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COCA COLA BOTTLING CO CONSOLIDATED /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Introduction The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("M,D&A") of Coca-Cola Bottling Co. Consolidated (the "Company") should be read in conjunction with the Company's consolidated financial statements and the accompanying notes to the consolidated financial statements. M,D&A includes the following sections: • Our Business and the Nonalcoholic Beverage Industry - a general description of the Company's business and the nonalcoholic beverage industry. • Areas of Emphasis - a summary of the Company's key priorities. • Overview of Operations and Financial Condition - a summary of key information and trends concerning the financial results for the third quarter of 2014 ("Q3 2014") and the first nine months of 2014 ("YTD 2014") and changes from the third quarter of 2013 ("Q3 2013") and the first nine months of 2013 ("YTD 2013"). • 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 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 Q3 2014 and YTD 2014 compared to Q3 2013 and YTD 2013, respectively. • Financial Condition - an analysis of the Company's financial condition as of the end of Q3 2014 compared to year-end 2013 and the end of Q3 2013 as presented in the consolidated financial statements. • Liquidity and Capital Resources - an analysis of capital resources, cash sources and uses, operating activities, investing activities, financing activities, off-balance sheet arrangements, aggregate contractual obligations and hedging activities. • Cautionary Information Regarding Forward-Looking Statements. The consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries including Piedmont Coca-Cola Bottling Partnership ("Piedmont"). The noncontrolling interest primarily consists of The Coca-Cola Company's interest in Piedmont, which was 22.7% for all periods presented. Expansion of Company's Franchise Territory In April 2013, the Company announced that it had signed a non-binding letter of intent (the "LOI") with The Coca-Cola Company to expand the Company's franchise territory to include distribution rights in parts of Tennessee, Kentucky and Indiana that are served by Coca-Cola Refreshments USA, Inc. ("CCR"), a wholly owned subsidiary of The Coca-Cola Company. On May 23, 2014, the Company closed the transaction involving the first phase of this territory expansion, covering the Morristown and Johnson City, Tennessee territories served by CCR for a cash purchase price of $12.2 million. The financial results of the Morristown and Johnson City, Tennessee territories have been included in the Company's consolidated financial statements from the acquisition date and did not have a material impact on the Company's consolidated financial results for the three and nine month periods ended September 28, 2014. On October 24, 2014, the Company closed the transaction involving the second completed phase of territory expansion, covering the Knoxville, Tennessee territory previously served by CCR. The transaction is described in a subsequent events note to the Company's unaudited financial statements included in this quarterly report on Form 10-Q. 38 -------------------------------------------------------------------------------- Table of Contents On October 17, 2014, the Company and CCR entered into an agreement (the "Asset Exchange Agreement") pursuant to which CCR has agreed to exchange certain assets of CCR relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory currently served by CCR's facilities and equipment located in Lexington, Kentucky, including the rights to produce such beverages in the Lexington, Kentucky territory in exchange for certain assets of the Company relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory currently served by the Company's facilities and equipment located in Jackson, Tennessee, including the rights to produce such beverages in the Jackson, Tennessee territory. The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission ("SEC") on October 20, 2014, which includes a summary description of the Asset Exchange Agreement. The Company anticipates the closing of the transactions contemplated by the Asset Exchange Agreement will occur in the first half of 2015. While the Company is preparing to close the transactions contemplated by the Asset Exchange Agreement, the Company is continuing to work towards a definitive agreement or agreements with The Coca-Cola Company for the remainder of the proposed franchise territory expansion described in the LOI, including Cleveland and Cookeville, Tennessee, Louisville, Paducah and Pikeville, Kentucky, and Evansville, Indiana. There is no assurance, however, that the parties will enter into such an agreement or agreements, or that any of the additional proposed territory expansion transactions contemplated by the LOI will occur or the timing of any such transactions. Our Business and the Nonalcoholic Beverage Industry The Company produces, markets and distributes nonalcoholic beverages, primarily products of The Coca-Cola Company, which include some of the most recognized and popular beverage brands in the world. The Company is the largest independent bottler of products of The Coca-Cola Company in the United States, distributing these products in eleven states primarily in the Southeast. The Company also distributes several other beverage brands. These product offerings include both sparkling and still beverages. Sparkling beverages are carbonated beverages, including energy products. Still beverages are noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks. The Company had full year net sales of $1.6 billion in 2013. 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 approximately 79% of the Company's YTD 2014 bottle/can net sales to retail customers. The principal methods of competition in the nonalcoholic beverage industry are point-of-sale merchandising, new product introductions, new vending and dispensing equipment, packaging changes, pricing, price promotions, product quality, retail space management, customer service, frequency of distribution and advertising. The Company believes it is competitive in its territories with respect to each of these methods. Historically, operating results for the third quarter and first nine months of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company's products in the second and third quarters versus the first and fourth quarters of the fiscal year. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality. 39-------------------------------------------------------------------------------- Table of Contents The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During YTD 2014, the Company did not experience any triggering events or changes in circumstances that indicated the carrying amounts of the Company's franchise rights or goodwill exceeded fair values. As such, the Company has not recognized any impairments of franchise rights or goodwill. Net sales by product category were as follows: Third Quarter First Nine Months In Thousands 2014 2013 2014 2013 Bottle/can sales: Sparkling beverages (including energy products) $ 286,830 $ 273,905 $ 829,622 $ 798,271 Still beverages 81,540 73,336 217,878 196,352 Total bottle/can sales 368,370 347,241 1,047,500 994,623 Other sales: Sales to other Coca-Cola bottlers 41,291 42,030 123,680 126,621 Post-mix and other 48,015 45,193 134,551 125,750 Total other sales 89,306 87,223 258,231 252,371 Total net sales $ 457,676 $ 434,464 $ 1,305,731 $ 1,246,994 Areas of Emphasis Key priorities for the Company include revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity. Revenue Management Revenue management requires a strategy which reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based decision-making. Revenue management has been and continues to be a key performance driver which has significant impact on the Company's results of operations. Product Innovation and Beverage Portfolio Expansion Innovation of both new brands and packages has been and is expected to continue to be important to the Company's overall revenue. New packaging introductions over the last several years include the 1.25-liter bottle, the 7.5-ounce sleek can and the 2-liter contour bottle for Coca-Cola products. The Company has invested in its own brand portfolio with products such as Tum-E Yummies, a vitamin C enhanced flavored drink, and Fuel in a Bottle power shots. These brands enable the Company to participate in strong growth categories and capitalize on distribution channels that may include the Company's traditional Coca-Cola franchise territory as well as third party distributors outside the Company's traditional Coca-Cola franchise territory. While the growth prospects of Company-owned or exclusively licensed brands appear promising, the cost of developing, marketing and distributing these brands is anticipated to be significant as well. 40 -------------------------------------------------------------------------------- Table of Contents Distribution Cost Management Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs amounted to $156.7 million and $151.0 million in YTD 2014 and YTD 2013, respectively. Over the past several years, the Company has focused on converting its distribution system from a conventional routing system to a predictive system. This conversion to a predictive system has allowed the Company to more efficiently handle an increasing number of products. In addition, the Company has focused on reducing fixed warehouse-related costs by consolidating warehouse space throughout the Company's territory. The Company has three primary delivery systems for its current business: • bulk delivery for large supermarkets, mass merchandisers and club stores; • advanced sales delivery for convenience stores, drug stores, small supermarkets and certain on-premise accounts; and • full service delivery for its full service vending customers. Distribution cost management will continue to be a key area of emphasis for the Company. 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: Q3 2014 and YTD 2014 • a $0.3 million pre-tax unfavorable and a $0.6 million pre-tax favorable mark-to-market adjustment to cost of sales related to the Company's 2014 commodity hedging program in Q3 2014 and YTD 2014, respectively; • $2.6 million and $7.6 million recorded in S,D&A expenses (pre-tax) related to the Company's franchise territory expansion in Q3 2014 and YTD 2014, respectively; and • a $0.6 million decrease to income tax expense related to the reduction of the liability of uncertain tax positions in Q3 2014 primarily due to the lapse of the applicable statute of limitations. Q3 2013 and YTD 2013 • a $3.1 million pre-tax favorable adjustment to net sales in Q3 2013 related to a refund of 2012 cooperative trade marketing funds paid by the Company to The Coca-Cola Company that were not spent in 2012; • a $0.5 million pre-tax unfavorable mark-to-market adjustment to cost of sales related to the Company's 2013 commodity hedging program in YTD 2013; • $1.6 million and $3.3 million recorded in S,D&A expenses (pre-tax) related to the Company's franchise territory expansion in Q3 2013 and YTD 2013, respectively; • a $0.4 million decrease to income tax expense related to the American Taxpayer Relief Act in the first quarter of 2013; 41 -------------------------------------------------------------------------------- Table of Contents • a $2.3 million decrease to income tax expense related to state tax legislation enacted during Q3 2013; and • a $0.9 million decrease to income tax expense related to the reduction of the liability for uncertain tax positions in Q3 2013 primarily due to the lapse of the applicable statute of limitations. The following overview provides a summary of key information concerning the Company's financial results for Q3 2014 and YTD 2014 compared to Q3 2013 and YTD 2013. Third Quarter % In Thousands (Except Per Share Data) 2014 2013 Change Change Net sales $ 457,676 $ 434,464 $ 23,212 5.3 Cost of sales 272,734 258,352 14,382 5.6 Gross margin 184,942 176,112 8,830 5.0 S,D&A expenses 156,496 145,912 10,584 7.3 Income from operations 28,446 30,200 (1,754 ) (5.8 ) Interest expense, net 7,333 7,361 (28 ) (0.4 ) Income before taxes 21,113 22,839 (1,726 ) (7.6 ) Income tax expense 7,408 4,756 2,652 55.8 Net income 13,705 18,083 (4,378 ) (24.2 ) Net income attributable to the Company 12,132 16,169 (4,037 ) (25.0 ) Basic net income per share: Common Stock $ 1.31 $ 1.75 $ (.44 ) (25.1 ) Class B Common Stock $ 1.31 $ 1.75 $ (.44 ) (25.1 ) Diluted net income per share: Common Stock $ 1.30 $ 1.74 $ (.44 ) (25.3 ) Class B Common Stock $ 1.30 $ 1.74 $ (.44 ) (25.3 ) First Nine Months % In Thousands (Except Per Share Data) 2014 2013 Change Change Net sales $ 1,305,731 $ 1,246,994 $ 58,737 4.7 Cost of sales 778,936 746,868 32,068 4.3 Gross margin 526,795 500,126 26,669 5.3 S,D&A expenses 454,969 427,539 27,430 6.4 Income from operations 71,826 72,587 (761 ) (1.0 ) Interest expense, net 21,899 22,149 (250 ) (1.1 ) Income before taxes 49,927 50,438 (511 ) (1.0 ) Income tax expense 17,789 14,550 3,239 22.3 Net income 32,138 35,888 (3,750 ) (10.4 ) Net income attributable to the Company 28,364 32,260 (3,896 ) (12.1 ) Basic net income per share: Common Stock $ 3.06 $ 3.49 $ (.43 ) (12.3 ) Class B Common Stock $ 3.06 $ 3.49 $ (.43 ) (12.3 ) Diluted net income per share: Common Stock $ 3.05 $ 3.47 $ (.42 ) (12.1 ) Class B Common Stock $ 3.04 $ 3.46 $ (.42 ) (12.1 ) 42 -------------------------------------------------------------------------------- Table of Contents The Company's net sales increased 5.3% in Q3 2014 compared to Q3 2013. The increase in net sales in Q3 2014 compared to Q3 2013 was primarily due to a 5.4% increase in bottle/can volume to retail customers and a 1.4% increase in bottle/can sales price per unit to retail customers. The Company's net sales increased 4.7% in YTD 2014 compared to YTD 2013. The increase in net sales in YTD 2014 compared to YTD 2013 was primarily due to a 4.3% increase in bottle/can volume to retail customers and a 1.4% increase in bottle/can sales price per unit to retail customers. The increases in bottle/can volume to retail customers were primarily due to increases in the still beverage category and the incremental volume resulting from the acquisition of the Johnson City and Morristown, Tennessee territories in May 2014. Bottle/can sales to retail customers price per unit increases were primarily due to a sales price increase in sparkling beverages. Bottle/can volume to retail customers increases in Q3 2014 and YTD 2014 compared to Q3 2013 and YTD 2013 due to the Morristown and Johnson City, Tennessee territories acquisition were 3.1% and 1.5%, respectively. The Company's bottle/can volume to retail customers was impacted by cooler and wetter than normal weather in most of the Company's territories during the first and second quarters of 2013. Gross margin dollars increased 5.0% in Q3 2014 compared to Q3 2013. The Company's gross margin percentage decreased to 40.4% in Q3 2014 compared to 40.5% in Q3 2013. Gross margin dollars increased 5.3% in YTD 2014 compared to YTD 2013. The Company's gross margin percentage increased to 40.3% in YTD 2014 compared to 40.1% in YTD 2013. The increase in gross margin percentage in YTD 2014 compared to YTD 2013 was primarily due to higher sales price per unit to retail customers. S,D&A expenses increased 7.3% in Q3 2014 from Q3 2013. The increase in S,D&A expenses in Q3 2014 from Q3 2013 was primarily attributable to increased employee salaries and wages including bonuses and incentives, increased marketing expense and increased expenses related to the Company's franchise territory expansion. S,D&A expenses increased 6.4% in YTD 2014 from YTD 2013. The increase in S,D&A expenses in YTD 2014 from YTD 2013 was primarily attributable to increased employee salaries and wages including bonuses and incentives, increased expenses related to the Company's franchise territory expansion, increased marketing expenses and increased property and casualty insurance expense. Net interest expense decreased 1.1% in YTD 2014 compared to YTD 2013. The decrease in interest expense was due to lower average borrowings on the Company's $200 million five-year unsecured revolving credit facility ("$200 million facility") and lower interest expense on capital leases. The Company's overall weighted average interest rate on its debt and capital lease obligations was 5.8% during both YTD 2014 and YTD 2013. Income tax expense increased 22.3% in YTD 2014 as compared to YTD 2013. The increase to income tax expense was primarily due to a reduction of $0.4 million in YTD 2013 associated with the American Taxpayer Relief Act enacted on January 2, 2013 and a reduction of $2.3 million in YTD 2013 due to the impact on the Company's net deferred tax liabilities associated with a reduction in a state corporate tax rate. Net debt and capital lease obligations were summarized as follows: Sept. 28, Dec. 29, Sept. 29, In Thousands 2014 2013 2013 Debt $ 443,709 $ 398,566 $ 413,520 Capital lease obligations 60,568 64,989 66,110 Total debt and capital lease obligations 504,277 463,555 479,630 Less: Cash and cash equivalents 23,067 11,761 25,283 Total net debt and capital lease obligations (1) $ 481,210 $ 451,794 $ 454,347 (1) The non-GAAP measure "Total net debt and capital lease obligations" is used to provide investors with additional information which management believes is helpful in the evaluation of the Company's capital structure and financial leverage. This non-GAAP financial information is not presented elsewhere in this report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. 43 -------------------------------------------------------------------------------- Table of Contents Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements Critical Accounting Policies and Estimates In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for the year ended December 29, 2013 a discussion of the Company's most critical accounting policies, which are those most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company did not make changes in any critical accounting policies during YTD 2014. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is made. New Accounting Pronouncements Recently Adopted Pronouncements In July 2013, the Financial Accounting Standards Board ("FASB") issued new guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The provisions of the new guidance were effective for fiscal years beginning after December 15, 2013. The requirements of this new guidance did not have a material impact on the Company's consolidated financial statements. Recently Issued Pronouncements In April 2014, the FASB issued new guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. The new guidance is effective for annual and interim periods beginning after December 15, 2014. The impact on the Company of adopting the new guidance will depend on the nature, terms and size of business disposals completed after the effective date. In May 2014, the FASB issued new guidance on accounting for revenue from contracts with customers. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company is in the process of evaluating the impact of the new guidance on the Company's consolidated financial statements. In August 2014, the FASB issued new guidance that specifies the responsibility that an entity's management has to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The requirements of this new guidance are not expected to have an impact on the Company's consolidated financial statements. 44-------------------------------------------------------------------------------- Table of Contents Results of Operations Q3 2014 Compared to Q3 2013 and YTD 2014 Compared to YTD 2013 Net Sales Net sales increased $23.2 million, or 5.3%, to $457.7 million in Q3 2014 compared to $434.5 million in Q3 2013. Net sales increased $58.7 million, or 4.7% to $1,305.7 million in YTD 2014 compared to $1,247.0 million in YTD 2013. The increase in net sales for Q3 2014 compared to Q3 2013 was principally attributable to the following: Q3 2014 Attributable to: (In Millions) $ 18.7 5.4% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (3.1% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories) 5.0 1.4% increase in bottle/can sales price per unit to retail customers primarily due to an increase in sparkling beverages sales price per unit 3.2 Increase in freight revenue (3.1 ) Refund in 2013 of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the third quarter of 2013. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate. (1.2 ) 2.7% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products (0.8 ) Decrease in sales of the Company's own brand portfolio (primarily Tum-E Yummies) 0.7 2.8% increase in post-mix sales price per unit 0.7 Other $ 23.2 Total increase in net sales 45 -------------------------------------------------------------------------------- Table of Contents The increase in net sales for YTD 2014 compared to YTD 2013 was principally attributable to the following: YTD 2014 Attributable to: (In Millions) $ 42.2 4.3% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (1.5% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories) 14.1 1.4% increase in bottle/can sales price per unit to retail customers primarily due to an increase in sparkling beverages sales price per unit 7.8 Increase in freight revenue (5.5 ) 4.4% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products (3.1 ) Refund in 2013 of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the third quarter of 2013. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate. 2.6 2.1% increase in sales price per unit of sales to other Coca-Cola bottlers primarily due to a higher percentage of energy products and still beverages which have a higher sales price per unit than sparkling beverages (excluding energy products) 2.0 3.1% increase in post-mix sales price per unit (1.6 ) Decrease in sales of the Company's own brand portfolio (primarily Tum-E Yummies) 0.2 Other $ 58.7 Total increase in net sales The Company's bottle/can volume was impacted by cooler and wetter than normal weather in most of the Company's territories during the first and second quarters of 2013. Bottle/can volume to retail customers increased in Q3 2014 and YTD 2014 compared to Q3 2013 and YTD 2013 due to the acquisition of the Morristown and Johnson City, Tennessee territories were 3.1% and 1.5%, respectively. In YTD 2014, the Company's bottle/can sales to retail customers accounted for 80% of the Company's total net sales. Bottle/can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the volume generated in each package and the channels in which those packages are sold. Product category sales volume in Q3 2014 and Q3 2013 and YTD 2014 and YTD 2013 as a percentage of total bottle/can sales volume to retail customers and the percentage change by product category was as follows: Bottle/Can Sales Volume Bottle/Can Sales Volume Product Category Q3 2014 Q3 2013 % Increase Sparkling beverages (including energy products) 77.4 % 78.7 % 3.7 Still beverages 22.6 % 21.3 % 11.7 Total bottle/can sales volume 100.0 % 100.0 % 5.4 46 -------------------------------------------------------------------------------- Table of Contents Bottle/Can Sales Volume Bottle/Can Sales Volume Product Category YTD 2014 YTD 2013 % Increase Sparkling beverages (including energy products) 78.8 % 80.5 % 2.2 Still beverages 21.2 % 19.5 % 12.9 Total bottle/can sales volume 100.0 % 100.0 % 4.3 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 both YTD 2014 and YTD 2013, approximately 68% of the Company's bottle/can volume to retail customers was sold for future consumption, while the remaining bottle/can volume to retail customers of approximately 32% was sold for immediate consumption. The Company's largest customer, Wal-Mart Stores, Inc., accounted for approximately 22% and 21% of the Company's total bottle/can volume to retail customers during YTD 2014 and YTD 2013, respectively. The Company's second largest customer, Food Lion, LLC, accounted for approximately 9% and 8% of the Company's total bottle/can volume to retail customers during YTD 2014 and YTD 2013, respectively. All of the Company's beverage sales are to customers in the United States. The Company recorded delivery fees in net sales of $4.7 million and $4.8 million in YTD 2014 and YTD 2013, respectively. These fees are used to offset a portion of the Company's delivery and handling costs. Cost of Sales Cost of sales includes the following: raw material costs, manufacturing labor, manufacturing overhead including depreciation expense, manufacturing warehousing costs and shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers. Cost of sales increased 5.6%, or $14.4 million, to $272.8 million in Q3 2014 compared to $258.4 million in Q3 2013. Cost of sales increased 4.3%, or $32.0 million, to $778.9 million in YTD 2014 compared to $746.9 million in YTD 2013. The increase in cost of sales for Q3 2014 compared to Q3 2013 was principally attributable to the following: Q3 2014 Attributable to: (In Millions) $ 11.1 5.4% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (3.1% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories) 2.7 Increase in freight cost of sales 2.5 Increase in raw material costs and increased purchases of finished products (1.2 ) Increase in marketing funding support received (primarily from The Coca-Cola Company) (1.1 ) 2.7% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products (0.8 ) Decrease in cost of sales of the Company's own brand portfolio (primarily Tum-E Yummies) 1.2 Other $ 14.4 Total increase in cost of sales 47 -------------------------------------------------------------------------------- Table of Contents The increase in cost of sales for YTD 2014 compared to YTD 2013 was principally attributable to the following: YTD 2014 Attributable to: (In Millions) $ 24.9 4.3% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (1.5% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories) 7.0 Increase in freight cost of sales 6.8 Increase in raw material costs and increased purchases of finished products (5.3 ) 4.4% decrease in sales volume to other Coca-Cola bottlers primarily due to volume decreases in the sparkling beverage category excluding energy products (2.8 ) Increase in marketing funding support received (primarily from The Coca-Cola Company) 2.3 Increase in cost of sales to other Coca-Cola bottlers (primarily due to a higher percentage of energy products and still beverages which have higher costs per unit than sparkling beverages (excluding energy products) (1.9 ) Decrease in cost due to the Company's commodity hedging program (1.8 ) Decrease in cost of sales of the Company's own brand portfolio (primarily Tum-E Yummies) 1.6 Increase in manufacturing labor costs 1.2 Other $ 32.0 Total increase in cost of sales The following inputs represent a substantial portion of the Company's total cost of sales: (1) sweeteners, (2) packaging materials, including plastic bottles and aluminum cans, and (3) finished products purchased from other vendors. The Company anticipates that the costs of some of the underlying commodities related to these inputs will have a smaller increase in 2014 compared to 2013. Since 2008, the Company has been purchasing concentrate from The Coca-Cola Company for all sparkling beverages for which the Company purchases concentrate from The Coca-Cola Company under an incidence-based pricing arrangement and has not purchased concentrates at standard concentrate prices as was the Company's practice in prior years. During the two-year term of a new incidence-based pricing agreement that the Company entered into with The Coca-Cola Company in December 2013 that began January 1, 2014 and will end on December 31, 2015, the pricing of such concentrate will continue to be governed by the incidence-based pricing model rather than the other agreements that the Company has with The Coca-Cola Company. Under the incidence-based pricing model, the concentrate price The Coca-Cola Company charges is impacted by a number of factors, including the incidence rate in effect, the Company's pricing and sales of finished products, the channels in which the finished products are sold and package mix. 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 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. 48-------------------------------------------------------------------------------- Table of Contents Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to customers for marketing programs, was $14.6 million for Q3 2014 compared to $13.4 million for Q3 2013. Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to customers for marketing programs, was $41.4 million for YTD 2014 compared to $38.7 million for YTD 2013. Gross Margin Gross margin dollars increased 5.0%, or $8.8 million, to $184.9 million in Q3 2014 compared to $176.1 million in Q3 2013. Gross margin as a percentage of net sales decreased to 40.4% for Q3 2014 from 40.5% for Q3 2013. Gross margin dollars increased 5.3%, or $26.7 million, to $526.8 million in YTD 2014 compared to $500.1 million in YTD 2013. Gross margin as a percentage of net sales increased to 40.3% for YTD 2014 from 40.1% for YTD 2013. The increase in gross margin dollars for Q3 2014 compared to Q3 2013 was principally attributable to the following: Q3 2014 Attributable to: (In Millions) $ 7.6 5.4% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (3.1% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories) 5.0 1.4% increase in bottle/can sales price per unit to retail customers primarily due to an increase in sparkling beverages sales price per unit (3.1 ) Refund in 2013 of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the third quarter of 2013. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate. (2.5 ) Increase in raw material costs and increased purchases of finished products 1.2 Increase in marketing funding support received (primarily from The Coca-Cola Company) 0.7 2.8% increase in post-mix sales price per unit (0.1 ) Other $ 8.8 Total increase in gross margin 49 -------------------------------------------------------------------------------- Table of Contents The increase in gross margin dollars for YTD 2014 compared to YTD 2013 was principally attributable to the following: YTD 2014 Attributable to: (In Millions) $ 17.3 4.3% increase in bottle/can volume to retail customers primarily due to a volume increase in still beverages (1.5% of the total bottle/can volume increase related to the acquisition of the Johnson City and Morristown, Tennessee territories) 14.1 1.4% increase in bottle/can sales price to retail customers primarily due to an increase in sparkling beverages sales price per unit (6.8 ) Increase in raw material costs and increased purchases of finished products (3.1 ) Refund in 2013 of 2012 cooperative trade marketing funds paid to The Coca-Cola Company based on updated information related to the collective marketing funds paid by the Company and other non-related bottlers maintained by The Coca-Cola Company that was not available until the third quarter of 2013. The amount previously paid and expensed by the Company was in accordance with the agreed upon contractual rate and the refund represented a change in estimate. 2.8 Increase in marketing funding support received (primarily from The Coca-Cola Company) 2.6 2.1% increase in sales price per unit of sales to other Coca-Cola bottlers primarily due to a higher percentage of energy products and still beverages which have a higher sales price per unit than sparkling beverages (excluding energy products) (2.3 ) Increase in cost of sales to other Coca-Cola bottlers primarily due to a higher percentage of energy products and still beverages which have higher costs per unit than sparkling beverages (excluding energy products) 2.0 3.1% increase in post-mix sales price per unit 1.9 Decrease in cost due to the Company's commodity hedging program (1.6 ) Increase in manufacturing labor costs 0.8 Increase in freight gross margin (1.0 ) Other $ 26.7 Total increase in gross margin 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 and the Company does not. 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. 50 -------------------------------------------------------------------------------- Table of Contents S,D&A expenses increased by $10.6 million, or 7.3%, to $156.5 million in Q3 2014 from $145.9 million in Q3 2013. S,D&A expenses as a percentage of net sales increased to 34.2% in Q3 2014 from 33.6% in Q3 2013. S,D&A expenses increased by $27.4 million, or 6.4%, to $454.9 million in YTD 2014 from $427.5 million in YTD 2013. S,D&A expenses as a percentage of net sales increased to 34.8% in YTD 2014 from 34.3% in YTD 2013. The increase in S,D&A expenses for Q3 2014 compared to Q3 2013 was principally attributable to the following: Q3 2014 Attributable to: (In Millions) $ 3.6 Increase in employee salaries due to normal salary increases and additional personnel related to the acquisition of the Johnson City and Morristown, Tennessee territories 2.5 Increase in bonus expense, incentive expense and other performance pay initiatives due to the Company's financial performance 1.0 Increase in marketing expense primarily due to increased spending for promotional items and various marketing programs 1.0 Increase in expenses related to the Company's franchise territory expansion, primarily professional fees related to due diligence and consulting fees related to infrastructure 2.5 Other $ 10.6 Total increase in S,D&A expenses The increase in S,D&A expenses for YTD 2014 compared to YTD 2013 was principally attributable to the following: YTD 2014 Attributable to: (In Millions) $ 6.7 Increase in employee salaries due to normal salary increases and additional personnel 5.7 Increase in bonus expense, incentive expense and other performance pay initiatives due to the Company's financial performance 4.3 Increase in expenses related to the Company's franchise territory expansion, primarily professional fees related to due diligence and consulting fees related to infrastructure 2.5 Increase in marketing expense primarily due to increased spending for promotional items and various marketing programs 0.8 Increase in employer payroll taxes and an increase in employee benefit costs primarily due to increased medical insurance expense partially offset by a pension benefit 0.7 Increase in property and casualty insurance expense primarily due to an increase in auto insurance claims 6.7 Other $ 27.4 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 $156.7 million and $151.0 million in YTD 2014 and YTD 2013, respectively. The Company's expense recorded in S,D&A expenses related to the two Company-sponsored pension plans decreased by $1.3 million to a benefit of $0.2 million in YTD 2014 from an expense of $1.1 million in YTD 2013. 51-------------------------------------------------------------------------------- Table of Contents The Company provides a 401(k) Savings Plan for substantially all of its full-time employees who are not part of collective bargaining agreements. During 2013, the Company's 401(k) Savings Plan matching contribution was discretionary with the Company having the option to make matching contributions for eligible participants of up to 5% of eligible participants' contributions. The 5% matching contribution was accrued during 2013 and paid in the first quarter of 2014. During 2014, the Company has matched the first 3.5% of participants' contributions while maintaining the option to increase the matching contributions an additional 1.5%, for a total of 5%, for the Company's employees based on the financial results for 2014. The total expense for this benefit recorded in S,D&A expenses was $5.4 million and $5.1 million in YTD 2014 and YTD 2013, respectively. Certain employees of the Company participate in a multi-employer pension plan, the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund ("the Plan"), to which the Company makes monthly contributions on behalf of such employees. The Plan was certified by the Plan's actuary as being in "critical" status for the plan year beginning January 1, 2013. As a result, the Plan adopted a "Rehabilitation Plan" effective January 1, 2015. The Company agreed and incorporated such agreement in the renewal of the collective bargaining agreement with the union, effective April 28, 2014, to participate in the Rehabilitation Plan. The Company will increase its contribution rates to the Plan effective January 2015 with additional increases occurring annually to support the Rehabilitation Plan. There would likely be a withdrawal liability in the event the Company withdraws from its participation in the Plan. The Company's withdrawal liability was reported by the Plan's actuary as of April 2014 to be approximately $4.5 million. The Company does not currently anticipate withdrawing from the Plan. Interest Expense Net interest expense was flat in Q3 2014 compared to Q3 2013. Net interest expense decreased 1.1% in YTD 2014 compared to YTD 2013. The decrease in YTD 2014 compared to YTD 2013 was primarily due to lower average borrowings on the Company's $200 million facility and lower interest expense on capital leases. The Company's overall weighted average interest rate on its debt and capital lease obligations was 5.8% during both YTD 2014 and YTD 2013. Income Taxes The Company's effective tax rate, as calculated by dividing income tax expense by income before income taxes, for YTD 2014 and YTD 2013 was 35.6% and 28.8%, respectively. 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 YTD 2014 and YTD 2013 was 38.5% and 31.1%, respectively. The increase in the effective tax rate for YTD 2014 resulted primarily from certain favorable tax provisions in YTD 2013 associated with the American Taxpayer Relief Act enacted on January 2, 2013, state tax legislation enacted in Q3 2013 that reduced the corporate tax rate and a reduction to the liabilities for uncertain tax positions. 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. 52-------------------------------------------------------------------------------- Table of Contents Noncontrolling Interest The Company recorded net income attributable to noncontrolling interest of $3.8 million and $3.6 million in YTD 2014 and YTD 2013, respectively, related to the portion of Piedmont owned by The Coca-Cola Company. Financial Condition Total assets increased to $1.38 billion at September 28, 2014, from $1.28 billion at December 29, 2013 primarily due to increases in cash and cash equivalents; accounts receivables; inventories; property, plant and equipment, net and other identifiable intangible assets, including acquired assets from the acquisition of the Johnson City and Morristown, Tennessee territories. Net working capital, defined as current assets less current liabilities, increased by $55.6 million to $86.0 million at September 28, 2014 from December 29, 2013 and increased by $30.5 million at September 28, 2014 from September 29, 2013. Significant changes in net working capital from December 29, 2013 were as follows: • An increase in cash and cash equivalents of $11.3 million primarily due to borrowings from the Company's $200 million facility. • An increase in accounts receivable, trade of $15.9 million primarily due to normal seasonal increase in sales and accounts receivable sales from acquired franchise territories. • An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $15.2 million and $21.2 million, respectively, primarily due to the timing of payments. • An increase in inventories of $18.1 million primarily due to normal seasonal increase in sales and acquired inventories from new territories. • A decrease of $20.0 million in the current portion of debt due to the refinance of the Company's uncommitted line of credit with borrowings under the Company's $350 million five-year unsecured amended and restated revolving credit facility on October 31, 2014 and, accordingly, the $20.0 million outstanding balance was classified as long-term as of September 28, 2014. • An increase in accounts payable trade of $5.9 million primarily due to normal seasonal increases in purchases and timing of payments. • An increase in accrued interest payable of $5.1 million due to timing of payments. Significant changes in net working capital from September 29, 2013 were as follows: • An increase in accounts receivable, trade of $7.4 million primarily due to the timing of payments and accounts receivable sales from acquired franchise territories. • An increase in accounts receivable from and an increase in accounts payable to The Coca-Cola Company of $8.5 million and $3.7 million, respectively, primarily due to the timing of payments. • An increase in inventories of $9.9 million primarily due to acquired inventories from new territories and inventory required for future marketing strategy. • A decrease of $20.0 million in the current portion of debt due to the refinance of the Company's uncommitted line of credit with borrowings under the Company's $350 million five-year unsecured amended and restated revolving credit facility on October 31, 2014 and, accordingly, the $20.0 million outstanding balance was classified as long-term as of September 28, 2014. 53 -------------------------------------------------------------------------------- Table of Contents • An increase in accrued compensation of $5.2 million primarily due to increased bonus accrual due to the Company's financial performance. Debt and capital lease obligations were $504.3 million as of September 28, 2014 compared to $463.6 million as of December 29, 2013 and $479.6 million as of September 29, 2013. Debt and capital lease obligations as of September 28, 2014 included $60.6 million of capital lease obligations related primarily to Company facilities. Liquidity and Capital Resources Capital Resources The Company's available sources of capital include cash flows from operations, available credit facility balances and the issuance of debt and equity securities. Historically, operating results for the third quarter and the first nine months of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company's products in the second and third quarter versus the first and fourth quarters of the fiscal year. Management believes the Company has sufficient resources available to finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending 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 in the future. On October 16, 2014, the Company entered into a $350 million five-year unsecured revolving credit facility ("$350 million facility") which amended and restated the Company's existing $200 million five-year unsecured revolving credit agreement dated as of September 21, 2011 ("$200 million facility"). The $350 million facility has a scheduled maturity date of October 16, 2019 and up to $50 million is available for the issuance of letters of credit. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement, the Company may increase the aggregate availability under the facility to $450 million. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, dependent on the Company's credit rating at the time of borrowing. At the Company's current credit ratings, the Company must pay an annual facility fee of .15% of the lenders' aggregate commitments under the facility. The $350 million facility includes, and the $200 million facility included, two financial covenants: a cash flow/fixed charges ratio ("fixed charges coverage ratio") and a funded indebtedness/cash flow ratio ("operating cash flow ratio"), each as defined in the respective credit agreements. The Company was in compliance with these covenants under the $200 million facility at September 28, 2014 and is currently in compliance with these covenants under the $350 million facility. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources. The Company has $100 million of senior notes which mature in April 2015. The Company currently expects to use borrowings under the $350 million facility to repay the notes when due and, accordingly, has classified all the $100 million Senior Notes due April 2015 as long-term. On September 28, 2014, December 29, 2013 and September 29, 2013, the Company had $20.0 million outstanding on an uncommitted line of credit. On October 31, 2014, the Company terminated the uncommitted line of credit and refinanced the outstanding balance with borrowings under the $350 million facility and, accordingly, has classified the outstanding balance on the uncommitted line of credit as of September 28, 2014 as long-term. 54-------------------------------------------------------------------------------- Table of Contents The Company has obtained the majority of its long-term financing, other than capital leases, from public markets. As of September 28, 2014, $373.7 million of the Company's total outstanding balance of debt and capital lease obligations of $504.3 million was financed through publicly offered debt. The Company had capital lease obligations of $60.6 million as of September 28, 2014. As of September 28, 2014, the Company had $50.0 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 in YTD 2014 and YTD 2013 have been provided by operating activities and available credit facilities. The primary uses of cash in YTD 2014 were for capital expenditures, the payment of debt and capital lease obligations, dividend payments, income tax payments, pension plan contributions, acquisition of new territories and funding working capital. The primary uses of cash in YTD 2013 were for capital expenditures, the payment of debt and capital lease obligations, dividend payments, income tax payments and funding working capital. A summary of activity for YTD 2014 and YTD 2013 follows: First Nine Months In Millions 2014 2013Cash Sources Cash provided by operating activities (excluding income tax and pension payments) $ 81.7 $ 88.7 Proceeds from $200 million facility 85.0 55.0 Proceeds from the sale of property, plant and equipment 1.2 6.0 Total cash sources $ 167.9 $ 149.7 Cash Uses Capital expenditures $ 61.4 $ 45.2 Acquisition of new territories 12.2 - Payment on $200 million facility 40.0 65.0 Payment on capital lease obligations 4.4 3.9 Dividends 6.9 6.9 Income tax payments 24.2 13.6 Contributions to pension plans 7.5 .1 Other - .1 Total cash uses $ 156.6 $ 134.8 Increase in cash $ 11.3 $ 14.9 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 $3 million and $8 million for the remainder of 2014. Operating Activities During YTD 2014, cash flow from operating activities decreased $25.0 million compared to YTD 2013. The decrease was primarily due to $10.6 million in additional income tax payments and $7.4 million in additional pension payments during YTD 2014 compared to YTD 2013 and $12.4 million additional increase in inventories for YTD 2014 compared to YTD 2013. These decreases to operating activities YTD 2014 compared to YTD 2013 were offset by a $6.0 million decrease in accrued compensation. 55 -------------------------------------------------------------------------------- Table of Contents Investing Activities On May 7, 2014, the Company and CCR entered into an asset purchase agreement relating to the territory served by CCR through CCR's facilities and equipment located in Johnson City and Morristown, Tennessee. The closing of this transaction occurred on May 23, 2014 for a cash purchase price of $12.2 million, which amount remains subject to adjustment until July 2, 2015, as specified in the asset purchase agreement. See Note 4 to the consolidated financial statements for additional information related to the Johnson City and Morristown, Tennessee territory acquisition. Additions to property, plant and equipment during YTD 2014 were $57.0 million of which $2.9 million were accrued in accounts payable, trade as unpaid. This amount does not include $8.5 million in property, plant and equipment acquired at the date of acquisition for the Johnson City and Morristown, Tennessee territories. This compared to $32.7 million in total additions to property, plant and equipment during YTD 2013 of which $2.0 million were accrued in accounts payable, trade as unpaid. Capital expenditures during YTD 2014 were funded with cash flows from operations and available credit facilities. The Company anticipates total additions to property, plant and equipment in fiscal year 2014 will be in the range of $80 million to $90 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 On October 16, 2014, the Company entered into a $350 million facility which amended and restated the Company's existing $200 million facility. The $350 million facility has a scheduled maturity date of October 16, 2019 and up to $50 million is available for the issuance of letters of credit. Subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement, the Company may increase the aggregate availability under the facility to $450 million. Borrowings under the agreement bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, dependent on the Company's credit rating at the time of borrowing. At the Company's current credit ratings, the Company must pay an annual facility fee of .15% of the lenders' aggregate commitments under the facility. The $350 million facility includes, and the $200 million facility included, two financial covenants: a cash flow/fixed charges ratio ("fixed charges coverage ratio") and a funded indebtedness/cash flow ratio ("operating cash flow ratio"), each as defined in the respective credit agreements. The Company was in compliance with these covenants under the $200 million facility at September 28, 2014 and is currently in compliance with these covenants under the $350 million facility. 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 $350 million facility have the ability to and will meet any funding requests from the Company. On September 28, 2014, December 29, 2013 and September 29, 2013, the Company had $50.0 million, $5.0 million and $20.0 million, respectively, of outstanding borrowings on the $200 million facility. During YTD 2014, the Company's net borrowings under the $200 million facility increased $45.0 million primarily to fund working capital requirements, capital expenditures and the acquisition of the Johnson City and Morristown, Tennessee territories. During YTD 2013, the Company's net borrowings under the $200 million facility decreased $10.0 million primarily due to increased cash available for repayments as a result of seasonally lower working capital requirements. 56 -------------------------------------------------------------------------------- Table of Contents The Company has $100 million of senior notes which mature in April 2015. The Company currently expects to use borrowings under the $350 million facility to repay the notes when due and, accordingly, has classified all the $100 million Senior Notes due April 2015 as long-term. On September 28, 2014, December 29, 2013 and September 29, 2013, the Company had $20.0 million outstanding on an uncommitted line of credit. On October 31, 2014, the Company terminated the uncommitted line of credit and refinanced the outstanding balance with borrowings under the $350 million facility and, accordingly, has classified the outstanding balance on the uncommitted line of credit as of September 28, 2014 as long-term. As of September 28, 2014, December 29, 2013 and September 29, 2013, the weighted average interest rate of the Company's debt and capital lease obligations was 5.8%, 6.2% and 6.1%, respectively, for its outstanding debt and capital lease obligations. The Company's overall weighted average interest rate on its debt and capital lease obligations was 5.8% in both YTD 2014 and YTD 2013. As of September 28, 2014, $70.0 million of the Company's debt and capital lease obligations of $504.3 million were subject to changes in short-term interest rates. All of the outstanding debt on the Company's balance sheet has been issued by the Company with none having been issued by any of the Company's subsidiaries. There are no guarantees of the Company's debt. The Company or its subsidiaries have entered into eight capital leases. At September 28, 2014, 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 rating 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. Changes in the credit ratings of The Coca-Cola Company could adversely affect the Company's credit ratings as well. The indentures under which the Company's public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company's subsidiaries in excess of certain amounts. Off-Balance Sheet Arrangements The Company is a member of two manufacturing cooperatives and has guaranteed $32.7 million of debt for these entities as of September 28, 2014. In addition, the Company has an equity ownership in each of the entities. The members of both cooperatives consist solely of Coca-Cola bottlers. The Company does not anticipate either of these cooperatives will fail to fulfill their commitments. The Company further believes each of these cooperatives has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss from the Company's guarantees. As of September 28, 2014, the Company's maximum exposure, if the entities borrowed up to their borrowing capacity, would have been $71.7 million including the Company's equity interests. See Note 15 and Note 20 to the consolidated financial statements for additional information about these entities. 57-------------------------------------------------------------------------------- Table of Contents Aggregate Contractual Obligations The following table summarizes the Company's contractual obligations and commercial commitments as of September 28, 2014: Payments Due by Period Oct. 2014- Oct. 2015- Oct. 2017- After In Thousands Total Sept. 2015 Sept. 2017 Sept. 2019 Sept. 2019 Contractual obligations: Total debt, excluding interest $ 443,709 $ 120,000 $ 164,757 $ 108,952 $ 50,000 Capital lease obligations, excluding interest 60,568 6,325 14,093 15,903 24,247 Estimated interest on long-term debt and capital lease obligations(1) 69,957 23,081 27,735 16,074 3,067 Purchase obligations (2) 919,815 94,340 188,680 188,680 448,115 Other long-term liabilities (3) 151,866 12,009 19,268 13,592 106,997 Operating leases 54,365 5,695 10,845 8,669 29,156 Long-term contractual arrangements (4) 40,039 10,907 14,971 8,030 6,131 Postretirement obligations (5) 69,288 4,686 6,183 7,739 50,680 Purchase orders (6) 51,747 51,747 - - - Total contractual obligations $ 1,861,354 $ 328,790 $ 446,532 $ 367,639 $ 718,393 (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 June 2024 from South Atlantic Canners, a manufacturing cooperative. (3) Includes obligations under executive benefit plans, the liability to exit from a multi-employer pension plan, acquisition related contingent consideration 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) Includes the liability for postretirement benefit obligations only. The unfunded portion of the Company's pension plans is excluded as the timing and/or the amount of any cash payment is uncertain. (6) Purchase orders include commitments in which a written purchase order has been issued to a vendor, but the goods have not been received or the services have not been performed. The Company has $2.8 million of uncertain tax positions, including accrued interest, as of September 28, 2014 (excluded from other long-term liabilities in the table above because the Company is uncertain as to if or when such amounts will be recognized) all of which would affect the Company's effective tax rate if recognized. While it is expected that the amount of uncertain tax positions may change in the next 12 months, the Company does not expect any change to have a material impact on the consolidated financial statements. See Note 16 to the consolidated financial statements for additional information. The Company is a member of Southeastern Container ("Southeastern"), 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 15 and Note 20 to the consolidated financial statements for additional information related to Southeastern. 58-------------------------------------------------------------------------------- Table of Contents As of September 28, 2014, the Company has $23.4 million of standby letters of credit, primarily related to its property and casualty insurance programs. See Note 15 to the consolidated financial statements for additional information related to commercial commitments, guarantees, legal and tax matters. The Company contributed $7.5 million to the two Company-sponsored pension plans in YTD 2014. Based on information currently available, the Company estimates it will be required to make contributions for the remainder of 2014 in the range of $1 million to $3 million to these two plans. Postretirement medical care payments are expected to be approximately $3 million in 2014. See Note 19 to the consolidated financial statements for additional information related to pension and postretirement obligations. Hedging Activities Commodity Hedging The Company entered into derivative instruments to hedge certain commodity purchases for 2014 and 2013. Fees paid by the Company for derivative instruments 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. In February 2014, the Company paid $0.9 million for agreements to hedge certain commodity costs for 2014. The notional amount of these agreements at inception was $31.6 million. The net impact of the commodity hedges was to decrease the cost of sales by $0.9 million in YTD 2014 and to increase the cost of sales by $0.9 million in YTD 2013. 59 -------------------------------------------------------------------------------- Table of Contents Cautionary Information Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q, as well as information included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, news 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 expectation regarding the time frame for and sequencing of subsequent phases of the expansion of the Company's franchise territory; • the Company's belief that the undiscounted amounts to be paid under the acquisition related contingent consideration arrangement will be between $1.0 million and $1.8 million per year; • the Company's belief that the covenants on its $350 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 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 key priorities which are revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity; • the Company's belief that cash contributions to the two Company-sponsored pension plans will be in the range of $1 million to $3 million for the remainder of 2014; • the Company's belief that postretirement medical care payments are expected to be approximately $3 million in 2014; • the Company's belief that cash requirements for income taxes will be in the range of $3 million to $8 million for the remainder of 2014; • the Company's expectation that additions to property, plant and equipment in 2014 will be in the range of $80 million to $90 million; • 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 beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements; • 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; 60 -------------------------------------------------------------------------------- Table of Contents • the Company's belief that all of the banks participating in the Company's $350 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 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 $26 million assuming no change in volume; • 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 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 the risk of loss with respect to funds deposited with banks is minimal; • the Company's expectation that the costs of some of the underlying commodities to inputs to the Company's total cost of sales will have a smaller increase for the remainder of 2014 compared to 2013; and • 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 September 28, 2014. 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 statements and expectations or adversely affect future periods include, but are not limited to, the factors set forth in Part I. Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 29, 2013. 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. 61-------------------------------------------------------------------------------- Table of Contents |