 1, 2013, the Company had approximately 5,000 full-time employees, of whom approximately 400 were union members. The total number of employees, including part-time employees, was approximately 6,500. Approximately 7% of the Company’s labor force is covered by collective bargaining agreements. One collective bargaining agreement covering approximately .4% of the Company’s employees expired during 2012 and the Company entered into a new agreement in 2012. Two collective bargaining agreements covering approximately .7% of the Company’s employees will expire during 2013.

 

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Exchange Act Reports

The Company makes available free of charge through the Company’s Internet website, www.cokeconsolidated.com, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission (SEC). The SEC maintains an Internet website, www.sec.gov, which contains reports, proxy and information statements, and other information filed electronically with the SEC. Any materials that the Company files with the SEC may also be read and copied at the SEC’s Public Reference Room, 100 F Street, N.E., Room 1580, Washington, D. C. 20549.

Information on the operations of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The information provided on the Company’s website is not part of this report and is not incorporated herein by reference.

 

Item 1A. Risk Factors

In addition to other information in this Form 10-K, the following risk factors should be considered carefully in evaluating the Company’s business. The Company’s business, financial condition or results of operations could be materially and adversely affected by any of these risks.

The Company may not be able to respond successfully to changes in the marketplace.

The Company operates in the highly competitive nonalcoholic beverage industry and faces strong competition from other general and specialty beverage companies. The Company’s response to continued and increased customer and competitor consolidations and marketplace competition may result in lower than expected net pricing of the Company’s products. The Company’s ability to gain or maintain the Company’s share of sales or gross margins may be limited by the actions of the Company’s competitors, which may have advantages in setting their prices due to lower raw material costs. Competitive pressures in the markets in which the Company operates may cause channel and product mix to shift away from more profitable channels and packages. If the Company is unable to maintain or increase volume in higher-margin products and in packages sold through higher-margin channels (e.g., immediate consumption), pricing and gross margins could be adversely affected. The Company’s efforts to improve pricing may result in lower than expected sales volume.

Acquisitions of bottlers by their franchisors may lead to uncertainty in the Coca-Cola bottler system or adversely impact the Company.

The Coca-Cola Company acquired the North American operations of Coca-Cola Enterprises Inc. in 2010, and the Company’s primary competitors were acquired at approximately the same time by their franchisor. These transactions may cause uncertainty within the Coca-Cola bottler system or adversely impact the Company and its business. At this time, it remains uncertain what the ultimate impact of these transactions will be on the Company’s business and financial results.

Changes in how significant customers market or promote the Company’s products could reduce revenue.

The Company’s revenue is affected by how significant customers market or promote the Company’s products. Revenue has been negatively impacted by less aggressive price promotion by some retailers in the future consumption channels over the past several years. If the Company’s significant customers change the manner in which they market or promote the Company’s products, the Company’s revenue and profitability could be adversely impacted.

Changes in the Company’s top customer relationships could impact revenues and profitability.

The Company is exposed to risks resulting from several large customers that account for a significant portion of its bottle/can volume and revenue. The Company’s two largest customers accounted for approximately 30% of the Company’s 2012 bottle/can volume to retail customers and approximately 21% of the Company’s total net sales. The loss of one or both of these customers could adversely affect the Company’s results of

 

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operations. These customers typically make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance and generally do not enter into long-term contracts. In addition, these significant customers may re-evaluate or refine their business practices related to inventories, product displays, logistics or other aspects of the customer-supplier relationship. The Company’s results of operations could be adversely affected if revenue from one or more of these customers is significantly reduced or if the cost of complying with these customers’ demands is significant. If receivables from one or more of these customers become uncollectible, the Company’s results of operations may be adversely impacted. One of these customers has announced store closing in the United States, but the Company has not determined if this could affect the Company’s results of operations.

Changes in public and consumer preferences related to nonalcoholic beverages could reduce demand for the Company’s products and reduce profitability.

The Company’s business depends substantially on consumer tastes and preferences that change in often unpredictable ways. The success of the Company’s business depends in large measure on working with the Beverage Companies to meet the changing preferences of the broad consumer market. Health and wellness trends throughout the marketplace have resulted in a shift from sugar sparkling beverages to diet sparkling beverages, tea, sports drinks, enhanced water and bottled water over the past several years. Failure to satisfy changing consumer preferences could adversely affect the profitability of the Company’s business.

The Company’s sales can be impacted by the health and stability of the general economy.

Unfavorable changes in general economic conditions, such as a recession or economic slowdown in the geographic markets in which the Company does business, may have the temporary effect of reducing the demand for certain of the Company’s products. For example, economic forces may cause consumers to shift away from purchasing higher-margin products and packages sold through immediate consumption and other highly profitable channels. Adverse economic conditions could also increase the likelihood of customer delinquencies and bankruptcies, which would increase the risk of uncollectibility of certain accounts. Each of these factors could adversely affect the Company’s revenue, price realization, gross margins and overall financial condition and operating results.

Miscalculation of the Company’s need for infrastructure investment could impact the Company’s financial results.

Projected requirements of the Company’s infrastructure investments may differ from actual levels if the Company’s volume growth is not as the Company anticipates. The Company’s infrastructure investments are generally long-term in nature; therefore, it is possible that investments made today may not generate the returns expected by the Company due to future changes in the marketplace. Significant changes from the Company’s expected returns on cold drink equipment, fleet, technology and supply chain infrastructure investments could adversely affect the Company’s consolidated financial results.

The Company’s inability to meet requirements under its beverage agreements could result in the loss of distribution rights.

Approximately 88% of the Company’s bottle/can volume to retail customers in 2012 consisted of 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 bottle/can volume to retail customers in 2012 consisted of products of other beverage companies and the Company’s own products. The Company must satisfy various requirements under its beverage agreements. Failure to satisfy these requirements could result in the loss of distribution rights for the respective products.

 

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Material changes in, or the Company’s inability to satisfy, the performance requirements for marketing funding support, or decreases from historic levels of marketing funding support, could reduce the Company’s profitability.

Material changes in the performance requirements, or decreases in the levels of marketing funding support historically provided, under marketing programs with The Coca-Cola Company and other beverage companies, or the Company’s inability to meet the performance requirements for the anticipated levels of such marketing funding support payments, could adversely affect the Company’s profitability. The Coca-Cola Company and other beverage companies are under no obligation to continue marketing funding support at historic levels.

Changes in The Coca-Cola Company’s and other beverage companies’ levels of advertising, marketing spending and product innovation could reduce the Company’s sales volume.

The Coca-Cola Company’s and other beverage companies’ levels of advertising, marketing spending and product innovation directly impact the Company’s operations. While the Company does not believe there will be significant changes in the levels of marketing and advertising by the Beverage Companies, there can be no assurance that historic levels will continue. The Company’s volume growth will also continue to be dependent on product innovation by the Beverage Companies, especially The Coca-Cola Company. Decreases in marketing, advertising and product innovation by the Beverage Companies could adversely impact the profitability of the Company.

The inability of the Company’s aluminum can or plastic bottle suppliers to meet the Company’s purchase requirements could reduce the Company’s profitability.

The Company currently obtains all of its aluminum cans from two domestic suppliers and all of its plastic bottles from two domestic cooperatives. The inability of these aluminum can or plastic bottle suppliers to meet the Company’s requirements for containers could result in short-term shortages until alternative sources of supply can be located. The Company attempts to mitigate these risks by working closely with key suppliers and by purchasing business interruption insurance where appropriate. Failure of the aluminum can or plastic bottle suppliers to meet the Company’s purchase requirements could reduce the Company’s profitability.

The inability of the Company to offset higher raw material costs with higher selling prices, increased bottle/can volume or reduced expenses could have an adverse impact on the Company’s profitability.

Raw material costs, including the costs for plastic bottles, aluminum cans and high fructose corn syrup, have been subject to significant price volatility and have increased in recent years at faster rates than the general rate of inflation. In addition, there are no limits on the prices The Coca-Cola Company and other beverage companies can charge for concentrate. If the Company cannot offset higher raw material costs with higher selling prices, increased sales volume or reductions in other costs, the Company’s profitability could be adversely affected.

The consolidation among suppliers of certain of the Company’s raw materials could have an adverse impact on the Company’s profitability.

In recent years, there has been consolidation among suppliers of certain of the Company’s raw materials. The reduction in the number of competitive sources of supply could have an adverse effect upon the Company’s ability to negotiate the lowest costs and, in light of the Company’s relatively small in-plant raw material inventory levels, has the potential for causing interruptions in the Company’s supply of raw materials.

The increasing reliance on purchased finished goods from external sources makes the Company subject to incremental risks that could have an adverse impact on the Company’s profitability.

With the introduction of FUZE, Campbell and glacéau products into the Company’s portfolio during 2007 and Monster Energy products during 2008, the Company has become increasingly reliant on purchased finished goods from external sources versus the Company’s internal production. As a result, the Company is subject to incremental risk including, but not limited to, product availability, price variability, product quality and production capacity shortfalls for externally purchased finished goods.

 

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Sustained increases in fuel prices or the inability of the Company to secure adequate supplies of fuel could have an adverse impact on the Company’s profitability.

The Company uses significant amounts of fuel in the distribution of its products. International or domestic geopolitical or other events could impact the supply and cost of fuel and could impact the timely delivery of the Company’s products to its customers. While the Company is working to reduce fuel consumption and manage the Company’s fuel costs, there can be no assurance that the Company will succeed in limiting the impact on the Company’s business or future cost increases. The Company may use derivative instruments to hedge some or all of the Company’s projected diesel fuel and unleaded gasoline purchases. These derivative instruments relate to fuel used in the Company’s delivery fleet and other vehicles. Continued upward pressure in these costs could reduce the profitability of the Company’s operations.

Sustained increases in workers’ compensation, employment practices and vehicle accident claims costs could reduce the Company’s profitability.

The Company uses various insurance structures to manage its workers’ compensation, auto liability, medical and other insurable risks. These structures consist of retentions, deductibles, limits and a diverse group of insurers that serve to strategically transfer and mitigate the financial impact of losses. Losses are accrued using assumptions and procedures followed in the insurance industry, adjusted for company-specific history and expectations. Although the Company has actively sought to control increases in these costs, there can be no assurance that the Company will succeed in limiting future cost increases. Continued upward pressure in these costs could reduce the profitability of the Company’s operations.

Sustained increases in the cost of employee benefits could reduce the Company’s profitability.

The Company’s profitability is substantially affected by the cost of pension retirement benefits, postretirement medical benefits and current employees’ medical benefits. In recent years, the Company has experienced significant increases in these costs as a result of macro-economic factors beyond the Company’s control, including increases in health care costs, declines in investment returns on pension assets and changes in discount rates used to calculate pension and related liabilities. Although the Company has actively sought to control increases in these costs, there can be no assurance the Company will succeed in limiting future cost increases, and continued upward pressure in these costs could reduce the profitability of the Company’s operations.

On March 23, 2010, the Patient Protection and Affordable Care Act (“PPACA”) was signed into law. On March 30, 2010, a companion bill, the Health Care and Education Reconciliation Act of 2010 (“Reconciliation Act”), was also signed into law. The PPACA and the Reconciliation Act, when taken together, represent comprehensive health care reform legislation that will likely affect the cost associated with providing employer-sponsored medical plans. The Company is continuing to assess the impact this legislation will have on the Company’s employer-sponsored medical plans. Additionally, the PPACA and the Reconciliation Act include provisions that reduce the tax benefits available to employers that receive Medicare Part D subsidies.

Product liability claims brought against the Company or product recalls could negatively affect the Company’s business, financial results and brand image.

The Company may be liable if the consumption of the Company’s products causes injury or illness. The Company may also be required to recall products if they become contaminated or are damaged or mislabeled. A significant product liability or other product-related legal judgment against the Company or a widespread recall of the Company’s products could negatively impact the Company’s business, financial results and brand image.

Cybersecurity risks - technology failures or cyberattacks on the Company’s systems could disrupt the Company’s operations and negatively impact the Company’s business.

The Company increasingly relies on information technology systems to process, transmit and store electronic information. For example, the Company’s production and distribution facilities, inventory

 

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management and driver handheld devices all utilize information technology to maximize efficiencies and minimize costs. Furthermore, a significant portion of the communication between personnel, customers and suppliers depends on information technology. Like most companies, the Company’s information technology systems may be vulnerable to interruption due to a variety of events beyond the Company’s control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues. The Company has technology security initiatives and disaster recovery plans in place to mitigate the Company’s risk to these vulnerabilities, but these measures may not be adequate or implemented properly to ensure that the Company’s operations are not disrupted.

Changes in interest rates could adversely affect the profitability of the Company.

As of December 30, 2012, $50.0 million of the Company’s debt and capital lease obligations of $493.0 million were subject to changes in short-term interest rates. The Company’s $200 million revolving credit facility and $20 million uncommitted line of credit are subject to changes in short-term interest rates. On December 30, 2012, the Company had $30.0 million of outstanding borrowings on the $200 million revolving credit facility and $20.0 million of outstanding borrowing on the $20 million uncommitted line of credit. If interest rates increase in the future, it could increase the Company’s borrowing cost and it could reduce the Company’s overall profitability. The Company’s pension and postretirement medical benefits costs are subject to changes in interest rates. A decline in interest rates used to discount the Company’s pension and postretirement medical liabilities could increase the cost of these benefits and increase the overall liability.

The level of the Company’s debt could restrict the Company’s operating flexibility and limit the Company’s ability to incur additional debt to fund future needs.

As of December 30, 2012, the Company had $493.0 million of debt and capital lease obligations. The Company’s level of debt requires the Company to dedicate a substantial portion of the Company’s future cash flows from operations to the payment of principal and interest, thereby reducing the funds available to the Company for other purposes. The Company’s debt can negatively impact the Company’s operations by (1) limiting the Company’s ability and/or increasing the cost to obtain funding for working capital, capital expenditures and other general corporate purposes; (2) increasing the Company’s vulnerability to economic downturns and adverse industry conditions by limiting the Company’s ability to react to changing economic and business conditions; and (3) exposing the Company to a risk that a significant decrease in cash flows from operations could make it difficult for the Company to meet the Company’s debt service requirements.

Recent volatility in the financial markets may negatively impact the Company’s ability to access the credit markets.

Capital and credit markets have become increasingly volatile as a result of adverse conditions that caused the failure and near failure of a number of large financial services companies. If the capital and credit markets continue to experience volatility, it is possible that the Company’s ability to access the credit markets may be limited by these factors at a time when the Company would like or need to do so. If the availability of funds is limited, the Company may incur increased costs associated with borrowing to meet the Company’s requirements.

On September 21, 2011, the Company entered into a $200 million five-year unsecured revolving credit agreement (“$200 million facility”). This replaced the previous $200 million five-year unsecured revolving credit agreement which had been scheduled to mature in 2012. The $200 million facility has a scheduled maturity date of September 21, 2016. The Company repaid $150 million of Senior Notes which matured in 2012. The Company borrowed from its $200 million facility and its $20 million uncommitted line of credit and used cash flows generated by operations to fund the repayments. As of December 30, 2012, the Company had $170 million available on its $200 million facility. The limitation of availability of funds could have an impact on the Company’s ability to refinance maturing debt and/or react to changing economic and business conditions.

 

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The Company’s credit rating could be negatively impacted by changes to The Coca-Cola Company’s credit rating.

The Company’s credit rating could be significantly impacted by capital management activities of The Coca-Cola Company and/or changes in the credit rating of The Coca-Cola Company. A lower credit rating could significantly increase the Company’s interest costs or could have an adverse effect on the Company’s ability to obtain additional financing at acceptable interest rates or to refinance existing debt.

Changes in legal contingencies could adversely impact the Company’s future profitability.

Changes from expectations for the resolution of outstanding legal claims and assessments could have a material adverse impact on the Company’s profitability and financial condition. In addition, the Company’s failure to abide by laws, orders or other legal commitments could subject the Company to fines, penalties or other damages.

Legislative changes that affect the Company’s distribution, packaging and products could reduce demand for the Company’s products or increase the Company’s costs.

The Company’s business model is dependent on the availability of the Company’s various products and packages in multiple channels and locations to better satisfy the needs of the Company’s customers and consumers. Laws that restrict the Company’s ability to distribute products in schools and other venues, as well as laws that require deposits for certain types of packages or those that limit the Company’s ability to design new packages or market certain packages, could negatively impact the financial results of the Company.

In addition, excise or other taxes imposed on the sale of certain of the Company’s products by the federal government and certain state and local governments could cause consumers to shift away from purchasing products of the Company. If enacted, such taxes could materially affect the Company’s business and financial results, particularly if they were enacted in a form that incorporated them into the shelf prices for the Company’s products.

Significant additional labeling or warning requirements may inhibit sales of affected products.

Various jurisdictions may seek to adopt significant additional product labeling or warning requirements relating to the content or perceived adverse health consequences of certain of the Company’s products. If these types of requirements become applicable to one or more of the Company’s major products under current or future environmental or health laws or regulations, they may inhibit sales of such products.

Additional taxes resulting from tax audits could adversely impact the Company’s future profitability.

An assessment of additional taxes resulting from audits of the Company’s tax filings could have an adverse impact on the Company’s profitability, cash flows and financial condition.

Natural disasters and unfavorable weather could negatively impact the Company’s future profitability.

Natural disasters or unfavorable weather conditions in the geographic regions in which the Company does business could have an adverse impact on the Company’s revenue and profitability. For example, prolonged drought conditions in the geographic regions in which the Company does business could lead to restrictions on the use of water, which could adversely affect the Company’s ability to manufacture and distribute products and the Company’s cost to do so.

Global climate change or legal, regulatory, or market responses to such change could adversely impact the Company’s future profitability.

The growing political and scientific sentiment is that increased concentrations of carbon dioxide and other greenhouse gases in the atmosphere are influencing global weather patterns. Changing weather patterns, along

 

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with the increased frequency or duration of extreme weather conditions, could impact the availability or increase the cost of key raw materials that the Company uses to produce its products. In addition, the sale of these products can be impacted by weather conditions.

Concern over climate change, including global warming, has led to legislative and regulatory initiatives directed at limiting greenhouse gas (GHG) emissions. For example, the United States Environmental Protection Agency (USEPA) began imposing GHG regulations on utilities, refineries and major manufacturers in 2011. Although the immediate effect was minor, as such regulations apply only to those that are planning to build large new facilities or materially modify existing ones, over the next decade the USEPA plan to extend the scope of the GHG regulations to cover virtually all sources of GHG’s. Those USEPA regulations or future laws enacted or regulations adopted that directly or indirectly affect the Company’s production, distribution, packaging, cost of raw materials, fuel, ingredients and water could all impact the Company’s business and financial results.

Issues surrounding labor relations could adversely impact the Company’s future profitability and/or its operating efficiency.

Approximately 7% of the Company’s employees are covered by collective bargaining agreements. The inability to renegotiate subsequent agreements on satisfactory terms and conditions could result in work interruptions or stoppages, which could have a material impact on the profitability of the Company. Also, the terms and conditions of existing or renegotiated agreements could increase costs, or otherwise affect the Company’s ability to fully implement operational changes to improve overall efficiency. One collective bargaining agreement covering approximately .4% of the Company’s employees expired during 2012 and the Company entered into a new agreement in 2012. Two collective bargaining agreements covering approximately .7% of the Company’s employees will expire during 2013.

The Company’s ability to change distribution methods and business practices could be negatively affected by United States Coca-Cola bottler system disputes.

Litigation filed by some United States bottlers of Coca-Cola products indicates that disagreements may exist within the Coca-Cola bottler system concerning distribution methods and business practices. Although the litigation has been resolved, disagreements among various Coca-Cola bottlers could adversely affect the Company’s ability to fully implement its business plans in the future.

Management’s use of estimates and assumptions could have a material effect on reported results.

The Company’s consolidated financial statements and accompanying notes to the consolidated financial statements include estimates and assumptions by management that impact reported amounts. Actual results could materially differ from those estimates.

Changes in accounting standards could affect the Company’s reported financial results.

New accounting standards or pronouncements that may become applicable to the Company from time to time, or changes in the interpretation of existing standards and pronouncements could have a significant effect on the Company’s reported results for the affected periods.

Obesity and other health concerns may reduce demand for some of the Company’s products.

Consumers, public health officials, public health advocates and government officials are becoming increasingly concerned about the public health consequences associated with obesity, particularly among young people. In February 2013, a group of public health officials and health advocates submitted a petition to the FDA requesting that agency to regulate the amount of caloric sweeteners in sparkling and other beverages. The FDA has not responded to the petition. In addition, some researchers, health advocates and dietary guidelines are encouraging consumers to reduce the consumption of sugar, including sugar sparkling beverages. Increasing public concern about these issues; possible new taxes and governmental regulations concerning the production, marketing, labeling or availability of the Company’s beverages; and negative publicity resulting from actual or threatened legal actions against the Company or other companies in the same industry relating to the marketing,

 

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labeling or sale of sugar sparkling beverages may reduce demand for these beverages, which could adversely affect the Company’s profitability.

The Company has experienced public policy challenges regarding the sale of soft drinks in schools, particularly elementary, middle and high schools.

A number of states have regulations restricting the sale of soft drinks and other foods in schools. Many of these restrictions have existed for several years in connection with subsidized meal programs in schools. The focus has more recently turned to the growing health, nutrition and obesity concerns of today’s youth. The impact of restrictive legislation, if widely enacted, could have an adverse impact on the Company’s products, image and reputation.

The concentration of the Company’s capital stock ownership with the Harrison family limits other stockholders’ ability to influence corporate matters.

Members of the Harrison family, including the Company’s Chairman and Chief Executive Officer, J. Frank Harrison, III, beneficially own shares of Common Stock and Class B Common Stock representing approximately 85% of the total voting power of the Company’s outstanding capital stock. In addition, three members of the Harrison family, including Mr. Harrison, III, serve on the Board of Directors of the Company. As a result, members of the Harrison family have the ability to exert substantial influence or actual control over the Company’s management and affairs and over substantially all matters requiring action by the Company’s stockholders. Additionally, as a result of the Harrison family’s significant beneficial ownership of the Company’s outstanding voting stock, the Company has relied on the “controlled company” exemption from certain corporate governance requirements of The NASDAQ Stock Market LLC. This concentration of ownership may have the effect of delaying or preventing a change in control otherwise favored by the Company’s other stockholders and could depress the stock price. It also limits other stockholders’ ability to influence corporate matters and, as a result, the Company may take actions that the Company’s other stockholders may not view as beneficial.

 

Item 1B. Unresolved Staff Comments

None.

 

Item 2. Properties

The principal properties of the Company include its corporate headquarters, four production/distribution facilities and 41 sales distribution centers. The Company owns two production/distribution facilities and 33 sales distribution centers, and leases its corporate headquarters, two production/distribution facilities, 8 sales distribution centers and 3 additional storage warehouses.

The Company leases its 110,000 square foot corporate headquarters and a 65,000 square foot adjacent office building from a related party. The lease has a fifteen-year term and expires in December 2021. Rental payments for these facilities were $4.0 million in 2012.

The Company leases its 542,000 square foot Snyder Production Center and an adjacent 105,000 square foot distribution center in Charlotte, North Carolina from a related party pursuant to a lease with a ten-year term which expires in December 2020. Rental payments under this lease totaled $3.5 million in 2012.

The Company leases its 330,000 square foot production/distribution facility in Nashville, Tennessee. The lease requires monthly payments through December 2014. Rental payments under this lease totaled $.5 million in 2012.

The Company leases a 278,000 square foot warehouse which serves as additional space for its Charlotte, North Carolina distribution center. The lease requires monthly payments through July 2022. Rental payments under this lease totaled $.7 million in 2012.

The Company leases a 220,000 square foot sales distribution center in Lavergne, Tennessee. In the first quarter of 2011, a new lease replaced the existing lease. The new lease requires monthly payments through 2026, but did not require rental payments for the first eleven months of the lease. Rental payments under the lease were $.6 million in 2012.

 

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The Company leases its 50,000 square foot sales distribution center in Charleston, South Carolina. The Company amended the lease in the first quarter of 2012. The amended lease requires monthly payments through February 2027. Rental payments under this lease totaled $.3 million in 2012.

The Company leases its 57,000 square foot sales distribution center in Greenville, South Carolina. The lease requires monthly payments through July 2018. Rental payments under this lease totaled $.7 million in 2012.

The Company leases a 75,000 square foot warehouse which serves as additional space for the Company’s Roanoke, Virginia distribution center. The Company signed a lease extension in 2012, effective in 2013, to increase the space by 36,000 square feet to a total of 111,000 square feet. The extended lease requires payments through the first quarter of 2025. Rental payments under this lease totaled $.3 million in 2012.

The Company leases a 233,000 square foot sales distribution center in Clayton, North Carolina. This lease requires monthly lease payments through March 2026. Rental payments under this lease totaled $1.0 million in 2012.

The Company owns and operates a 316,000 square foot production/distribution facility in Roanoke, Virginia and a 271,000 square foot production/distribution facility in Mobile, Alabama.

The approximate percentage utilization of the Company’s production facilities is indicated below:

Production Facilities

 

Location

   Percentage
Utilization *
 

Charlotte, North Carolina

     71

Mobile, Alabama

     56

Nashville, Tennessee

     80

Roanoke, Virginia

     69

 

* Estimated 2013 production divided by capacity (based on operations of 6 days per week and 20 hours per day).

The Company currently has sufficient production capacity to meet its operational requirements. In addition to the production facilities noted above, the Company utilizes a portion of the production capacity at SAC, a cooperative located in Bishopville, South Carolina, that owns a 261,000 square foot production facility.

The Company’s products are generally transported to sales distribution facilities for storage pending sale. The number of sales distribution facilities by market area as of January 31, 2013 was as follows:

Sales Distribution Facilities

 

Region

   Number of
Facilities
 

North Carolina

     12   

South Carolina

     6   

South Alabama

     4   

South Georgia

     4   

Middle Tennessee

     3   

Western Virginia

     4   

West Virginia

     8   
  

 

 

 

Total

     41   
  

 

 

 

The Company’s facilities are all in good condition and are adequate for the Company’s operations as presently conducted.

 

 

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The Company also operates approximately 1,900 vehicles in the sale and distribution of the Company’s beverage products, of which approximately 1,200 are route delivery trucks. In addition, the Company owns approximately 187,000 beverage dispensing and vending machines for the sale of the Company’s products in the Company’s bottling territories.

 

Item 3. Legal Proceedings

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 that 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.

 

Item 4. Mine Safety Disclosures

Not applicable.

Executive Officers of the Company

The following is a list of names and ages of all the executive officers of the Company indicating all positions and offices with the Company held by each such person. All officers have served in their present capacities for the past five years except as otherwise stated.

J. FRANK HARRISON, III, age 58, is Chairman of the Board of Directors and Chief Executive Officer. Mr. Harrison, III was appointed Chairman of the Board of Directors in December 1996. Mr. Harrison, III served as Vice Chairman from November 1987 through December 1996 and was appointed as the Company’s Chief Executive Officer in May 1994. He was first employed by the Company in 1977 and has served as a Division Sales Manager and as a Vice President.

HENRY W. FLINT, age 58, is President and Chief Operating Officer, a position he has held since August 2012. Previously, he was Vice Chairman of the Board of Directors of the Company, a position he held since April 2007. Previously, he was Executive Vice President and Assistant to the Chairman of the Company, a position to which he was appointed in July 2004. Prior to that, he was a Managing Partner at the law firm of Kennedy Covington Lobdell & Hickman, L.L.P. with which he was associated from 1980 to 2004.

WILLIAM B. ELMORE, age 57, is Vice Chairman of the Board of Directors, a position he has held since August 2012. Previously, he was President and Chief Operating Officer and a Director of the Company, positions he has held since January 2001. Previously, he was Vice President, Value Chain from July 1999 and Vice President, Business Systems from August 1998 to June 1999. He was Vice President, Treasurer from June 1996 to July 1998. He was Vice President, Regional Manager for the Virginia Division, West Virginia Division and Tennessee Division from August 1991 to May 1996.

WILLIAM J. BILLIARD, age 46, is Vice President, Operations Finance and Chief Accounting Officer. He was named Vice President of Operations Finance on November 1, 2010 and was appointed Chief Accounting Officer on February 20, 2006. Previously, he was also Vice President and Corporate Controller of the Company and was first employed by the Company on February 20, 2006. Before joining the Company, he was Senior Vice President, Interim Chief Financial Officer and Corporate Controller of Portrait Corporation of America, Inc., a portrait photography studio company, from September 2005 to January 2006 and Senior Vice President, Corporate Controller from August 2001 to September 2005. Prior to that, he served as Vice President, Chief Financial Officer of Tailored Management, a long-term staffing company, from August 2000 to August 2001. Portrait Corporation of America, Inc. filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in August 2006.

ROBERT G. CHAMBLESS, age 47, is Senior Vice President, Sales and Marketing, a position he has held since August 2010. Previously, he was Senior Vice President, Sales, a position he held since June 2008. He held the position of Vice President—Franchise Sales from early 2003 to June 2008 and Region Sales Manager

 

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for our Southern Division between 2000 and 2003. He was Sales Manager in the Company’s Columbia, South Carolina branch between 1997 and 2000. He has served the Company in several other positions prior to this position and was first employed by the Company in 1986.

CLIFFORD M. DEAL, III, age 51, is Vice President and Treasurer, a position he has held since June 1999. Previously, he was Director of Compensation and Benefits from October 1997 to May 1999. He was Corporate Benefits Manager from December 1995 to September 1997 and was Manager of Tax Accounting from November 1993 to November 1995.

NORMAN C. GEORGE, age 57, is President, BYB Brands, Inc, a wholly-owned subsidiary of the Company that distributes and markets Tum-E Yummies and other products developed by the Company, a position he has held since July 2006. Prior to that he was Senior Vice President, Chief Marketing and Customer Officer, a position he was appointed to in September 2001. Prior to that, he was Vice President, Marketing and National Sales, a position he was appointed to in December 1999. Prior to that, he was Vice President, Corporate Sales, a position he had held since August 1998. Previously, he was Vice President, Sales for the Carolinas South Region, a position he held beginning in November 1991.

JAMES E. HARRIS, age 50, is Senior Vice President, Shared Services and Chief Financial Officer, a position he has held since January 28, 2008. He served as a Director of the Company from August 2003 until January 25, 2008 and was a member of the Audit Committee and the Finance Committee. He served as Executive Vice President and Chief Financial Officer of MedCath Corporation, an operator of cardiovascular hospitals, from December 1999 to January 2008. From 1998 to 1999, he was Chief Financial Officer of Fresh Foods, Inc., a manufacturer of fully cooked food products. From 1987 to 1998, he served in several different officer positions with The Shelton Companies, Inc. He also served two years with Ernst & Young LLP as a senior accountant.

DAVID L. HOPKINS, age 53, is Senior Vice President, Operations. He was named Senior Vice President of Operations in May 2011. Prior to that, he was Vice President of Logistics from 2003 to 2011 and Vice President of Operations from 1994 to 2003. He served as Vice President of Manufacturing from 1990 to 1994. His career with the Company began in 1988 as the Roanoke Plant Manager.

UMESH M. KASBEKAR, age 55, is Senior Vice President, Planning and Administration, a position he has held since January 1995. Prior to that, he was Vice President, Planning, a position he was appointed to in December 1988.

DAVID M. KATZ, age 44, is Senior Vice President, Assistant to the Chairman and Chief Executive Officer, a position he has held since January 2013. Previously, he was Senior Vice President Midwest Region for Coca-Cola Refreshments (“CCR”) a position he began in 2011. Prior to the formation of CCR, he was Vice President, Sales Operations for Coca-Cola Enterprises Inc.’s (“CCE”) East Business Unit in 2010. In 2008 he was promoted to President and Chief Executive Officer of Coca-Cola Bottlers’ Sales and Services Company, LLC. He began his Coca-Cola career in 1993 with CCE as a Logistics Consultant.

LAUREN C. STEELE, age 58, is Senior Vice President, Corporate Affairs, a position to which he was appointed in March 2012. Prior to that he was Vice President of Corporate Affairs, a position he has held since May 1989. He is responsible for governmental, media and community relations for the Company.

MICHAEL A. STRONG, age 59, is Senior Vice President, Human Resources, a position to which he was appointed in March 2011. Previously, he was Vice President of Human Resources, a position to which he was appointed in December 2009. He was Region Sales Manager for the North Carolina West Region from December 2006 to November 2009. Prior to that, he served as Division Sales Manager and General Manager as well as other key sales related positions. He joined the Company in 1985 when the Company acquired Coca-Cola Bottling Company in Mobile, Alabama, where he began his career.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 Market under the symbol COKE. The table below sets forth for the periods indicated the high and low reported sales prices per share of Common Stock. There is no established public trading market for the Class B Common Stock. Shares of Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock.

 

     Fiscal Year  
     2012      2011  
     High      Low      High      Low  

First quarter

   $ 65.27       $ 56.51       $ 67.38       $ 52.80   

Second quarter

     64.89         60.05         76.32         64.97   

Third quarter

     69.15         63.88         69.92         53.50   

Fourth quarter

     70.93         61.07         59.81         50.26   

A quarterly dividend rate of $.25 per share on both Common Stock and Class B Common Stock was maintained throughout 2011 and 2012. Shares of Common Stock and Class B Common Stock have participated equally in dividends since 1994.

Pursuant to the Company’s certificate of incorporation, no cash dividend or dividend of property or stock other than stock of the Company, as specifically described in the 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.

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 or paid in the future.

The number of stockholders of record of the Common Stock and Class B Common Stock, as of March 1, 2013, was 2,842 and 10, respectively.

On March 6, 2012, the Compensation Committee determined that 40,000 shares of restricted Class B Common Stock, $1.00 par value, should be issued (pursuant to a Performance Unit Award Agreement approved in 2008) to J. Frank Harrison, III, in connection with his services in 2011 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 to satisfy tax withholding obligations in connection with the vesting of the performance units.

On March 5, 2013, the Compensation Committee determined that 40,000 shares of restricted Class B Common Stock, $1.00 par value, should be issued (pursuant to a Performance Unit Award Agreement approved in 2008) to J. Frank Harrison, III, in connection with his services in 2012 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, 19,880 of such shares were settled in cash to satisfy tax withholding obligations in connection with the vesting of the performance units.

The shares issued to Mr. Harrison, III were issued without registration under the Securities Act of 1933 (the “Securities Act”) in reliance on Section 4(2) of the Securities Act.

Presented below is a line graph comparing the yearly percentage change in the cumulative total return on the Company’s Common Stock to the cumulative total return of the Standard & Poor’s 500 Index and a peer group for the period commencing December 30, 2007 and ending December 30, 2012. The peer group is comprised of Dr Pepper Snapple Group, Inc., The Coca-Cola Company, Cott Corporation, National Beverage Corp., and PepsiCo, Inc.

 

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The graph assumes that $100 was invested in the Company’s Common Stock, the Standard & Poor’s 500 Index and the peer group on December 30, 2007 and that all dividends were reinvested on a quarterly basis. Returns for the companies included in the peer group have been weighted on the basis of the total market capitalization for each company.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Coca-Cola Bottling Co. Consolidated, the S&P 500 Index, and a Peer Group

 

LOGO

 

     12/30/07     12/28/08     1/3/10     1/2/11     1/1/12     12/30/12  

CCBCC

  $ 100      $ 77      $ 95      $ 100      $ 107      $ 121   

S&P 500

  $ 100      $ 63      $ 80      $ 92      $ 94      $ 109   

Peer Group

  $ 100      $ 73      $ 92      $ 107      $ 115      $ 122   

 

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Item 6. Selected Financial Data

The following table sets forth certain selected financial data concerning the Company for the five years ended December 30, 2012. The data for the five years ended December 30, 2012 is derived from audited consolidated financial statements of the Company. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth in Item 7 hereof and is qualified in its entirety by reference to the more detailed consolidated financial statements and notes contained in Item 8 hereof. This information should also be read in conjunction with the “Risk Factors” set forth in Item 1A.

SELECTED FINANCIAL DATA*

 

    Fiscal Year**  

In Thousands (Except Per Share Data)

  2012     2011     2010     2009     2008  

Summary of Operations

         

Net sales

  $ 1,614,433      $ 1,561,239      $ 1,514,599      $ 1,442,986      $ 1,463,615   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales

    960,124        931,996        873,783        822,992        848,409   

Selling, delivery and administrative expenses

    565,623        541,713        544,498        525,491        555,728   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    1,525,747        1,473,709        1,418,281        1,348,483        1,404,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    88,686        87,530        96,318        94,503        59,478   

Interest expense, net

    35,338        35,979        35,127        37,379        39,601   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    53,348        51,551        61,191        57,124        19,877   

Income tax expense

    21,889        19,528        21,649        16,581        8,394   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    31,459        32,023        39,542        40,543        11,483   

Less: Net income attributable to noncontrolling interest

    4,242        3,415        3,485        2,407        2,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Coca-Cola Bottling Co. Consolidated

  $ 27,217      $ 28,608      $ 36,057      $ 38,136      $ 9,091
  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

         

Common Stock

  $ 2.95      $ 3.11      $ 3.93      $ 4.16      $ .99   

Class B Common Stock

  $ 2.95      $ 3.11      $ 3.93      $ 4.16      $ .99   

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

         

Common Stock

  $ 2.94      $ 3.09      $ 3.91      $ 4.15      $ .99   

Class B Common Stock

  $ 2.92      $ 3.08      $ 3.90      $ 4.13      $ .99   

Cash dividends per share:

         

Common Stock

  $ 1.00      $ 1.00      $ 1.00      $ 1.00      $ 1.00   

Class B Common Stock

  $ 1.00      $ 1.00      $ 1.00      $ 1.00      $ 1.00   

Other Information

         

Weighted average number of common shares
outstanding:

         

Common Stock

    7,141        7,141        7,141        7,072        6,644   

Class B Common Stock

    2,085        2,063        2,040        2,092        2,500   

Weighted average number of common shares outstanding — assuming dilution:

         

Common Stock

    9,266        9,244        9,221        9,197        9,160   

Class B Common Stock

    2,125        2,103        2,080        2,125        2,516   

Year-End Financial Position

         

Total assets

  $ 1,283,474      $ 1,362,425      $ 1,307,622      $ 1,283,077      $ 1,315,772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current portion of debt

    20,000        120,000                      176,693   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current portion of obligations under capital leases

    5,230        4,574        3,866        3,846        2,781   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Obligations under capital leases

    64,351        69,480        55,395        59,261        74,833   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term debt

    403,386        403,219        523,063        537,917        414,757   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity of Coca-Cola Bottling Co. Consolidated

    135,259        129,470        126,064        114,460        74,478   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying notes to consolidated financial statements for additional information.

 

** All years presented are 52-week fiscal years except 2009 which was a 53-week year. The estimated net sales, gross margin and selling, delivery and administrative expenses for the additional selling week in 2009 of approximately $18 million, $6 million and $4 million, respectively, are included in reported results for 2009.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Revision of Prior Period Financial Statements

During the fourth quarter of 2012, Coca-Cola Bottling Co. Consolidated (“the Company”) identified an error in the treatment of a certain prior year deferred tax asset in the Consolidated Balance Sheets. This resulted in an understatement of the net noncurrent deferred income tax liability and an overstatement of retained earnings, and therefore equity, for each of the impacted periods. This error affected the Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity as presented in each of the quarters of 2012, 2011 and 2010, including the year-end consolidated financial statements for 2011 and 2010. The Company has revised prior period financial statements to correct this immaterial error. Refer to Note 1 Significant Accounting Policies — Revision of Prior Period Financial Statements for further details. This revision did not affect the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows for any of these periods. The discussion and analysis included herein is based on the financial results (and revised Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity) for the years ended December 30, 2012, January 1, 2012 and January 2, 2011.

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 consolidated financial statements of the Company 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 three years ended 2012.

 

   

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 the three years presented in the consolidated financial statements.

 

   

Financial Condition — an analysis of the Company’s financial condition as of the end of the last two years 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 fiscal years presented are the 52-week periods ended December 30, 2012 (“2012”), January 1, 2012 (“2011”) and January 2, 2011 (“2010”). The Company’s fiscal year ends on the Sunday closest to December 31 of each year.

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

Piedmont is the Company’s only significant subsidiary that has a noncontrolling interest. Noncontrolling interest income of $4.2 million in 2012, $3.4 million in 2011 and $3.5 million in 2010 are included in net income on the Company’s consolidated statements of operations. In addition, the amount of consolidated net income attributable to both the Company and noncontrolling interest are shown on the Company’s consolidated

 

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statements of operations. Noncontrolling interest primarily related to Piedmont totaled $64.2 million and $59.9 million at December 30, 2012 and January 1, 2012, respectively. These amounts are shown as noncontrolling interest in the equity section of the Company’s consolidated balance sheets.

During May 2010, Nashville, Tennessee experienced a severe rain storm which caused extensive flood damage in the area. The Company has a production/sales distribution facility located in the flooded area. Due to damage incurred during this flood, the Company recorded a loss of $.2 million on uninsured cold drink equipment. This loss was offset by gains of $1.1 million for the excess of insurance proceeds received over the net book value of production equipment damaged as a result of the flood. In 2010, the Company received $7.1 million in insurance proceeds related to losses from the flood.

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 net sales of $1.6 billion in 2012.

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 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.

The Coca-Cola Company acquired Coca-Cola Enterprises Inc. (“CCE”) on October 2, 2010. In connection with the transaction, CCE changed its name to Coca-Cola Refreshments USA, Inc. (“CCR”) and transferred its beverage operations outside of North America to an independent third party. As a result of the transaction, the North American operations of CCE are now included in CCR. In M,D&A, references to “CCR” refer to CCR and CCE as it existed prior to the acquisition by The Coca-Cola Company. The Coca-Cola Company had a significant equity interest in CCE prior to the acquisition.

The Company’s net sales in the last three fiscal years by product category were as follows:

 

     Fiscal Year  

In Thousands

   2012      2011      2010  

Bottle/can sales:

        

Sparkling beverages (including energy products)

   $ 1,073,071       $ 1,052,164       $ 1,031,423   

Still beverages

     233,895         219,628         213,570   
  

 

 

    

 

 

    

 

 

 

Total bottle/can sales

     1,306,966         1,271,792         1,244,993   
  

 

 

    

 

 

    

 

 

 

Other sales:

        

Sales to other Coca-Cola bottlers

     152,401         150,274         140,807   

Post-mix and other

     155,066         139,173         128,799   
  

 

 

    

 

 

    

 

 

 

Total other sales

     307,467         289,447         269,606   
  

 

 

    

 

 

    

 

 

 

Total net sales

   $ 1,614,433       $ 1,561,239       $ 1,514,599   
  

 

 

    

 

 

    

 

 

 

 

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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 driver which has a 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. New packaging introductions include the 1.25-liter bottle in 2011, 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 and Fuel in a Bottle power shots. These brands enable the Company to participate in strong growth categories and capitalize on distribution channels that 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 $200.0 million, $191.9 million and $187.2 million in 2012, 2011 and 2010, 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 increasing numbers of products. In addition, the Company has closed a number of smaller sales distribution centers 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 sale delivery for convenience stores, drug stores, small supermarkets and on-premises 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.

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:

2012

 

   

a $.5 million pre-tax favorable mark-to-market adjustment to cost of sales related to the Company’s 2013 commodity hedging program; and

 

   

a $1.5 million debit to income tax expense to increase the valuation allowance for certain deferred tax assets of the Company.

 

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2011

 

   

a $6.7 million pre-tax unfavorable mark-to-market adjustment to cost of sales related to the Company’s 2011 commodity hedging program;

 

   

a $.2 million pre-tax unfavorable mark-to-market adjustment to S,D&A expenses related to the Company’s 2011 commodity hedging program; and

 

   

a $.9 million credit to income tax expense related to the reduction of the liability for uncertain tax positions in 2011 due mainly to the expiration of applicable statute of limitations.

2010

 

   

a $3.8 million pre-tax unfavorable mark-to-market adjustment to cost of sales related to the Company’s 2010 and 2011 commodity hedging program;

 

   

a $.9 million pre-tax favorable adjustment to cost of sales related to the gain on the replacement of flood damaged production equipment;

 

   

a $1.4 million pre-tax unfavorable mark-to-market adjustment to S,D&A expenses related to the Company’s 2010 commodity hedging program;

 

   

a $3.7 million pre-tax unfavorable adjustment to S,D&A expenses related to the impairment/accelerated depreciation of property, plant and equipment;

 

   

a $.5 million unfavorable adjustment to income tax expense related to the elimination of the deduction related to the Medicare Part D subsidy; and

 

   

a $1.7 million credit to income tax expense related to the reduction of the liability for uncertain tax positions in 2010 due mainly to the expiration of applicable statute of limitations.

The following overview is a summary of key information concerning the Company’s financial results for 2012 compared to 2011 and 2010.

 

     Fiscal Year  

In Thousands (Except Per Share Data)

   2012      2011      2010  

Net sales

   $ 1,614,433       $ 1,561,239       $ 1,514,599   

Cost of sales

     960,124         931,996         873,783   

Gross margin

     654,309         629,243         640,816   

S,D&A expenses

     565,623         541,713         544,498   

Income from operations

     88,686         87,530         96,318   

Interest expense, net

     35,338         35,979         35,127   

Income before taxes

     53,348         51,551         61,191   

Income tax expense

     21,889         19,528         21,649   

Net income

     31,459         32,023         39,542   

Net income attributable to the Company

     27,217         28,608         36,057   

Basic net income per share:

        

Common Stock

   $ 2.95       $ 3.11       $ 3.93   

Class B Common Stock

   $ 2.95       $ 3.11       $ 3.93   

Diluted net income per share:

        

Common Stock

   $ 2.94       $ 3.09       $ 3.91   

Class B Common Stock

   $ 2.92       $ 3.08       $ 3.90   

The Company’s net sales grew 6.6% from 2010 to 2012. The net sales increase was primarily due to an increase in bottle/can sales price per unit and in bottle/can volume. Bottle/can sales price per unit increased 3.6% primarily due to a per unit increase in sparkling beverages except energy products. Bottle/can volume increased by 1.3% primarily due to a 15.7% increase in still beverages partially offset by a 1.2% decrease in sparkling beverages.

 

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Gross margin dollars increased 2.1% from 2010 to 2012. The Company’s gross margin as a percentage of net sales decreased from 42.3% in 2010 to 40.5% in 2012. The decrease in gross margin percentage was primarily due to increases in raw material costs partially offset by an increase in bottle/can sales prices.

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) finished products purchased from other vendors. The Company anticipates that the cost 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 2013 compared to 2012 due to the impact of these rising commodity costs unless they can be offset by price increases.

S,D&A expenses increased 3.9% from 2010 to 2012. The increase in S,D&A expenses was primarily the result of an increase in employee salaries including bonuses and incentives (salary increases and additional personnel), an increase in software amortization, an increase in professional fees, an increase in marketing expense, an increase in employer payroll taxes and an increase in depreciation and amortization of property, plant and equipment primarily due to increased purchases of refurbished vending machines with shorter lives, capitalization of software projects and the addition of two capital leases entered into the first quarter of 2011. Employee benefits expense also increased from 2010 to 2012 primarily due to increased medical insurance expense (both active and retired employees) partially offset by a decrease in pension expense. The increase in S,D&A expenses was partially offset by a decrease in property and casualty insurance expense. During 2010, an impairment expense/accelerated depreciation expense of $3.6 million was recorded.

Net interest expense was unchanged in 2012 compared to 2010. The Company’s overall weighted average interest rate on its debt and capital lease obligations increased to 6.1% during 2012 from 5.9% during 2010.

Income tax expense increased 1.1% from 2010 to 2012. The small percentage increase was primarily due to higher adjustments related to the liability for uncertain tax positions and for valuation allowances partially offset by lower pretax income. The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, was 41.0% for 2012 compared to 35.4% for 2010. The effective tax rates differ from statutory rates as a result of adjustments to the liability for uncertain tax positions, adjustments to the deferred tax asset valuation allowance and permanent items. The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes less net income attributable to noncontrolling interest, was 44.6% for 2012 compared to 37.5% for 2010.

Net debt and capital lease obligations at fiscal year ends were as follows:

 

In Thousands

   Dec. 30,
2012
     Jan. 1,
2012
     Jan. 2,
2011
 

Debt

   $ 423,386       $ 523,219       $ 523,063   

Capital lease obligations

     69,581         74,054         59,261   
  

 

 

    

 

 

    

 

 

 

Total debt and capital lease obligations

     492,967         597,273         582,324   

Less: Cash, cash equivalents and restricted cash

     10,399         93,758         49,372   
  

 

 

    

 

 

    

 

 

 

Total net debt and capital lease obligations (1)

   $ 482,568       $ 503,515       $ 532,952   
  

 

 

    

 

 

    

 

 

 

 

(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 evaluating 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

 

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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 believes the following discussion addresses 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 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 contemplated and prior to making such change.

Allowance for Doubtful Accounts

The Company evaluates the collectibility of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s recent past loss history and an overall assessment of past due trade accounts receivable outstanding.

The Company’s review of potential bad debts considers the specific industry in which a particular customer operates, such as supermarket retailers, convenience stores and mass merchandise retailers, and the general economic conditions that currently exist in that specific industry. The Company then considers the effects of concentration of credit risk in a specific industry and for specific customers within that industry.

Property, Plant and Equipment

Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Company’s business model or changes in the Company’s capital spending strategy could result in the actual useful lives differing from the Company’s current estimates. Factors such as changes in the planned use of manufacturing equipment, cold drink dispensing equipment, transportation equipment, warehouse facilities or software could also result in shortened useful lives. In those cases where the Company determines that the useful life of property, plant and equipment should be shortened or lengthened, the Company depreciates the net book value in excess of the estimated salvage value over its revised remaining useful life.

The Company evaluates the recoverability of the carrying amount of its property, plant and equipment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These evaluations are performed at a level where independent cash flows may be attributed to either an asset or an asset group. If the Company determines that the carrying amount of an asset or asset group is not recoverable based upon the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair value of the long-lived assets.

During 2012, the Company performed a review of property, plant and equipment. As a result of this review, $.3 million was recorded to impairment expense for manufacturing equipment.

During 2011, the Company performed a review of property, plant and equipment and determined there was no impairment to be recorded.

During 2010, the Company performed a review of property, plant and equipment. As a result of this review, $.9 million was recorded to impairment expense for five Company-owned sales distribution centers held-for-sale. The Company also recorded accelerated depreciation of $.5 million for certain other property, plant and equipment which was replaced in the first quarter of 2011. During 2010, the Company also determined the warehouse operations in Sumter, South Carolina would be relocated to other facilities and recorded impairment and accelerated depreciation of $2.2 million for the value of equipment and real estate related to the Sumter, South Carolina property.

 

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Franchise Rights

The Company considers franchise rights with The Coca-Cola Company and other beverage companies to be indefinite lived because the agreements are perpetual or, when not perpetual, the Company anticipates the agreements will continue to be renewed upon expiration. The cost of renewals is minimal, and the Company has not had any renewals denied. The Company considers franchise rights as indefinite lived intangible assets and, therefore, does not amortize the value of such assets. Instead, franchise rights are tested at least annually for impairment.

Impairment Testing of Franchise Rights and Goodwill

Generally accepted accounting principles (GAAP) requires testing of intangible assets with indefinite lives and goodwill for impairment at least annually. The Company conducts its annual impairment test as of the first day of the fourth quarter of each fiscal year. The Company also reviews intangible assets with indefinite lives and goodwill for impairment if there are significant changes in business conditions that could result in impairment. For both franchise rights and goodwill, when appropriate, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of the franchise rights or goodwill is below its carrying value.

When a quantitative analysis is considered necessary for the annual impairment analysis of franchise rights, the Company utilizes the Greenfield Method to estimate the fair value. The Greenfield Method assumes the Company is starting new, owning only franchise rights, and makes investments required to build an operation comparable to the Company’s current operations. The Company estimates the cash flows required to build a comparable operation and the available future cash flows from these operations. The cash flows are then discounted using an appropriate discount rate. The estimated fair value based upon the discounted cash flows is then compared to the carrying value on an aggregated basis. After completing these analyses, there was no impairment of the Company’s recorded franchise rights in 2012, 2011 or 2010. In addition to the discount rate, the estimated fair value includes a number of assumptions such as cost of investment to build a comparable operation, projected net sales, cost of sales, operating expenses and income taxes. Changes in the assumptions required to estimate the present value of the cash flows attributable to franchise rights could materially impact the fair value estimate.

The Company has determined that it has one reporting unit for purposes of assessing goodwill for potential impairment. When a quantitative analysis is considered necessary for the annual impairment analysis of goodwill, the Company develops an estimated fair value for the reporting unit considering three different approaches:

 

   

market value, using the Company’s stock price plus outstanding debt;

 

   

discounted cash flow analysis; and

 

   

multiple of earnings before interest, taxes, depreciation and amortization based upon relevant industry data.

The estimated fair value of the reporting unit is then compared to its carrying amount including goodwill. If the estimated fair value exceeds the carrying amount, goodwill will be considered not to be impaired and the second step of the GAAP impairment test is not necessary. If the carrying amount including goodwill exceeds its estimated fair value, the second step of the impairment test is performed to measure the amount of the impairment, if any. In the second step, a comparison is made between book value of goodwill to the implied fair value of goodwill. Implied fair value of goodwill is determined by comparing the fair value of the reporting unit to the book value of its net identifiable assets excluding goodwill. If the implied fair value of goodwill is below the book value of goodwill, an impairment loss would be recognized for the difference. Based on these analyses, there was no impairment of the Company’s recorded goodwill in 2012, 2011 or 2010. The Company does not believe that the reporting unit is at risk of impairment in the future. The discounted cash flow analysis includes a number of assumptions such as weighted average cost of capital, projected sales volume, net sales, cost of sales and operating expenses. Changes in these assumptions could materially impact the fair value estimates.

 

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The Company uses its overall market capitalization as part of its estimate of fair value of the reporting unit and in assessing the reasonableness of the Company’s internal estimates of fair value.

To the extent that actual and projected cash flows decline in the future, or if market conditions deteriorate significantly, the Company may be required to perform an interim impairment analysis that could result in an impairment of franchise rights and goodwill. The Company has determined that there has not been an interim impairment trigger since the first day of the fourth quarter of 2012 annual test date.

Income Tax Estimates

The Company records a valuation allowance to reduce the carrying value of its deferred tax assets if, based on the weight of available evidence, it is determined that it is more likely than not that such assets will not ultimately be realized. While the Company considers future taxable income and prudent and feasible tax planning strategies in assessing the need for a valuation allowance, should the Company determine it will not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the valuation allowance will be charged to income in the period in which such determination is made. A reduction in the valuation allowance and corresponding adjustment to income may be required if the likelihood of realizing existing deferred tax assets increases to a more likely than not level. The Company regularly reviews the realizability of deferred tax assets and initiates a review when significant changes in the Company’s business occur that could impact the realizability assessment.

In addition to a valuation allowance related to net operating loss carryforwards, the Company records liabilities for uncertain tax positions related to certain state and federal income tax positions. These liabilities reflect the Company’s best estimate of the ultimate income tax liability based on currently known facts and information. Material changes in facts or information as well as the expiration of the statute of limitations and/or settlements with individual tax jurisdictions may result in material adjustments to these estimates in the future. The Company recorded net decreases to its liability for uncertain tax positions in 2011 and 2010 primarily as a result of the expiration of the statute of limitations. The Company recorded a net increase to its liability for uncertain tax positions in 2012.

Revenue Recognition

Revenues are recognized when finished products are delivered to customers and both title and the risks and benefits of ownership are transferred, price is fixed and determinable, collection is reasonably assured and, in the case of full service vending, when cash is collected from the vending machines. Appropriate provision is made for uncollectible accounts.

The Company receives service fees from The Coca-Cola Company related to the delivery of fountain syrup products to The Coca-Cola Company’s fountain customers. In addition, the Company receives service fees from The Coca-Cola Company related to the repair of fountain equipment owned by The Coca-Cola Company. The fees received from The Coca-Cola Company for the delivery of fountain syrup products to their customers and the repair of their fountain equipment are recognized as revenue when the respective services are completed. Service revenue represents approximately 1% of net sales.

The Company performs freight hauling and brokerage for third parties in addition to delivering its own products. The freight charges are recognized as revenues when the delivery is complete. Freight revenue from third parties represents approximately 1% of net sales.

Revenues do not include sales or other taxes collected from customers.

Risk Management Programs

The Company uses various insurance structures to manage its workers’ compensation, auto liability, medical and other insurable risks. These structures consist of retentions, deductibles, limits and a diverse group of insurers that serve to strategically transfer and mitigate the financial impact of losses. The Company uses commercial insurance for claims as a risk reduction strategy to minimize catastrophic losses. Losses are accrued

 

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using assumptions and procedures followed in the insurance industry, adjusted for company-specific history and expectations. The Company has standby letters of credit, primarily related to its property and casualty insurance programs. On December 30, 2012, these letters of credit totaled $20.8 million. In connection with the letters of credit, the Company was required to maintain $3.0 million in restricted cash as of January 1, 2012. The requirement to maintain restricted cash for these letters of credit was eliminated in the first quarter of 2012.

Pension and Postretirement Benefit Obligations

The Company sponsors pension plans covering certain full-time nonunion employees and certain union employees who meet eligibility requirements. As discussed below, the Company ceased further benefit accruals under the principal Company-sponsored pension plan effective June 30, 2006. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets, employee turnover and age at retirement, as determined by the Company, within certain guidelines. In addition, the Company uses subjective factors such as mortality rates to estimate the projected benefit obligation. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net periodic pension cost recorded by the Company in future periods. The discount rate used in determining the actuarial present value of the projected benefit obligation for the Company’s pension plans was 4.47% in 2012 and 5.18% in 2011. The discount rate assumption is generally the estimate which can have the most significant impact on net periodic pension cost and the projected benefit obligation for these pension plans. The Company determines an appropriate discount rate annually based on the annual yield on long-term corporate bonds as of the measurement date and reviews the discount rate assumption at the end of each year.

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 nonunion plan effective June 30, 2006. Annual pension costs were $2.9 million, $2.9 million and $5.7 million in 2012, 2011 and 2010 respectively. The decrease in pension plan expense in 2011 compared to 2010 was primarily due to a change in the mortality assumption offset by a change in the amortization period for future benefits.

Annual pension expense is estimated to be approximately $1.7 million in 2013.

A .25% increase or decrease in the discount rate assumption would have impacted the projected benefit obligation and net periodic pension cost of the Company-sponsored pension plans as follows:

 

In Thousands

   .25% Increase     .25% Decrease  

Increase (decrease) in:

    

Projected benefit obligation at December 30, 2012

   $ (11,138   $ 11,832   

Net periodic pension cost in 2012

     (208     208   

The weighted average expected long-term rate of return of plan assets was 7% for 2012, 7% for 2011 and 8% for 2010. This rate reflects an estimate of long-term future returns for the pension plan assets. This estimate is primarily a function of the asset classes (equities versus fixed income) in which the pension plan assets are invested and the analysis of past performance of these asset classes over a long period of time. This analysis includes expected long-term inflation and the risk premiums associated with equity and fixed income investments. See Note 17 to the consolidated financial statements for the details by asset type of the Company’s pension plan assets at December 30, 2012 and January 1, 2012, and the weighted average expected long-term rate of return of each asset type. The actual return of pension plan assets were gains of 12.9% for 2012, 0.9% for 2011 and 12.1% for 2010.

The Company sponsors a postretirement health care plan for employees meeting specified qualifying criteria. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the net periodic postretirement benefit cost and postretirement benefit obligation for this plan. These factors include assumptions about the discount rate and the expected growth rate for the cost of health care benefits. In addition,

 

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the Company uses subjective factors such as withdrawal and mortality rates to estimate the projected liability under this plan. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. The Company does not pre-fund its postretirement benefits and has the right to modify or terminate certain of these benefits in the future.

The discount rate assumption, the annual health care cost trend and the ultimate trend rate for health care costs are key estimates which can have a significant impact on the net periodic postretirement benefit cost and postretirement obligation in future periods. The Company annually determines the health care cost trend based on recent actual medical trend experience and projected experience for subsequent years.

The discount rate assumptions used to determine the pension and postretirement benefit obligations are based on yield rates available on double-A bonds as of each plan’s measurement date. The discount rate used in determining the postretirement benefit obligation was 4.94% in 2011 and 4.11% in 2012. The discount rate was derived using the Aon/Hewitt AA above median yield curve. Projected benefit payouts for each plan were matched to the Aon/Hewitt AA above median yield curve and an equivalent flat rate was derived.

A .25% increase or decrease in the discount rate assumption would have impacted the projected benefit obligation and service cost and interest cost of the Company’s postretirement benefit plan as follows:

 

In Thousands

   .25%
Increase
    .25%
Decrease
 

Increase (decrease) in:

    

Postretirement benefit obligation at December 30, 2012

   $ (2,045   $ 2,149   

Service cost and interest cost in 2012

     (129     134   

A 1% increase or decrease in the annual health care cost trend would have impacted the postretirement benefit obligation and service cost and interest cost of the Company’s postretirement benefit plan as follows:

 

In Thousands

   1%
Increase
     1%
Decrease
 

Increase (decrease) in:

     

Postretirement benefit obligation at December 30, 2012

   $ 8,615       $ (7,777

Service cost and interest cost in 2012

     542         (490

New Accounting Pronouncements

Recently Adopted Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) amended its guidance on the presentation of comprehensive income in financial statements to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items that are recorded in other comprehensive income. The new guidance requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The Company elected to report components of comprehensive income in two separate but consecutive statements. The new guidance was effective for the quarter ended April 1, 2012 and was applied retrospectively. The Company’s adoption of the new guidance resulted in a change in the presentation of the Company’s consolidated financial statements but did not have any impact on the Company’s results of operations, financial position or liquidity.

In September 2011, the 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 new guidance did not have a material impact on the Company’s consolidated financial statements.

 

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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 new guidance did not 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 February 2013, the FASB issued new guidance which establishes new requirements for disclosing reclassifications of items out of accumulated other comprehensive income. The new guidance requires a company to report the effect of significant reclassifications from accumulated other comprehensive income to the respective line items in net income or cross-reference to other disclosures for items not reclassified entirely to net income. The new guidance is effective for annual and interim periods beginning after December 15, 2012. The new guidance expands disclosure of other comprehensive income but does not change the manner in which items of other comprehensive income are accounted for or the way in which net income or other comprehensive income is reported in the financial statements.

Results of Operations

2012 Compared to 2011

A summary of the Company’s financial results for 2012 and 2011 follows:

 

     Fiscal Year              

In Thousands (Except Per Share Data)

   2012     2011     Change     % Change  

Net sales

   $ 1,614,433      $ 1,561,239      $ 53,194        3.4   

Gross margin

     654,309 (1)      629,243 (3)      25,066        4.0   

S,D&A expenses

     565,623        541,713 (4)      23,910        4.4   

Interest expense, net

     35,338        35,979        (641     (1.8

Income before taxes

     53,348        51,551        1,797        3.5   

Income tax expense

     21,889 (2)      19,528 (5)      2,361        12.1   

Net income

     31,459 (1)(2)      32,023 (3)(4)(5)      (564     (1.8

Net income attributable to noncontrolling interest

     4,242        3,415        827        24.2   

Net income attributable to Coca-Cola Bottling Co. Consolidated

     27,217 (1)(2)      28,608 (3)(4)(5)      (1,391     (4.9

Basic net income per share:

        

Common Stock

   $ 2.95      $ 3.11      $ (.16     (5.1

Class B Common Stock

   $ 2.95      $ 3.11      $ (.16     (5.1

Diluted net income per share:

        

Common Stock

   $ 2.94      $ 3.09      $ (.15     (4.9

Class B Common Stock

   $ 2.92      $ 3.08      $ (.16     (5.2

 

(1) Results in 2012 included a favorable mark-to-market adjustment of $0.5 million (pre-tax), or $0.3 million after tax, related to the Company’s commodity hedging program which was reflected as a decrease in cost of sales.

 

(2) Results in 2012 included a debit of $1.5 million related to the increase of the valuation allowance for certain deferred tax assets which was reflected as an increase to income tax expense.

 

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(3) Results in 2011 included an unfavorable mark-to-market adjustment of $6.7 million (pre-tax), or $4.0 million after tax, related to the Company’s commodity hedging program, which was reflected as an increase in cost of sales.

 

(4) Results in 2011 included an unfavorable mark-to market adjustment of $0.2 million (pre-tax), or $0.1 million after tax, related to the Company’s commodity hedging program, which was reflected as an increase in S,D&A expenses.

 

(5) Results in 2011 included a credit of $0.9 million related to the reduction of the Company’s liability for uncertain tax positions mainly due to the expiration of applicable statute of limitations, which was reflected as a reduction to income tax expense.

Net Sales

Net sales increased $53.2 million, or 3.4%, to $1.61 billion in 2012 compared to $1.56 billion in 2011.

This increase in net sales was principally attributable to the following:

 

Amount

   

Attributable to:

(In Millions)      
$ 22.3      1.7% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products
  12.9      1.0% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages
  6.5      4.4% 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
  5.2      Increase in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)
  (4.4   2.9% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages
  3.0      3.6% increase in post-mix sales price per unit
  2.6      Increase in data analysis and consulting services
  1.9      2.3% increase in post-mix sales volume
  1.8      Increase in supply chain and logistics solutions consulting
  1.4      Other

 

 

   
$ 53.2      Total increase in net sales

 

 

   

In 2012, the Company’s bottle/can sales to retail customers accounted for 81.0% of 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.

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

 

     Bottle/Can Sales
Volume
    Bottle/Can Sales  Volume
% Increase (Decrease)
 

Product Category

   2012     2011    

Sparkling beverages (including energy products)

     82.8     84.1     (0.5

Still beverages

     17.2     15.9     9.1   
  

 

 

   

 

 

   

Total bottle/can volume

     100.0     100.0     1.0   
  

 

 

   

 

 

   

 

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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 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. The Company’s largest customer, Wal-Mart Stores, Inc., accounted for approximately 22% of the Company’s total bottle/can volume and approximately 15% of the Company’s total net sales during 2012. The Company’s second largest customer, Food Lion, LLC, accounted for approximately 8% of the Company’s total bottle/can volume and approximately 6% of the Company’s total net sales during 2012. All of the Company’s beverage sales are to customers in the United States.

The Company recorded delivery fees in net sales of $7.0 million in 2012 and $7.1 million in 2011. 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 increased 3.0%, or $28.1 million, to $960.1 million in 2012 compared to $932.0 million in 2011.

This increase in cost of sales was principally attributable to the following:

 

Amount

   

Attributable to:

(In Millions)      
$ 22.1      Increases in raw material costs and increased purchases of finished products
  7.6      1.0% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages
  3.9      Decrease in marketing funding support received primarily from The Coca-Cola Company
  (4.3   2.9% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages
  (2.8   Decrease in cost due to the Company’s commodity hedging program
  2.2      Increase in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)
  1.3      2.3% increase in post-mix sales volume
  (1.9   Other

 

 

   
$ 28.1      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) finished products purchased from other vendors. The Company anticipates that the cost 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 2013 compared to 2012 due to the impact of these rising commodity costs unless they can be offset by 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

 

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and Allied Beverages is governed by the Incidence Pricing Agreement rather than the Cola and Allied Beverage Agreements. The concentrate price 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.

The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca-Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the local territories served by the Company. The Company also benefits from national advertising programs conducted by The Coca-Cola Company and other beverage companies. Certain of the marketing expenditures by The Coca-Cola Company and other beverage companies are made pursuant to annual arrangements. Although The Coca-Cola Company has advised the Company that it intends to continue to provide marketing funding support, it is not obligated to do so under the Company’s Beverage Agreements. Significant decreases in marketing funding support from The Coca-Cola Company or other beverage companies could adversely impact operating results of the Company in the future.

Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to the Company’s customers for marketing programs, was $53.6 million in 2012 compared to $57.5 million in 2011.

Gross Margin

Gross margin dollars increased 4.0%, or $25.1 million, to $654.3 million in 2012 compared to $629.2 million in 2011. Gross margin as a percentage of net sales increased to 40.5% in 2012 from 40.3% in 2011.

This increase in gross margin was principally attributable to the following:

 

Amount

   

Attributable to:

(In Millions)      
$ 22.3      1.7% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages except energy products
  (22.1   Increases in raw material costs and increased purchases of finished products
  6.5      4.4% 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
  5.3      1.0% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages
  (3.9   Decrease in marketing funding support received primarily from The Coca-Cola Company
  3.0      Increase in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)
  3.0      3.6% increase in post-mix sales price per unit
  2.8      Decrease in cost due to the Company’s commodity hedging program
  2.6      Increase in data analysis and consulting services
  1.8      Increase in supply chain and logistics solutions consulting
  0.6      2.3% increase in post-mix sales volume
  (0.1   2.9% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages
  3.3      Other

 

 

   
$ 25.1      Total increase in gross margin

 

 

   

 

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The increase in gross margin percentage was 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 finished products.

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 $23.9 million, or 4.4%, to $565.6 million in 2012 from $541.7 million in 2011. S,D&A expenses as a percentage of sales increased to 35.0% in 2012 from 34.7% in 2011.

This increase in S,D&A expenses was principally attributable to the following:

 

Amount

    

Attributable to:

(In Millions)       
$ 8.6       Increase in employee salaries including bonus and incentives due to normal salary increases and additional personnel
  3.7       Increase in employee benefit costs primarily due to increased medical insurance (active and retiree) offset by decreased 401(k) match expense
  2.7       Increase in marketing expense primarily due to various marketing programs
  2.4       Increase in professional and consulting expense
  1.3       Increase in software amortization (continued investment in technology)
  1.0       Increase in communication expense (primarily data)
  0.8       Increase in employer payroll taxes
  0.7       Increase in property and casualty insurance expense primarily due to an increase in workers’ compensation claims
  2.7       Other

 

 

    
$ 23.9       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 $200.0 million and $191.9 million in 2012 and 2011, respectively.

The net impact of the Company’s commodity hedging program on S,D&A expenses was an increase of $.6 million in 2011. There was no impact on S,D&A expenses in 2012.

The Company’s expense recorded in S,D&A expenses related to the two Company-sponsored pension plans was $2.5 million in both 2012 and 2011.

The Company provides a 401(k) Savings Plan for substantially all of the Company’s full-time employees who are not covered by a collective bargaining agreement. The Company matched the first 3% of participants’

 

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contributions for 2011 while maintaining the option to increase the matching contributions an additional 2%, for a total of 5%, for the Company’s employees based on the financial results for 2011. The 2% matching contributions were accrued during 2011 for a total accrual 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 match the first 3% of participants’ contributions while maintaining 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 5% matching contributions were accrued (less 3% matching contributions paid in the first quarter of 2012) during 2012 for a total accrual of $7.7 million. Based on the Company’s financial results, the Company decided to make matching contributions of 5% of participants’ contributions for the entire year of 2012. The Company made this contribution payment for 2012 in the first quarter of 2013. The total expense for this benefit recorded in S,D&A expenses was $7.2 million and $7.5 million in 2012 and 2011, respectively.

Interest Expense

Net interest expense decreased 1.8%, or $.6 million in 2012 compared to 2011. The decrease was primarily due to the repayment at maturity of $150 million of Senior Notes in November 2012. This was partially offset by 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 2012 from 6.0% during 2011. See the “Liquidity and Capital Resources – Hedging Activities Interest and Hedging” section of M,D&A for additional information.

Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for 2012 and 2011 was 41.0% and 37.9%, respectively. The increase in the effective tax rate for 2012 resulted primarily from an increase in the liability for uncertain tax positions and an increase to the valuation allowance in 2012 as compared to 2011. The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, for 2012 and 2011 was 44.6% and 40.6%, respectively.

The Company increased its valuation allowance by $1.8 million for 2012. The net effect was an increase in income tax expense due primarily to the Company’s assessment of its ability to use certain net operating loss carryforwards. In 2012, the Company increased its liability for uncertain tax positions by $.8 million resulting in an increase to income tax expense. In 2011, the Company reduced its liability for uncertain tax positions by $.2 million resulting in a decrease to income tax expense. See Note 14 to the consolidated financial statements for additional information.

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.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $4.2 million in 2012 compared to $3.4 million in 2011 primarily related to the portion of Piedmont owned by The Coca-Cola Company.

 

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2011 Compared to 2010

A summary of the Company’s financial results for 2011 and 2010 follows:

 

     Fiscal Year              

In Thousands (Except Per Share Data)

   2011     2010     Change     % Change  

Net sales

   $ 1,561,239      $ 1,514,599      $ 46,640        3.1   

Gross margin

     629,243 (1)      640,816 (4)(5)      (11,573     (1.8

S,D&A expenses

     541,713 (2)      544,498 (6)(7)      (2,785     (0.5

Interest expense, net

     35,979        35,127        852        2.4   

Income before taxes

     51,551        61,191        (9,640     (15.8

Income tax expense

     19,528 (3)      21,649 (8)      (2,121     (9.8

Net income

     32,023 (1)(2)(3)      39,542 (4)(5)(6)(7)(8)      (7,519     (19.0

Net income attributable to noncontrolling interest

     3,415        3,485        (70     (2.0

Net income attributable to Coca-Cola Bottling Co. Consolidated

     28,608 (1)(2)(3)      36,057 (4)(5)(6)(7)(8)      (7,449     (20.7

Basic net income per share:

        

Common Stock

   $ 3.11      $ 3.93      $ (.82     (20.9

Class B Common Stock

   $ 3.11      $ 3.93      $ (.82     (20.9

Diluted net income per share:

        

Common Stock

   $ 3.09      $ 3.91      $ (.82     (21.0

Class B Common Stock

   $ 3.08      $ 3.90      $ (.82     (21.0

 

(1) Results in 2011 included an unfavorable mark-to-market adjustment of $6.7 million (pre-tax), or $4.0 million after tax, related to the Company’s commodity hedging program, which was reflected as an increase in cost of sales.

 

(2) Results in 2011 included an unfavorable mark-to market adjustment of $0.2 million (pre-tax), or $0.1 million after tax, related to the Company’s commodity hedging program, which was reflected as an increase in S,D&A expenses.

 

(3) Results in 2011 included a credit of $0.9 million related to the reduction of the Company’s liability for uncertain tax positions mainly due to the expiration of applicable statute of limitations, which was reflected as a reduction to income tax expense.

 

(4) Results in 2010 included an unfavorable mark-to-market adjustment of $3.8 million (pre-tax), or $2.3 million after tax, related to the Company’s commodity hedging program, which was reflected as an increase in cost of sales.

 

(5) Results in 2010 included a credit of $.9 million (pre-tax), or $.6 million after tax, related to the gain on the replacement of flood damaged equipment, which was reflected as a reduction in cost of sales.

 

(6) Results in 2010 included an unfavorable mark-to-market adjustment of $1.4 million (pre-tax), or $0.9 million after tax, related to the Company’s commodity hedging program, which was reflected as an increase in S,D&A expenses.

 

(7) Results in 2010 included a debit of $3.7 million (pre-tax), or $2.2 million after tax, related to the impairment/accelerated depreciation of property, plant and equipment, which was reflected as an increase in S,D&A expenses.

 

(8) Results in 2010 included a credit of $1.7 million related to the reduction of the Company’s liability for uncertain tax positions mainly due to the expiration of applicable statute of limitations, which was reflected as a reduction to income tax expense and a debit of $.5 million related to the impact of the change in the tax law eliminating the tax deduction for Medicare Part D subsidy, which was reflected as an increase to income tax expense.

 

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Net Sales

Net sales increased $46.6 million, or 3.1%, to $1.56 billion in 2011 compared to $1.51 billion in 2010.

This increase in net sales was principally attributable to the following:

 

Amount

   

Attributable to:

(In Millions)      
$ 23.1      1.8% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages (except energy products) and a change in product mix due to a higher percentage of still beverages sold, which have a higher sales price per unit partially offset by a decrease in sales price per unit of still beverages
  6.6      4.6% 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 except energy products
  7.9      Increase in freight revenue
  3.7      .3% increase in bottle/can volume primarily due to a volume increase in still beverages partially offset by a volume decrease in sparkling beverages except energy products
  3.7      5.0% increase in post-mix sales volume
  3.4      Increase in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)
  1.7      2.2% increase in post-mix sales price per unit
  (1.2   .9% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages
  (2.3   Other

 

 

   
$ 46.6      Total increase in net sales

 

 

   

In 2011, the Company’s bottle/can sales to retail customers accounted for 81.5% of 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.

The increase in sales price per unit of sparkling beverages and the volume decrease in sparkling beverages in 2011 were primarily the result of an event that occurred in 2010 which was not repeated in 2011. During all of the second quarter of 2010, the Company’s largest customer, Wal-Mart Stores, Inc., had a promotion on 24-pack 12-ounce cans which increased overall 12-ounce sparkling can sales volume and overall bottle/can volume in 2010 while lowering sparkling sales price per unit as 24-pack 12-ounce cans have a lower sales price per unit than other sparkling beverages.

Product category sales volume in 2011 and 2010 as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

 

      Bottle/Can Sales
Volume
    Bottle/Can Sales  Volume
% Increase (Decrease)
 

Product Category

   2011     2010    

Sparkling beverages (including energy products)

     84.1     85.0     (0.7

Still beverages

     15.9     15.0     6.1   
  

 

 

   

 

 

   

Total bottle/can volume

     100.0     100.0     0.3   
  

 

 

   

 

 

   

 

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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 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 21% of the Company’s total bottle/can volume and approximately 15% of the Company’s total net sales during 2011. The Company’s second largest customer, Food Lion, LLC, accounted for approximately 9% of the Company’s total bottle/can volume and approximately 7% of the Company’s total net sales during 2011. All of the Company’s beverage sales are to customers in the United States.

The Company recorded delivery fees in net sales of $7.1 million in 2011 and $7.5 million in 2010. These fees are used to offset a portion of the Company’s delivery and handling costs.

Cost of Sales

Cost of sales increased 6.7%, or $58.2 million, to $932.0 million in 2011 compared to $873.8 million in 2010.

This increase in cost of sales was principally attributable to the following:

 

Amount

   

Attributable to:

(In Millions)      
  $45.3      Increases in raw material costs such as plastic bottles
  7.4      Increase in freight cost of sales
  (3.9   Increase in marketing funding support received primarily from The Coca-Cola Company
  2.5      5.0% increase in post-mix sales volume
  2.1      .3% increase in bottle/can volume primarily due to a volume increase in still beverages that was partially offset by a decrease in sparkling beverages (except energy products)
  1.3      Increase in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)
  (1.1   .9% decrease in sales volume to other Coca-Cola bottlers primarily due to decreases in sparkling beverages
  0.9      Gain on the replacement of flood damaged production equipment in 2010
  (0.4   Decrease in cost due to the Company’s commodity hedging program
  4.1      Other

 

 

   
  $58.2      Total increase in cost of sales

 

 

   

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 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. For 2010 and 2011, the Company continued to utilize the incidence pricing model.

Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to the Company’s customers for marketing programs, was $57.5 million in 2011 compared to $53.6 million in 2010.

 

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The Company’s production facility located in Nashville, Tennessee was damaged by a flood in May 2010. The Company recorded a gain of $.9 million from the replacement of production equipment damaged by the flood. The gain was based on replacement value insurance coverage that exceeded the net book value of the damaged production equipment.

Gross Margin

Gross margin dollars decreased 1.8%, or $11.6 million, to $629.2 million in 2011 compared to $640.8 million in 2010. Gross margin as a percentage of net sales decreased to 40.3% in 2011 from 42.3% in 2010.

This decrease in gross margin was principally attributable to the following:

 

Amount

    

Attributable to:

(In Millions)       
  $(45.3)       Increases in raw material costs such as plastic bottles
  23.1       1.8% increase in bottle/can sales price per unit primarily due to an increase in sales price per unit in sparkling beverages (except energy products) and a change in product mix due to a higher percentage of still beverages sold, which have a higher sales price per unit partially offset by a decrease in sales price per unit of still beverages
  6.6       4.6% 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 except energy products
  3.9       Increase in marketing funding support received primarily from The Coca-Cola Company
  2.1       Increase in sales of the Company’s own brand portfolio (primarily Tum-E Yummies)
  1.7       2.2% increase in post-mix sales price per unit
  1.6       .3% increase in bottle/can volume primarily due to a volume increase in still beverages partially offset by a decrease in sparkling beverages except energy products
  1.2       5.0% increase in post-mix sales volume
  (0.9)       Gain on the replacement of flood damaged production equipment in 2010
  0.5       Increase in freight gross margin
  0.4       Decrease in cost due to the Company’s commodity hedging program
  (0.1)       .9% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in sparkling beverages
  (6.4)       Other

 

 

    
  $(11.6)       Total decrease in gross margin

 

 

    

The decrease in gross margin percentage was primarily due to higher costs of raw materials that were partially offset by higher bottle/can sales prices per unit.

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 decreased by $2.8 million, or .5%, to $541.7 million in 2011 from $544.5 million in 2010. S,D&A expenses as a percentage of sales decreased to 34.7% in 2011 from 35.9% in 2010.

 

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This decrease in S,D&A expenses was principally attributable to the following:

 

Amount

   

Attributable to:

(In Millions)      
  $(3.7   Decrease in impairment/accelerated depreciation of property, plant and equipment ($3.7 million in 2010)
  (2.5   Decrease in bonus expense, incentive expense and other performance pay initiatives due to the Company’s financial performance
  2.3      Increase in marketing expense primarily due to various marketing programs
  (2.2   Decrease in property and casualty insurance expense primarily due to a decrease in auto and workers’ compensation claims
  1.9      Increase in employee salaries primarily due to normal salary increases
  1.8      Increase in depreciation and amortization of property, plant and equipment primarily due to increased purchases of refurbished vending machines with shorter useful lives, increased amortization from software projects and two additional capital leases entered into the first quarter of 2011
  0.7      Increase in fuel costs related to the movement of finished goods from sales distribution centers to customer locations
  (0.6   Decrease in loss on sale of property, plant and equipment
  (0.5   Decrease in professional fees primarily due to consulting project support in 2010
  0.5      Increase in bad debt expense
  0.2      Increase in employee benefit costs primarily due to increased medical insurance (active and retiree) offset by decreased pension expense
  (0.7   Other

 

 

   
  $(2.8   Total decrease 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 $191.9 million and $187.2 million in 2011 and 2010, respectively.

The net impact of the Company’s commodity hedging program on S,D&A expenses was an increase of $.6 million and $1.7 million in 2011 and 2010, respectively.

During 2010, the Company performed a review of property, plant and equipment. As a result of this review, $.9 million was recorded to impairment expense for five Company-owned sales distribution centers held-for-sale. The Company also recorded accelerated depreciation of $.5 million for certain other property, plant and equipment which was replaced in the first quarter of 2011. During 2010, the Company also determined the warehouse operations in Sumter, South Carolina would be relocated to other facilities and recorded impairment and accelerated depreciation of $2.2 million for the value of equipment and real estate related to the Sumter, South Carolina property.

The Company’s expense recorded in S,D&A expenses related to the two Company-sponsored pension plans decreased by $2.4 million from $4.9 million in 2010 to $2.5 million in 2011.

The Company provides a 401(k) Savings Plan for substantially all of the Company’s full-time employees who are not covered by a collective bargaining agreement. The Company matched the first 3% of participants’ contributions for 2010 and 2011. The Company maintained the option to increase the Company’s matching contributions by up to an additional 2%, for a total of 5%, based on the Company’s financial results. Based on the

 

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Company’s financial results, the Company decided to increase the matching contributions for the additional 2% for the entire year of 2010. The Company made these additional contribution payments for each quarter in 2010 in the following quarter concluding with the fourth quarter of 2010 payment being made in the first quarter of 2011. 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 2% matching contributions were accrued during 2011. The Company made the additional contribution payment for 2011 in the first quarter of 2012. The total cost, including the 2% matching contributions for this benefit recorded in S,D&A expenses, was $7.5 million and $7.6 million in 2011 and 2010, respectively.

Interest Expense

Net interest expense increased 2.4%, or $.9 million in 2011 compared to 2010. 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 6.0% during 2011 from 5.9% during 2010. This increase is the result of the conversion of one of the Company’s capital leases from a floating rate to a fixed rate in late 2010, combined with the Company’s use of short-term borrowings in 2010 at low variable rates relative to the fixed rates on the Company’s Senior Debt. See the “Liquidity and Capital Resources — Hedging Activities — Interest Rate Hedging” section of M,D&A for additional information.

Income Taxes

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, for 2011 and 2010 was 37.9% and 35.4%, respectively. The increase in the effective tax rate for 2011 resulted primarily from a comparatively lower reduction in the liability for uncertain tax positions and an increase to the valuation allowance in 2011 as compared to 2010. The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, for 2011 and 2010 was 40.6% and 37.5%, respectively.

During 2010, the Company reduced its liability for uncertain tax positions by $1.7 million resulting in a decrease in income tax expense. The reduction of the liability for uncertain tax positions was due primarily to the expiration of the applicable statute of limitations. During 2011, the Company reduced its liability for uncertain tax positions by $.9 million resulting in a decrease in income tax expense. The reduction of the liability for uncertain tax positions was due primarily to the expiration of the applicable statute of limitations. See Note 14 to the consolidated financial statements for additional information.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $3.4 million in 2011 compared to $3.5 million in 2010 primarily related to the portion of Piedmont owned by The Coca-Cola Company.

Financial Condition

Total assets decreased to $1.28 billion at December 30, 2012 from $1.36 billion at January 1, 2012 primarily due to a decrease in cash and cash equivalents (primarily due to the repayment of Senior Notes in November 2012).

Net working capital, defined as current assets less current liabilities, increased by $6.6 million to $25.0 million at December 30, 2012 from $18.4 million at January 1, 2012.

Significant changes in net working capital from January 1, 2012 to December 30, 2012 were as follows:

 

   

A decrease in cash and cash equivalents of $80.4 million primarily due to the repayment of Senior Notes in November 2012.

 

   

An increase in accounts receivable from The Coca-Cola Company and a decrease in accounts payable to The Coca-Cola Company of $6.2 million and $6.3 million, respectively, primarily due to the timing of payments.

 

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A decrease in current portion of long-term debt of $100.0 million due to the repayment of $150 million of Senior Notes that matured in November 2012. The Company had $20 million outstanding on an uncommitted line of credit at the end of 2012 that was used to repay the Senior Notes in November 2012. In 2011, $120 million of the $150 million Senior Notes due November 2012 was classified as current as this was the expected amount to be paid from available cash plus amounts borrowed from an uncommitted line of credit. The remaining $30 million of Senior Notes due in 2012 was expected to be paid from amounts to be borrowed on the Company’s $200 million five-year unsecured revolving credit facility (“$200 million facility”).

 

   

An increase in accounts payable, trade of $9.4 million primarily due to the timing of payments.

 

   

An increase in other accrued liabilities of $6.9 million primarily due to an increase in employee benefits accruals and the timing of payments.

Debt and capital lease obligations were $493.0 million as of December 30, 2012 compared to $597.3 million as of January 1, 2012. Debt and capital lease obligations as of December 30, 2012 and January 1, 2012 included $69.6 million and $74.1 million, respectively, of capital lease obligations related primarily to Company facilities.

Contributions to the Company’s pension plans were $25.0 million and $9.5 million in 2012 and 2011, respectively. The Company anticipates that contributions to the principal Company-sponsored pension plan in 2013 will be in the range of $1 million to $5 million.

Liquidity and Capital Resources

Capital Resources

The Company’s sources of capital include cash flows from operations, available credit facilities and the issuance of debt and equity securities. Management believes the Company has sufficient financial resources available to finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months. 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 or paid in the future.

As of December 30, 2012, the Company had $170 million available under the $200 million facility to meet its cash requirements. On September 21, 2011, the Company entered into the $200 million facility replacing the Company’s previous $200 million five-year unsecured revolving credit facility, dated March 8, 2007, which had been scheduled to mature in March 2012. 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 agreement 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 Company’s $200 million facility have the ability to and will meet any funding requests from the Company.

On February 10, 2010, the Company entered into an agreement for an uncommitted line of credit. Under this agreement, which is still in place, 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.

 

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The Company used a combination of available cash on hand, borrowings on the uncommitted line of credit and borrowings under the $200 million facility to repay $150 million of the Company’s Senior Notes that matured in November 2012. The Company classified $30 million of these Senior Notes as long-term at January 1, 2012 representing the portion the Company expected to repay using the $200 million facility.

The Company has obtained the majority of its long-term financing, other than capital leases, from public markets. As of December 30, 2012, $373.4 million of the Company’s total outstanding balance of debt and capital lease obligations of $493.0 million was financed through publicly offered debt. The Company had capital lease obligations of $69.6 million as of December 30, 2012. On December 30, 2012, the Company had $30.0 million and $20.0 million outstanding on the $200 million facility and the Company’s uncommitted line of credit, respectively.

Cash Sources and Uses

The primary sources of cash for the Company has 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 cash activity for 2012 and 2011 follows:

 

     Fiscal Year  

In Millions

   2012     2011  

Cash sources

    

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

   $ 122.3      $ 139.6   

Proceeds from $200 million facility

     30.0          

Proceeds from uncommitted line of credit

     20.0          

Proceeds from the reduction of restricted cash

     3.0        .5   

Proceeds from the sale of property, plant and equipment

     .7        1.8   
  

 

 

   

 

 

 

Total cash sources

   $ 176.0      $ 141.9   
  

 

 

   

 

 

 

Cash uses

    

Payment of $150 million Senior Notes

   $ 150.0      $   

Capital expenditures

     53.3        53.2   

Debt issuance costs

            .7   

Contributions to pension plans

     25.0        9.5   

Payment of capital lease obligations

     4.7        3.8   

Income tax payments

     14.1        20.4   

Dividends

     9.2        9.2   

Other

     .1        .2   
  

 

 

   

 

 

 

Total cash uses

   $ 256.4      $ 97.0   
  

 

 

   

 

 

 

Increase (decrease) in cash

   $ (80.4   $ 44.9   
  

 

 

   

 

 

 

Based on current projections, which include a number of assumptions such as the Company’s pre-tax earnings, the Company anticipates its cash requirements for income taxes will be between $18 million and $25 million in 2013.

Operating Activities

During 2012, cash flow provided by operating activities decreased $26.5 million compared to 2011. The decrease was primarily due to net changes in accounts receivable from The Coca-Cola Company and accounts payable to The Coca-Cola Company of $25.2 million, a $12.5 million decrease in 2012 compared to a

 

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$12.7 million increase in 2011. Additionally, an increase in contributions to pension plans of $15.5 million, $25.0 million in 2012 compared to $9.5 million in 2011 was offset by a decrease in income tax payments of $6.3 million, $14.1 million paid in 2012 compared to $20.4 million in 2011.

Investing Activities

Additions to property, plant and equipment during 2012 were $61.5 million of which $14.4 million were accrued in accounts payable, trade as unpaid. This amount compared to $49.0 million in additions to property, plant and equipment during 2011 of which $6.2 million were accrued in accounts payable, trade as unpaid. Capital expenditures during 2012 were funded with cash flows from operations. The Company anticipates that additions to property, plant and equipment in 2013 will be in the range of $75 million to $85 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 December 30, 2012, the Company had $170 million available under the $200 million facility to meet its short-term borrowing requirements. On September 21, 2011, the Company entered into the $200 million facility replacing the Company’s previous $200 million five-year unsecured revolving credit facility, dated March 8, 2007, which had been scheduled to mature in March 2012. 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 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 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 December 30, 2012 the Company had $30.0 million outstanding borrowings under the $200 million facility. On January 1, 2012, the Company had no outstanding borrowings on the $200 million facility.

On February 10, 2010, the Company entered into an agreement for an uncommitted line of credit. Under this agreement, which is still in place, 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 December 30, 2012, the Company had $20.0 million outstanding under the uncommitted line of credit. On January 1, 2012, the Company had no outstanding borrowings under the uncommitted line of credit.

The Company used a combination of available cash on hand, borrowings on the uncommitted line of credit and borrowings under the $200 million facility to repay $150 million of the Company’s Senior Notes that matured in November 2012. The Company had classified $30 million of these Senior Notes as long-term at January 1, 2012 representing the portion the Company expected to repay using the $200 million facility.

All of the outstanding debt 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.

 

 

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At December 30, 2012, the Company’s credit ratings were as follows:

 

     Long-Term Debt  

Standard & Poor’s

     BBB   

Moody’s

     Baa2   

The Company’s credit ratings, which the Company is disclosing to enhance understanding of the Company’s sources of liquidity and the effect of the Company’s ratings on the Company’s cost of funds, 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 Company’s public debt is not subject to financial covenants but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts.

Off-Balance Sheet Arrangements

The Company is a member of two manufacturing cooperatives and has guaranteed $35.9 million of their debt as of December 30, 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 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. As of December 30, 2012, the Company’s maximum exposure, if both of these cooperatives borrowed up to their aggregate borrowing capacity, would have been $72.8 million including the Company’s equity interest. See Note 13 and Note 18 of the consolidated financial statements for additional information.

Aggregate Contractual Obligations

The following table summarizes the Company’s contractual obligations and commercial commitments as of December 30, 2012:

 

     Payments Due by Period  

In Thousands

   Total      2013      2014-2015      2016-2017      2018 and
Thereafter
 

Contractual obligations:

              

Total debt, net of interest

   $ 423,386       $ 20,000       $ 100,000       $ 194,757       $ 108,629   

Capital lease obligations, net of interest

     69,581         5,230         11,939         14,162         38,250   

Estimated interest on debt and capital lease obligations(1)

     114,703         26,204         46,521         25,436         16,542   

Purchase obligations(2)

     133,060         93,925         39,135                   

Other long-term liabilities(3)

     124,846         12,393         18,050         13,277         81,126   

Operating leases

     40,846         5,974         9,936         6,702         18,234   

Long-term contractual arrangements(4)

     35,985         9,330         13,972         5,950         6,733   

Postretirement obligations

     69,828         2,653         6,046         7,210         53,919   

Purchase orders(5)

     35,029         35,029                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 1,047,264       $ 210,738       $ 245,599       $ 267,494       $ 323,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) Includes interest payments based on contractual terms.

 

(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, athletic 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 performed.

The Company has $5.5 million of uncertain tax positions including accrued interest, as of December 30, 2012 (excluded from other long-term liabilities in the table above because the Company is uncertain if or when such amounts will be recognized) of which $3.0 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 such change would have a significant impact on the consolidated financial statements. See Note 14 of the consolidated financial statements for additional information.

The Company is a member of Southeastern Container, a plastic bottle manufacturing cooperative, from which the Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. This obligation is not included in the Company’s table of contractual obligations and commercial commitments since there are no minimum purchase requirements. See Note 13 and Note 18 to the consolidated financial statements for additional information related to Southeastern.

As of December 30, 2012, the Company had $20.8 million of standby letters of credit, primarily related to its property and casualty insurance programs. See Note 13 of the consolidated financial statements for additional information related to commercial commitments, guarantees, legal and tax matters.

The Company contributed $25.0 million to its two Company-sponsored pension plans in 2012. Based on information currently available, the Company estimates it will be required to make cash contributions in 2013 in the range of $1 million to $5 million to those two plans. Postretirement medical care payments are expected to be approximately $3 million in 2013. See Note 17 to the consolidated financial statements for additional information related to pension and postretirement obligations.

Hedging Activities

Interest Rate Hedging

The Company periodically uses interest rate hedging products to mitigate risk from interest rate fluctuations. The Company has historically altered its fixed/floating rate mix based upon anticipated cash flows from operations relative to the Company’s debt level and the potential impact of changes in interest rates on the Company’s overall financial condition. Sensitivity analyses are performed to review the impact on the Company’s financial position and coverage of various interest rate movements. The Company does not use derivative financial instruments for trading purposes nor does it use leveraged financial instruments.

The Company has not had any interest rate swap agreements outstanding since September 2008.

Interest expense was reduced by $1.1 million, $1.2 million and $1.2 million due to amortization of the deferred gains on previously terminated interest rate swap agreements and forward interest rate agreements during 2012, 2011 and 2010, respectively. Interest expense will be reduced by the amortization of these deferred gains in 2013 through 2015 as follows: $.5 million, $.6 million, and $.1 million, respectively.

As of December 30, 2012 and January 1, 2012, the Company had a weighted average interest rate of 5.9% and 6.0%, respectively, for its outstanding debt and capital lease obligations. The Company’s overall weighted

 

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average interest rate on its debt and capital lease obligations increased to 6.1% in 2012 from 6.0% in 2011. As of December 30, 2012, $50.0 million of the Company’s debt and capital lease obligations of $493.0 million was maintained on a floating rate basis or was subject to changes in short-term interest rates.

Commodity Hedging

The Company entered into derivative instruments to hedge certain commodity purchases for 2013, 2011 and 2010. The Company pays fees for these instruments which are amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment of cost of sales or S,D&A expenses.

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions.

The net impact of the commodity hedges was to decrease the cost of sales by $.5 million in 2012, increase the cost of sales by $2.3 million in 2011 and increase the cost of sales by $2.6 million in 2010 and to increase S,D&A expenses by $.6 million and $1.7 million in 2011 and 2010, respectively.

 

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CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, as well as information included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company, contains, or may contain, forward-looking management comments and other statements that reflect management’s current outlook for future periods. These statements include, among others, statements relating to:

 

   

the Company’s belief that the covenants on its $200 million facility will not restrict its liquidity or capital resources;

 

   

the Company’s belief that other parties to certain contractual arrangements will perform their obligations;

 

   

the Company’s potential marketing funding support from The Coca-Cola Company and other beverage companies;

 

   

the Company’s belief that the risk of loss with respect to funds deposited with banks is minimal;

 

   

the Company’s belief that disposition of certain claims and legal proceedings will not have a material adverse effect on its financial condition, cash flows or results of operations and that no material amount of loss in excess of recorded amounts is reasonably possible as a result of these claims and legal proceedings;

 

   

the Company’s belief that the Company has adequately provided for any ultimate amounts that are likely to result from tax audits;

 

   

the Company’s belief that 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 Company’s belief that the cooperatives whose debt the Company guarantees have sufficient assets and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss and that the cooperatives will perform their obligations under their debt commitments;

 

   

the Company’s belief that certain franchise rights are perpetual or will be renewed upon expiration;

 

   

the Company’s key priorities which are revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity;

 

   

the Company’s expectation that new product introductions, packaging changes and sales promotions will continue to require substantial expenditures;

 

   

the Company’s belief that there is substantial and effective competition in each of the exclusive geographic territories in the United States in which it operates for the purposes of the United States Soft Drink Interbrand Competition Act;

 

   

the Company’s belief that it may market and sell nationally certain products it has developed and owns;

 

   

the Company’s belief that cash requirements for income taxes will be in the range of $18 million to $25 million in 2013;

 

   

the Company’s anticipation that pension expense related to the two Company-sponsored pension plans is estimated to be approximately $2 million in 2013;

 

   

the Company’s belief that cash contributions in 2013 to its two Company-sponsored pension plans will be in the range of $1 million to $5 million;

 

   

the Company’s belief that postretirement benefit payments are expected to be approximately $3 million in 2013;

 

   

the Company’s expectation that additions to property, plant and equipment in 2013 will be in the range of $75 million to $85 million;

 

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the Company’s belief that compliance with environmental laws will not have a material adverse effect on its capital expenditures, earnings or competitive position;

 

   

the Company’s belief that the majority of its deferred tax assets will be realized;

 

   

the Company’s intention to renew substantially all the Allied Beverage Agreements and Still Beverage Agreements as they expire;

 

   

the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements;

 

   

the Company’s expectations that raw materials will rise significantly in 2013 and that gross margins will be lower throughout 2013 compared to 2012, if these costs cannot be offset with price increases;

 

   

the Company’s belief that innovation of new brands and packages will continue to be critical to the Company’s overall revenue;

 

   

the Company’s beliefs that the growth prospects of Company-owned or exclusive licensed brands appear promising and the cost of developing, marketing and distributing these brands may be significant;

 

   

the Company’s expectation that uncertain tax positions may change over the next 12 months but will not have a significant impact on the consolidated financial statements;

 

   

the Company’s belief that all of the banks participating in the Company’s $200 million facility have the ability to and will meet any funding requests from the Company;

 

   

the Company’s belief that it is competitive in its territories with respect to the principal methods of competition in the nonalcoholic beverage industry;

 

   

the Company’s hypothetical calculation of the impact of a 1% increase in interest rates on outstanding floating rate debt and capital lease obligations for the next twelve months as of December 30, 2012; and

 

   

the Company’s estimate that a 10% increase in the market price of certain commodities over the current market prices would cumulatively increase costs during the next 12 months by approximately $23 million assuming no change in volume.

These statements and expectations are based on currently available competitive, financial and economic data along with the Company’s operating plans, and are subject to future events and uncertainties that could cause anticipated events not to occur or actual results to differ materially from historical or anticipated results. Factors that could impact those differences or adversely affect future periods include, but are not limited to, the factors set forth under Item 1A. — Risk Factors.

Caution should be taken not to place undue reliance on the Company’s forward-looking statements, which reflect the expectations of management of the Company only as of the time such statements are made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to certain market risks that arise in the ordinary course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for trading purposes. A discussion of the Company’s primary market risk exposure and interest rate risk is presented below.

Debt and Derivative Financial Instruments

The Company is subject to interest rate risk on its fixed and floating rate debt. The Company periodically uses interest rate hedging products to modify risk from interest rate fluctuations. The counterparties to these interest rate hedging arrangements were major financial institutions with which the Company also has other financial relationships. The Company did not have any interest rate hedging products as of December 30, 2012. As of December 30, 2012, $50.0 million of the Company’s debt and capital lease obligations of $493.0 million were subject to changes in short-term interest rates.

As it relates to the Company’s variable rate debt, assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of December 30, 2012, interest expense for the next twelve months would increase by approximately $.3 million. This amount was determined by calculating the effect of the hypothetical interest rate on our variable rate debt. This calculated, hypothetical increase in interest expense for the following twelve months may be different from the actual increase in interest expense from a 1% increase in interest rates due to varying interest rate reset dates on the Company’s floating rate debt.

Raw Material and Commodity Prices

The Company is also subject to commodity price risk arising from price movements for certain commodities included as part of its raw materials. The Company manages this commodity price risk in some cases by entering into contracts with adjustable prices. The Company periodically uses derivative commodity instruments in the management of this risk. The Company estimates that a 10% increase in the market prices of these commodities over the current market prices would cumulatively increase costs during the next 12 months by approximately $23 million assuming no change in volume.

In the third quarter of 2012, the Company entered into agreements to hedge a portion of the Company’s 2013 aluminum purchases. The Company paid a fee for these instruments which will be amortized over the corresponding period of the instruments. The Company accounts for its aluminum hedges on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales.

Effect of Changing Prices

The annual rate of inflation in the United States, as measured by year-over-year changes in the consumer price index, was 1.7% in 2012 compared to 3.0% in 2011 and 1.5% in 2010. Inflation in the prices of those commodities important to the Company’s business is reflected in changes in the consumer price index, but commodity prices are volatile and can and have in recent years increased at a faster rate than the rate of inflation as measured by the consumer price index.

The principal effect of inflation in both commodity and consumer prices on the Company’s operating results is to increase costs for both cost of sales and selling, delivery and administrative expenses. Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover those increased costs and may reduce their volume of purchases of those products. In that event, selling price increases may not be sufficient to offset completely the Company’s cost increases.

 

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Item 8. Financial Statements and Supplementary Data

COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Fiscal Year  

In Thousands (Except Per Share Data)

   2012      2011      2010  

Net sales

   $ 1,614,433       $ 1,561,239       $ 1,514,599   

Cost of sales

     960,124         931,996         873,783   
  

 

 

    

 

 

    

 

 

 

Gross margin

     654,309         629,243         640,816   

Selling, delivery and administrative expenses

     565,623         541,713         544,498   
  

 

 

    

 

 

    

 

 

 

Income from operations

     88,686         87,530         96,318   

Interest expense, net

     35,338         35,979         35,127   
  

 

 

    

 

 

    

 

 

 

Income before taxes

     53,348         51,551         61,191   

Income tax expense

     21,889         19,528         21,649   
  

 

 

    

 

 

    

 

 

 

Net income

     31,459         32,023         39,542   

Less: Net income attributable to noncontrolling interest

     4,242         3,415         3,485   
  

 

 

    

 

 

    

 

 

 

Net income attributable to Coca-Cola Bottling Co. Consolidated

   $ 27,217       $ 28,608       $ 36,057   
  

 

 

    

 

 

    

 

 

 

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

        

Common Stock

   $ 2.95       $ 3.11       $ 3.93   
  

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding

     7,141         7,141         7,141   

Class B Common Stock

   $ 2.95       $ 3.11       $ 3.93   
  

 

 

    

 

 

    

 

 

 

Weighted average number of Class B Common Stock shares outstanding

     2,085         2,063         2,040   

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

        

Common Stock

   $ 2.94       $ 3.09       $ 3.91   
  

 

 

    

 

 

    

 

 

 

Weighted average number of Common Stock shares outstanding — assuming dilution

     9,266         9,244         9,221   

Class B Common Stock

   $ 2.92       $ 3.08       $ 3.90   
  

 

 

    

 

 

    

 

 

 

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

     2,125         2,103         2,080   

See Accompanying Notes to Consolidated Financial Statements.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Fiscal Year  

In Thousands

   2012     2011     2010  

Net income

   $ 31,459      $ 32,023      $ 39,542   

Other comprehensive income (loss), net of tax:

      

Ownership share of Southeastern OCI

     0        0        49   

Foreign currency translation adjustment

     (1     2        (9

Defined benefit plans:

      

Actuarial loss

     (11,618     (12,967     (11,196

Prior service costs

     11        (1     (6

Postretirement benefits plan:

      

Actuarial loss

     (1,181     (3,369     (4,405

Prior service costs

     (917     (1,041     (1,084

Transition asset

     0        (11     (15
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (13,706     (17,387     (16,666
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     17,753        14,636        22,876   

Less: Comprehensive income attributable to noncontrolling interest

     4,242        3,415        3,485   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Coca-Cola Bottling Co. Consolidated

   $ 13,511      $ 11,221      $ 19,391   
  

 

 

   

 

 

   

 

 

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED BALANCE SHEETS

 

In Thousands (Except Share Data)

   Dec. 30,
2012
     Jan. 1,
2012
 

ASSETS

  

Current assets:

     

Cash and cash equivalents

   $ 10,399       $ 90,758   

Restricted cash

     0         3,000   

Accounts receivable, trade, less allowance for doubtful accounts
of $1,490 and $1,521, respectively

     103,524         105,515   

Accounts receivable from The Coca-Cola Company

     15,521         9,300   

Accounts receivable, other

     12,876         15,874   

Inventories

     65,924         66,158   

Prepaid expenses and other current assets

     33,068         31,607   
  

 

 

    

 

 

 

Total current assets

     241,312         322,212   
  

 

 

    

 

 

 

Property, plant and equipment, net

     307,467         302,920   

Leased property under capital leases, net

     54,150         59,804   

Other assets

     53,801         50,329   

Franchise rights

     520,672         520,672   

Goodwill

     102,049         102,049   

Other identifiable intangible assets, net

     4,023         4,439   
  

 

 

    

 

 

 

Total assets

   $ 1,283,474       $ 1,362,425   
  

 

 

    

 

 

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED BALANCE SHEETS

 

     Dec. 30,
2012
    Jan. 1,
2012
 

LIABILITIES AND EQUITY

  

Current liabilities:

    

Current portion of debt

   $ 20,000      $ 120,000   

Current portion of obligations under capital leases

     5,230        4,574   

Accounts payable, trade

     51,651        42,203   

Accounts payable to The Coca-Cola Company

     27,830        34,150   

Other accrued liabilities

     75,113        68,177   

Accrued compensation

     32,428        29,218   

Accrued interest payable

     4,060        5,448   
  

 

 

   

 

 

 

Total current liabilities

     216,312        303,770   
  

 

 

   

 

 

 

Deferred income taxes

     140,965        144,091   

Pension and postretirement benefit obligations

     140,719        138,156   

Other liabilities

     118,303        114,302   

Obligations under capital leases

     64,351        69,480   

Long-term debt

     403,386        403,219   
  

 

 

   

 

 

 

Total liabilities

     1,084,036        1,173,018   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 13)

    

Equity:

    

Convertible Preferred Stock, $100.00 par value:
Authorized-50,000 shares; Issued-None

    

Nonconvertible Preferred Stock, $100.00 par value:
Authorized-50,000 shares; Issued-None

    

Preferred Stock, $.01 par value:
Authorized-20,000,000 shares; Issued-None

    

Common Stock, $1.00 par value:
Authorized-30,000,000 shares; Issued-10,203,821 shares

     10,204        10,204   

Class B Common Stock, $1.00 par value:
Authorized-10,000,000 shares; Issued-2,716,956 and 2,694,636 shares, respectively

     2,715        2,693   

Class C Common Stock, $1.00 par value:
Authorized-20,000,000 shares; Issued-None

    

Capital in excess of par value

     107,681        106,201   

Retained earnings

     170,439        152,446   

Accumulated other comprehensive loss

     (94,526     (80,820
  

 

 

   

 

 

 
     196,513        190,724   
  

 

 

   

 

 

 

Less-Treasury stock, at cost:

    

Common Stock-3,062,374 shares

     60,845        60,845   

Class B Common Stock-628,114 shares

     409        409   
  

 

 

   

 

 

 

Total equity of Coca-Cola Bottling Co. Consolidated

     135,259        129,470   

Noncontrolling interest

     64,179        59,937   
  

 

 

   

 

 

 

Total equity

     199,438        189,407   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,283,474      $ 1,362,425   
  

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Fiscal Year  

In Thousands

   2012     2011     2010  

Cash Flows from Operating Activities

      

Net income

   $ 31,459      $ 32,023      $ 39,542   

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

      

Depreciation expense

     61,168        61,686        58,672   

Amortization of intangibles

     416        432        489   

Deferred income taxes

     7,138        7,888        (4,906

Loss on sale of property, plant and equipment

     633        547        1,195   

Impairment/accelerated depreciation of property, plant and equipment

     275        0        3,665   

Net gain on property, plant and equipment damaged in flood

     0        0        (892

Amortization of debt costs

     2,242        2,330        2,330   

Stock compensation expense

     2,623        2,342        2,223   

Amortization of deferred gains related to terminated interest rate agreements

     (1,145     (1,221     (1,211

Insurance proceeds received for flood damage

     0        0        5,682   

(Increase) decrease in current assets less current liabilities

     (288     5,529        1,920   

Increase in other noncurrent assets

     (5,087     (4,563     (1,726

Increase (decrease) in other noncurrent liabilities

     (16,261     2,652        2,788   

Other

     (1     5        (15
  

 

 

   

 

 

   

 

 

 

Total adjustments

     51,713        77,627        70,214   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     83,172        109,650        109,756   
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities

      

Additions to property, plant and equipment

     (53,271     (53,156     (57,798

Proceeds from the sale of property, plant and equipment

     701        1,772        1,795   

Insurance proceeds received for property, plant and equipment damaged in flood

     0        0        1,418   

Investment in subsidiary net of assets acquired

     0        0        (32

Change in restricted cash

     3,000        500        1,000   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (49,570     (50,884     (53,617
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities

      

Proceeds from lines of credit

     20,000        0        0   

Borrowing (repayment) under revolving credit facility

     30,000        0        (15,000

Payment of debt

     (150,000     0        0   

Cash dividends paid

     (9,224     (9,203     (9,180

Excess tax expense from stock-based compensation

     81        61        77   

Principal payments on capital lease obligations

     (4,682     (3,839     (3,846

Debt issuance costs paid

     0        (716     0   

Other

     (136     (183     (88
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (113,961     (13,880     (28,037
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     (80,359     44,886        28,102   
  

 

 

   

 

 

   

 

 

 

Cash at beginning of year

     90,758        45,872        17,770   
  

 

 

   

 

 

   

 

 

 

Cash at end of year

   $ 10,399      $ 90,758      $ 45,872   
  

 

 

   

 

 

   

 

 

 

Significant non-cash investing and financing activities

      

Issuance of Class B Common Stock in connection with stock award

   $ 1,421      $ 1,327      $ 1,316   

Capital lease obligations incurred

     209        18,632        0   

See Accompanying Notes to Consolidated Financial Statements.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

In Thousands

(Except Share Data)

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

Balance on Jan. 3, 2010

  $ 10,204      $ 2,649      $ 103,464      $ 107,995      $ (46,767   $ (61,254   $ 116,291      $ 52,804      $ 169,095   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revision of prior period (Note 1)

          (1,831         (1,831       (1,831
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revised beginning balance

  $ 10,204      $ 2,649      $ 103,464      $ 106,164      $ (46,767   $ (61,254   $ 114,460      $ 52,804      $ 167,264   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          36,057            36,057        3,485        39,542   

Other comprehensive income (loss), net of tax

            (16,666       (16,666       (16,666

Acquisition of noncontrolling interest

                  233        233   

Cash dividends paid

                 

Common ($1 per share)

          (7,141         (7,141       (7,141

Class B Common ($1 per share)

          (2,039         (2,039       (2,039

Issuance of 22,320 shares of Class B Common Stock

      22        1,294              1,316          1,316   

Stock compensation adjustment

        77              77          77   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on Jan. 2, 2011

  $ 10,204      $ 2,671      $ 104,835      $ 133,041      $ (63,433   $ (61,254   $ 126,064      $ 56,522      $ 182,586   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          28,608            28,608        3,415        32,023   

Other comprehensive income (loss), net of tax

            (17,387       (17,387       (17,387

Cash dividends paid

                 

Common ($1 per share)

          (7,141         (7,141       (7,141

Class B Common ($1 per share)

          (2,062         (2,062       (2,062

Issuance of 22,320 shares of Class B Common Stock

      22        1,305              1,327          1,327   

Stock compensation adjustment

        61              61          61   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on Jan. 1, 2012

  $ 10,204      $ 2,693      $ 106,201      $ 152,446      $ (80,820   $ (61,254   $ 129,470      $ 59,937      $ 189,407   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

          27,217            27,217        4,242        31,459   

Other comprehensive income (loss), net of tax

            (13,706       (13,706       (13,706

Cash dividends paid

                 

Common ($1 per share)

          (7,141         (7,141       (7,141

Class B Common ($1 per share)

          (2,083         (2,083       (2,083

Issuance of 22,320 shares of Class B Common Stock

      22        1,399              1,421          1,421   

Stock compensation adjustment

        81              81          81   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance on Dec. 30, 2012

  $ 10,204      $ 2,715      $ 107,681      $ 170,439      $ (94,526   $ (61,254   $ 135,259      $ 64,179      $ 199,438   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Accompanying Notes to Consolidated Financial Statements.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Significant Accounting Policies

Coca-Cola Bottling Co. Consolidated (the “Company”) produces, markets and distributes nonalcoholic beverages, primarily products of The Coca-Cola Company. The Company operates principally in the southeastern region of the United States and has one reportable segment.

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (GAAP) 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 fiscal years presented are the 52-week periods ended December 30, 2012 (“2012”), January 1, 2012 (“2011”) and January 2, 2011 (“2010”). The Company’s fiscal year ends on the Sunday closest to December 31 of each year.

Piedmont Coca-Cola Bottling Partnership (“Piedmont”) is the Company’s only subsidiary that has a significant noncontrolling interest. Noncontrolling interest income of $4.2 million in 2012, $3.4 million in 2011 and $3.5 million in 2010 are included in net income on the Company’s consolidated statements of operations. In addition, the amount of consolidated net income attributable to both the Company and noncontrolling interest are shown on the Company’s consolidated statements of operations. Noncontrolling interest primarily related to Piedmont totaled $64.2 million and $59.9 million at December 30, 2012 and January 1, 2012, respectively. These amounts are shown as noncontrolling interest in the equity section of the Company’s consolidated balance sheets.

Certain prior year amounts have been reclassified to conform to current classifications.

Revision of Prior Period Financial Statements

In connection with the preparation of the consolidated financial statements for the fourth quarter of 2012, the Company identified an error in the treatment of a certain prior year deferred tax asset in the Consolidated Balance Sheets. This resulted in an understatement of the net noncurrent deferred income tax liability and an overstatement of retained earnings, and therefore equity, for each of the impacted periods. This error affected the Consolidated Balance Sheets and Consolidated Statements of Changes in Stockholders’ Equity as presented in each of the quarters of 2012, 2011 and 2010, including the year-end consolidated financial statements for 2011 and 2010. In accordance with accounting guidance presented in ASC 250-10 (SEC Staff Accounting Bulletin No. 99, Materiality), the Company assessed the materiality of the error and concluded that it was not material to any of the Company’s previously issued financial statements taken as a whole. The Company has revised previously issued financial statements to correct the effect of this error. This revision did not affect the Company’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows for any of these periods.

 

     Year Ended January 1, 2012  

In Thousands

   As
Previously
Reported
    Adjustment     As
Revised
 

Deferred income taxes (noncurrent liability)

   $ 142,260      $ 1,831      $ 144,091   

Total liabilities

     1,171,187 (1)      1,831        1,173,018   

Retained earnings

     154,277        (1,831     152,446   

Total equity of Coca-Cola Bottling Co. Consolidated

     131,301        (1,831     129,470   

Total equity

     191,238        (1,831     189,407   

 

(1) Certain prior year amounts have been reclassified to conform to current classifications.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s significant accounting policies are as follows:

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, cash in banks and cash equivalents, which are highly liquid debt instruments with maturities of less than 90 days. The Company maintains cash deposits with major banks which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.

Credit Risk of Trade Accounts Receivable

The Company sells its products to supermarkets, convenience stores and other customers and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company’s trade accounts receivable are typically collected within approximately 30 days from the date of sale. The Company monitors its exposure to losses on trade accounts receivable and maintains an allowance for potential losses or adjustments. Past due trade accounts receivable balances are written off when the Company’s collection efforts have been unsuccessful in collecting the amount due.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method for finished products and manufacturing materials and on the average cost method for plastic shells, plastic pallets and other inventories.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements on operating leases are depreciated over the shorter of the estimated useful lives or the term of the lease, including renewal options the Company determines are reasonably assured. Additions and major replacements or betterments are added to the assets at cost. Maintenance and repair costs and minor replacements are charged to expense when incurred. When assets are replaced or otherwise disposed, the cost and accumulated depreciation are removed from the accounts and the gains or losses, if any, are reflected in the statement of operations. Gains or losses on the disposal of manufacturing equipment and manufacturing facilities are included in cost of sales. Gains or losses on the disposal of all other property, plant and equipment are included in selling, delivery and administrative (“S,D&A”) expenses. Disposals of property, plant and equipment generally occur when it is not cost effective to repair an asset.

The Company evaluates the recoverability of the carrying amount of its property, plant and equipment when events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. These evaluations are performed at a level where independent cash flows may be attributed to either an asset or an asset group. If the Company determines that the carrying amount of an asset or asset group is not recoverable based upon the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair value of the long-lived assets.

Leased Property Under Capital Leases

Leased property under capital leases is depreciated using the straight-line method over the lease term.

Internal Use Software

The Company capitalizes costs incurred in the development or acquisition of internal use software. The Company expenses costs incurred in the preliminary project planning stage. Costs, such as maintenance and

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

training, are also expensed as incurred. Capitalized costs are amortized over their estimated useful lives using the straight-line method. Amortization expense, which is included in depreciation expense, for internal-use software was $7.3 million, $7.0 million and $6.5 million in 2012, 2011 and 2010, respectively.

Franchise Rights and Goodwill

Under the provisions of generally accepted accounting principles (GAAP), all business combinations are accounted for using the acquisition method and goodwill and intangible assets with indefinite useful lives are not amortized but instead are tested for impairment annually, or more frequently if facts and circumstances indicate such assets may be impaired. The only intangible assets the Company classifies as indefinite lived are franchise rights and goodwill. The Company performs its annual impairment test as of the first day of the fourth quarter of each year. For both franchise rights and goodwill, when appropriate, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of the franchise rights or goodwill is below its carrying value.

When a quantitative analysis is considered necessary for the annual impairment analysis of franchise rights, the Company utilizes the Greenfield Method to estimate the fair value. The Greenfield Method assumes the Company is starting new, owning only franchise rights, and makes investments required to build an operation comparable to the Company’s current operations. The Company estimates the cash flows required to build a comparable operation and the available future cash flows from these operations. The cash flows are then discounted using an appropriate discount rate. The estimated fair value based upon the discounted cash flows is then compared to the carrying value on an aggregated basis.

The Company has determined that it has one reporting unit for purposes of assessing goodwill for potential impairment. When a quantitative analysis is considered necessary for the annual impairment analysis of goodwill, the Company develops an estimated fair value for the reporting unit considering three different approaches:

 

   

market value, using the Company’s stock price plus outstanding debt;

 

   

discounted cash flow analysis; and

 

   

multiple of earnings before interest, taxes, depreciation and amortization based upon relevant industry data.

The estimated fair value of the reporting unit is then compared to its carrying amount including goodwill. If the estimated fair value exceeds the carrying amount, goodwill is considered not impaired, and the second step of the impairment test is not necessary. If the carrying amount including goodwill exceeds its estimated fair value, the second step of the impairment test is performed to measure the amount of the impairment, if any. In the second step, a comparison is made between book value of goodwill to the implied fair value of goodwill. Implied fair value of goodwill is determined by comparing the fair value of the reporting unit to the book value of its net identifiable assets excluding goodwill. If the implied fair value of goodwill is below the book value of goodwill, an impairment loss would be recognized for the difference.

The Company uses its overall market capitalization as part of its estimate of fair value of the reporting unit and in assessing the reasonableness of the Company’s internal estimates of fair value.

To the extent that actual and projected cash flows decline in the future, or if market conditions deteriorate significantly, the Company may be required to perform an interim impairment analysis that could result in an impairment of franchise rights and goodwill.

Other Identifiable Intangible Assets

Other identifiable intangible assets primarily represent customer relationships and distribution rights and are amortized on a straight-line basis over their estimated useful lives.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Pension and Postretirement Benefit Plans

The Company has a noncontributory pension plan covering certain nonunion employees and one noncontributory pension plan covering certain union employees. Costs of the plans are charged to current operations and consist of several components of net periodic pension cost based on various actuarial assumptions regarding future experience of the plans. In addition, certain other union employees are covered by plans provided by their respective union organizations and the Company expenses amounts as paid in accordance with union agreements. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service.

Amounts recorded for benefit plans reflect estimates related to interest rates, investment returns, employee turnover and health care costs. The discount rate assumptions used to determine the pension and postretirement benefit obligations are based on yield rates available on double-A bonds as of each plan’s measurement date.

On February 22, 2006, the Board of Directors of the Company approved an amendment to the pension plan covering substantially all nonunion employees to cease further accruals under the plan effective June 30, 2006.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating loss and tax credit carryforwards as well as differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance will be provided against deferred tax assets, if the Company determines it is more likely than not such assets will not ultimately be realized.

The Company does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50 percent likely to be realized. The Company records interest and penalties related to uncertain tax positions in income tax expense.

Revenue Recognition

Revenues are recognized when finished products are delivered to customers and both title and the risks and benefits of ownership are transferred, price is fixed and determinable, collection is reasonably assured and, in the case of full service vending, when cash is collected from the vending machines. Appropriate provision is made for uncollectible accounts.

The Company receives service fees from The Coca-Cola Company related to the delivery of fountain syrup products to The Coca-Cola Company’s fountain customers. In addition, the Company receives service fees from The Coca-Cola Company related to the repair of fountain equipment owned by The Coca-Cola Company. The fees received from The Coca-Cola Company for the delivery of fountain syrup products to their customers and the repair of their fountain equipment are recognized as revenue when the respective services are completed. Service revenue represents approximately 1% of net sales.

The Company performs freight hauling and brokerage for third parties in addition to delivering its own products. The freight charges are recognized as revenues when the delivery is complete. Freight revenue from third parties represents approximately 1% of net sales.

Revenues do not include sales or other taxes collected from customers.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Marketing Programs and Sales Incentives

The Company participates in various marketing and sales programs with The Coca-Cola Company and other beverage companies and arrangements with customers to increase the sale of its products by its customers. Among the programs negotiated with customers are arrangements under which allowances can be earned for attaining agreed-upon sales levels and/or for participating in specific marketing programs.

Coupon programs are also developed on a territory-specific basis. The cost of these various marketing programs and sales incentives with The Coca-Cola Company and other beverage companies, included as deductions to net sales, totaled $58.1 million, $53.0 million and $51.8 million in 2012, 2011 and 2010, respectively.

Marketing Funding Support

The Company receives marketing funding support payments in cash from The Coca-Cola Company and other beverage companies. Payments to the Company for marketing programs to promote the sale of bottle/can volume and fountain syrup volume are recognized in earnings primarily on a per unit basis over the year as product is sold. Payments for periodic programs are recognized in the periods for which they are earned.

Under GAAP, cash consideration received by a customer from a vendor is presumed to be a reduction of the prices of the vendor’s products or services and is, therefore, to be accounted for as a reduction of cost of sales in the statements of operations unless those payments are specific reimbursements of costs or payments for services. Payments the Company receives from The Coca-Cola Company and other beverage companies for marketing funding support are classified as reductions of cost of sales.

Derivative Financial Instruments

The Company records all derivative instruments in the financial statements at fair value.

The Company uses derivative financial instruments to manage its exposure to movements in interest rates and certain commodity prices. The use of these financial instruments modifies the Company’s exposure to these risks with the intent of reducing risk over time. The Company does not use financial instruments for trading purposes, nor does it use leveraged financial instruments. Credit risk related to the derivative financial instruments is managed by requiring high credit standards for its counterparties and periodic settlements.

Interest Rate Hedges

The Company periodically enters into derivative financial instruments. The Company has standardized procedures for evaluating the accounting for financial instruments. These procedures include:

 

   

Identifying and matching of the hedging instrument and the hedged item to ensure that significant features coincide such as maturity dates and interest reset dates;

 

   

Identifying the nature of the risk being hedged and the Company’s intent for undertaking the hedge;

 

   

Assessing the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or variability to cash flows attributable to the hedged risk;

 

   

Assessing evidence that, at the hedge’s inception and on an ongoing basis, it is expected that the hedging relationship will be highly effective in achieving an offsetting change in the fair value or cash flows that are attributable to the hedged risk; and

 

   

Maintaining a process to review all hedges on an ongoing basis to ensure continued qualification for hedge accounting.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

To the extent the interest rate agreements meet the specified criteria, they are accounted for as either fair value or cash flow hedges. Changes in the fair values of designated and qualifying fair value hedges are recognized in earnings as offsets to changes in the fair value of the related hedged liabilities. Changes in the fair value of cash flow hedging instruments are recognized in accumulated other comprehensive income and are subsequently reclassified to earnings as an adjustment to interest expense in the same periods the forecasted payments affect earnings. Ineffectiveness of a cash flow hedge, defined as the amount by which the change in the value of the hedge does not exactly offset the change in the value of the hedged item, is reflected in current results of operations.

The Company evaluates its mix of fixed and floating rate debt on an ongoing basis. Periodically, the Company may terminate an interest rate derivative when the underlying debt remains outstanding in order to achieve its desired fixed/floating rate mix. Upon termination of an interest rate derivative accounted for as a cash flow hedge, amounts reflected in accumulated other comprehensive income are reclassified to earnings consistent with the variability of the cash flows previously hedged, which is generally over the life of the related debt that was hedged. Upon termination of an interest rate derivative accounted for as a fair value hedge, the value of the hedge as recorded on the Company’s balance sheet is eliminated against either the cash received or cash paid for settlement and the fair value adjustment of the related debt is amortized to earnings over the remaining life of the debt instrument as an adjustment to interest expense.

Interest rate derivatives designated as cash flow hedges are used to hedge the variability of cash flows related to a specific component of the Company’s long-term debt. Interest rate derivatives designated as fair value hedges are used to hedge the fair value of a specific component of the Company’s long-term debt. If the hedged component of long-term debt is repaid or refinanced, the Company generally terminates the related hedge due to the fact the forecasted schedule of payments will not occur or the changes in fair value of the hedged debt will not occur and the derivative will no longer qualify as a hedge. Any gain or loss on the termination of an interest rate derivative related to the repayment or refinancing of long-term debt is recognized currently in the Company’s statement of operations as an adjustment to interest expense. In the event a derivative previously accounted for as a hedge was retained and did not qualify for hedge accounting, changes in the fair value would be recognized in the statement of operations currently as an adjustment to interest expense.

Commodity Hedges

The Company may use derivative instruments to hedge some or all of the Company’s projected diesel fuel and unleaded gasoline purchases (used in the Company’s delivery fleet and other vehicles) and aluminum purchases. The Company generally pays a fee for these instruments which is amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment of related costs which are included in either cost of sales or S,D&A expenses.

Risk Management Programs

The Company uses various insurance structures to manage its workers’ compensation, auto liability, medical and other insurable risks. These structures consist of retentions, deductibles, limits and a diverse group of insurers that serve to strategically transfer and mitigate the financial impact of losses. The Company uses commercial insurance for claims as a risk reduction strategy to minimize catastrophic losses. Losses are accrued using assumptions and procedures followed in the insurance industry, adjusted for company-specific history and expectations.

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.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Selling, Delivery and Administrative 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.

Shipping and Handling Costs

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 were $200.0 million, $191.9 million and $187.2 million in 2012, 2011 and 2010, respectively.

The Company recorded delivery fees in net sales of $7.0 million, $7.1 million and $7.5 million in 2012, 2011 and 2010, respectively. These fees are used to offset a portion of the Company’s delivery and handling costs.

Stock Compensation with Contingent Vesting

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 will equal 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 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. The Company recognizes compensation expense over the requisite service period (one fiscal year) based on the Company’s stock price at the end of each accounting period, unless the achievement of the performance requirement for the fiscal year is considered unlikely.

See Note 16 to the consolidated financial statements for additional information on Mr. Harrison, III’s stock compensation program.

Net Income Per Share

The Company applies the two-class method for calculating and presenting net income per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under this method:

 

  (a) Income from continuing operations (“net income”) is reduced by the amount of dividends declared in the current period for each class of stock and by the contractual amount of dividends that must be paid for the current period.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

  (b) The remaining earnings (“undistributed earnings”) are allocated to Common Stock and Class B Common Stock to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. The total earnings allocated to each security is determined by adding together the amount allocated for dividends and the amount allocated for a participation feature.

 

  (c) The total earnings allocated to each security is then divided by the number of outstanding shares of the security to which the earnings are allocated to determine the earnings per share for the security.

 

  (d) Basic and diluted earnings per share (“EPS”) data are presented for each class of common stock.

In applying the two-class method, the Company determined that undistributed earnings should be allocated equally on a per share basis between the Common Stock and Class B Common Stock due to the aggregate participation rights of the Class B Common Stock (i.e., the voting and conversion rights) and the Company’s history of paying dividends equally on a per share basis on the Common Stock and Class B Common Stock.

Under the Company’s certificate of incorporation, the Board of Directors may declare dividends on Common Stock without declaring equal or any dividends on the Class B Common Stock. Notwithstanding this provision, Class B Common Stock has voting and conversion rights that allow the Class B Common Stock to participate equally on a per share basis with the Common Stock.

The Class B Common Stock is entitled to 20 votes per share and the Common Stock is entitled to one vote per share with respect to each matter to be voted upon by the stockholders of the Company. Except as otherwise required by law, the holders of the Class B Common Stock and Common Stock vote together as a single class on all matters submitted to the Company’s stockholders, including the election of the Board of Directors. As a result, the holders of the Class B Common Stock control approximately 85% of the total voting power of the stockholders of the Company and control the election of the Board of Directors. The Board of Directors has declared and the Company has paid dividends on the Class B Common Stock and Common Stock and each class of common stock has participated equally in all dividends declared by the Board of Directors and paid by the Company since 1994.

The Class B Common Stock conversion rights allow the Class B Common Stock to participate in dividends equally with the Common Stock. The Class B Common Stock is convertible into Common Stock on a one-for-one per share basis at any time at the option of the holder. Accordingly, the holders of the Class B Common Stock can participate equally in any dividends declared on the Common Stock by exercising their conversion rights.

As a result of the Class B Common Stock’s aggregated participation rights, the Company has determined that undistributed earnings should be allocated equally on a per share basis to the Common Stock and Class B Common Stock under the two-class method.

Basic EPS excludes potential common shares that were dilutive and is computed by dividing net income available for common stockholders by the weighted average number of Common and Class B Common shares outstanding. Diluted EPS for Common Stock and Class B Common Stock gives effect to all securities representing potential common shares that were dilutive and outstanding during the period.

2.    Piedmont Coca-Cola Bottling Partnership

On July 2, 1993, the Company and The Coca-Cola Company formed 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 December 30, 2012, January 1, 2012 and January 2, 2011 primarily represents the portion of Piedmont which is owned by The Coca-Cola Company. The Coca-Cola Company’s interest in Piedmont was 22.7% in all periods reported.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

The Company currently provides financing to Piedmont under an agreement that expires on December 31, 2015. Piedmont pays the Company interest on its borrowings at the Company’s average cost of funds plus 0.50%. There were no amounts outstanding under this agreement at December 30, 2012. The loan balance was $17.8 million at January 1, 2012.

3.    Inventories

Inventories were summarized as follows:

 

In Thousands

   Dec. 30,
2012
     Jan. 1,
2012
 

Finished products

   $ 36,445       $ 33,394   

Manufacturing materials

     11,019         14,061   

Plastic shells, plastic pallets and other inventories

     18,460         18,703   
  

 

 

    

 

 

 

Total inventories

   $ 65,924       $ 66,158   
  

 

 

    

 

 

 

4.    Property, Plant and Equipment

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

 

In Thousands

   Dec. 30,
2012
     Jan. 1,
2012
     Estimated
Useful Lives
 

Land

   $ 12,442       $ 12,537      

Buildings

     118,556         118,603         8-50 years   

Machinery and equipment

     140,963         136,113         5-20 years   

Transportation equipment

     163,586         152,451         4-20 years   

Furniture and fixtures

     41,580         41,170         3-10 years   

Cold drink dispensing equipment

     314,863         305,308         5-15 years   

Leasehold and land improvements

     71,956         74,500         5-20 years   

Software for internal use

     74,907         70,648         3-10 years   

Construction in progress

     8,264         3,796      
  

 

 

    

 

 

    

Total property, plant and equipment, at cost

     947,117         915,126      

Less: Accumulated depreciation and amortization