UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended October 1, 2017

Commission File Number 0-9286

 

COCA‑COLA BOTTLING CO. CONSOLIDATED

(Exact name of registrant as specified in its charter)

 

 

4100 Coca‑Cola Plaza
Charlotte, North Carolina 28211

(Address of principal executive offices)   (Zip Code)

(704) 557-4400

(Registrant’s telephone number, including area code)

 

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

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

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

 

 

 

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COCA‑COLA BOTTLING CO. CONSOLIDATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED OCTOBER 1, 2017

INDEX

 

 

 

 

 

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PART I - FINANCIAL INFORMATION

COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

See accompanying notes to consolidated condensed financial statements.

 

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COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

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COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

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COCA‑COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.Significant Accounting Policies and New Accounting Pronouncements

 

The consolidated condensed financial statements include the accounts of Coca‑Cola Bottling Co. Consolidated and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The consolidated condensed financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented:

 

 

The consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated condensed financial statements included in the Company’s Annual Report on Form 10‑K for 2016 filed with the Securities and Exchange Commission (the “SEC”).

 

The preparation of consolidated condensed financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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.

 

Significant Accounting Policies

 

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 condensed financial statements in conformity with GAAP. 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 2016 under the caption “Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements” in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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 significant accounting policies during the third quarter of 2017. 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.

 

Recently Adopted Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this guidance in the first quarter of 2017 and there was no impact to the Company’s consolidated condensed financial statements.

 

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory.” The new guidance requires an entity to measure most inventory “at lower of cost and net realizable value” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this guidance in the first quarter of 2017 and there was no material impact to the Company’s consolidated condensed financial statements.

 

 

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Recently Issued Pronouncements

 

In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Under the new guidance, entities should instead perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of the carrying amount over the fair value of the respective reporting unit. The new guidance is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated condensed financial statements.

 

In January 2017, the FASB issued ASU 2017-01 “Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The impact to the Company’s consolidated condensed financial statements will depend on the facts and circumstances of any specific future transactions.

 

In February 2016, the FASB issued ASU 2016-02 “Leases,” which requires lessees to recognize a right-to-use asset and a lease liability for virtually all leases (other than leases meeting the definition of a short-term lease). The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods beginning the following fiscal year. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated condensed financial statements. Additionally, the Company is evaluating the impacts of the standard beyond accounting, including system, data and process changes required to comply with the standard.

 

In January 2016, the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises the classification and measurement of investments in equity securities and the presentation of certain fair value changes in financial liabilities measured at fair value. The new guidance is effective for annual and interim periods beginning after December 31, 2017. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated condensed financial statements.

 

Over the past several years, the FASB has issued several accounting standards for revenue recognition:

 

 

The Company does not plan to early adopt this guidance and is in the process of determining whether to adopt a full retrospective approach or a modified retrospective approach. The Company has started its assessment of the impact of the new guidance on the Company’s consolidated financial statements by identifying and performing detailed walkthroughs of key revenue streams, including high level contract review. The Company will continue its assessment with detailed contract reviews for all revenue streams in order to evaluate revenue recognition requirements and prepare an implementation work plan. Based on the Company’s current assessment, it does not expect this guidance to have a material impact on the Company’s consolidated condensed financial statements. As the Company completes its overall assessment, the Company will identify and prepare to implement changes to its accounting policies and practices, business processes, systems and controls to support the new revenue recognition and disclosure requirements.

 

2.Acquisitions and Divestitures

 

As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company has engaged in a series of transactions since April 2013 with The Coca‑Cola Company and Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-

 

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owned subsidiary of The Coca‑Cola Company, to significantly expand the Company’s distribution and manufacturing operations. This expansion includes acquisition of the rights to serve additional distribution territories previously served by CCR (the “Expansion Territories”) and related distribution assets, as well as the acquisition of regional manufacturing facilities previously owned by CCR (the “Expansion Facilities”) and related manufacturing assets (collectively, the “Expansion Transactions”).

 

Year-to-Date 2017 Expansion Transactions

 

During the first quarter of 2017, the Company acquired distribution rights and related assets for the following Expansion Territories: Anderson, Bloomington, Fort Wayne, Indianapolis, Lafayette, South Bend and Terre Haute, Indiana and Columbus and Mansfield, Ohio. Additionally, during the first quarter of 2017, the Company acquired Expansion Facilities and related manufacturing assets located in Indianapolis and Portland, Indiana.

 

During the second quarter of 2017, the Company acquired distribution rights and related assets for the following Expansion Territories: Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio. Additionally, during the second quarter of 2017, the Company acquired an Expansion Facility and related manufacturing assets located in Twinsburg, Ohio. Collectively, these Expansion Transactions completed during the first three quarters of 2017 are the “YTD 2017 Expansion Transactions.” Details of the YTD 2017 Expansion Transactions are included below.

 

Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana Expansion Territories Acquisitions (“January 2017 Expansion Transaction”)

 

On January 27, 2017, the Company completed a portion of the transactions contemplated by a distribution and asset purchase agreement entered into by the Company and CCR in September 2016 (the “September 2016 Distribution APA”) by acquiring distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana. The closing of the January 2017 Expansion Transaction occurred for a cash purchase price of $31.6 million, which will remain subject to adjustment in accordance with the terms and conditions of the September 2016 Distribution APA.

 

Bloomington and Indianapolis, Indiana and Columbus and Mansfield, Ohio Expansion Territories Acquisitions and Indianapolis and Portland, Indiana Expansion Facilities Acquisitions (“March 2017 Expansion Transactions”)

 

On March 31, 2017, the Company completed the final transactions contemplated by (i) the September 2016 Distribution APA, by acquiring distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Bloomington and Indianapolis, Indiana and Columbus and Mansfield, Ohio, and (ii) a manufacturing asset purchase agreement entered into by the Company and CCR in September 2016 (the “September 2016 Manufacturing APA”), by acquiring Expansion Facilities and related manufacturing assets located in Indianapolis and Portland, Indiana. The closing of the March 2017 Expansion Transactions occurred for a cash purchase price of $108.7 million, which will remain subject to adjustment in accordance with the terms and conditions of the September 2016 Distribution APA and the September 2016 Manufacturing APA.

 

Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio Expansion Territories Acquisitions and Twinsburg, Ohio Expansion Facility Acquisition (“April 2017 Expansion Transactions”)

 

On April 28, 2017, the Company completed the transactions contemplated by (i) a distribution asset purchase agreement entered into by the Company and CCR in April 2017 (the “April 2017 Distribution APA”), by acquiring distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio, and (ii) a manufacturing asset purchase agreement entered into by the Company and CCR in April 2017 (the “April 2017 Manufacturing APA”), by acquiring an Expansion Facility and related manufacturing assets located in Twinsburg, Ohio. The closing of the April 2017 Expansion Transactions occurred for a cash purchase price of $87.7 million, which will remain subject to adjustment in accordance with the terms of the April 2017 Distribution APA and the April 2017 Manufacturing APA.

 

 

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The fair value of acquired assets and assumed liabilities of the YTD 2017 Expansion Transactions as of the acquisition dates is summarized as follows:

 

 

The goodwill for the YTD 2017 Expansion Transactions is included in the Nonalcoholic Beverages segment and is primarily attributed to operational synergies and the workforce acquired. Goodwill of $2.1 million and $15.0 million is expected to be deductible for tax purposes for the March 2017 Expansion Transactions and the April 2017 Expansion Transactions, respectively. No goodwill is expected to be deductible for tax purposes for the January 2017 Expansion Transaction.

 

Identifiable intangible assets acquired by the Company in the YTD 2017 Expansion Transactions consist of distribution agreements and customer lists, which have an estimated useful life of 40 years and 12 years, respectively.

 

2016 Expansion Transactions

 

During 2016, the Company acquired distribution rights and related assets for the following Expansion Territories: Easton, Salisbury, Capitol Heights, La Plata, Baltimore, Hagerstown and Cumberland, Maryland; Richmond, Yorktown and Alexandria, Virginia; Cincinnati, Dayton, Lima and Portsmouth, Ohio; and Louisa, Kentucky. The Company also acquired Expansion Facilities and related manufacturing assets in Sandston, Virginia; Silver Spring and Baltimore, Maryland; and Cincinnati, Ohio during 2016. Collectively, these are the “2016 Expansion Transactions.” Details of the 2016 Expansion Transactions are included below.

 

Easton and Salisbury, Maryland and Richmond and Yorktown, Virginia Expansion Territories Acquisitions and Sandston, Virginia Expansion Facility Acquisition (“January 2016 Expansion Transactions”)

 

An asset purchase agreement entered into by the Company and CCR in September 2015 (the “September 2015 APA”) contemplated, in part, the Company’s acquisition of distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Easton and Salisbury, Maryland and Richmond and Yorktown, Virginia. In addition, an asset purchase agreement entered into by the Company and CCR in October 2015 (the “October 2015 APA”) contemplated, in part, the Company’s acquisition of an Expansion Facility and related manufacturing assets in Sandston, Virginia. The closing of the January 2016 Expansion Transactions occurred on January 29, 2016, for a cash purchase price of $65.7 million. During the second quarter of 2017, the cash purchase price for the January 2016 Expansion Transactions increased by $9.4 million, which remains payable to The Coca‑Cola Company, as a result of net working capital and other fair value adjustments. As these adjustments were made beyond one year from the acquisition date, the Company recorded the adjustments through its consolidated condensed statements of operations. The cash purchase price for the January 2016 Expansion Transactions will remain subject to adjustment in accordance with the terms and conditions of the September 2015 APA and the October 2015 APA.

 

 

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Alexandria, Virginia and Capitol Heights and La Plata, Maryland Expansion Territories Acquisitions (“April 1, 2016 Expansion Transaction”)

 

The September 2015 APA also contemplated the Company’s acquisition of distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Alexandria, Virginia and Capitol Heights and La Plata, Maryland. The closing of the April 1, 2016 Expansion Transaction occurred on April 1, 2016, for a cash purchase price of $35.6 million, which will remain subject to adjustment in accordance with the terms and conditions of the September 2015 APA.

 

Baltimore, Hagerstown and Cumberland, Maryland Expansion Territories Acquisitions and Silver Spring and Baltimore, Maryland Expansion Facilities Acquisitions (“April 29, 2016 Expansion Transactions”)

 

On April 29, 2016, the Company completed the remaining transactions contemplated by (i) the September 2015 APA, by acquiring distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Baltimore, Hagerstown and Cumberland, Maryland, and (ii) the October 2015 APA, by acquiring Expansion Facilities and related manufacturing assets in Silver Spring and Baltimore, Maryland. The closing of the April 29, 2016 Expansion Transactions occurred for a cash purchase price of $69.0 million, which will remain subject to adjustment in accordance with the terms and conditions of the September 2015 APA and the October 2015 APA.

 

Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky Expansion Territories Acquisitions and Cincinnati, Ohio Expansion Facility Acquisition (“October 2016 Expansion Transactions”)

 

On October 28, 2016, the Company completed the initial transactions contemplated by (i) the September 2016 Distribution APA, by acquiring distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky, and (ii) the September 2016 Manufacturing APA, by acquiring an Expansion Facility and related manufacturing assets located in Cincinnati, Ohio. The closing of the October 2016 Expansion Transactions occurred for a cash purchase price of $98.2 million, which will remain subject to adjustment in accordance with the terms and conditions of the September 2016 Distribution APA and the September 2016 Manufacturing APA.

 

The fair value of acquired assets and assumed liabilities of the 2016 Expansion Transactions as of the acquisition dates is summarized as follows:

 

 

The goodwill for the 2016 Expansion Transactions is included in the Nonalcoholic Beverages segment and is primarily attributed to operational synergies and the workforce acquired. Goodwill of $15.4 million and $14.4 million is expected to be deductible for tax

 

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purposes for the January 2016 Expansion Transactions and the October 2016 Expansion Transactions, respectively. No goodwill is expected to be deductible for tax purposes for the April 1, 2016 Expansion Transaction or the April 29, 2016 Expansion Transactions.

 

Identifiable intangible assets acquired by the Company in the 2016 Expansion Transactions consist of distribution agreements and customer lists, which have an estimated useful life of 40 years and 12 years, respectively.

   

The Company has preliminarily allocated the purchase prices of the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions to the individual acquired assets and assumed liabilities. The valuations are subject to adjustment as additional information is obtained. Any adjustments made beyond one year from each transaction’s acquisition date are recorded through the Company’s consolidated condensed statements of operations.

 

YTD 2017 Expansion Transactions and 2016 Expansion Transactions Financial Results

 

The financial results of the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions have been included in the Company’s consolidated condensed financial statements from their respective acquisition dates. These Expansion Transactions contributed the following amounts to the Company’s consolidated condensed statement of operations:

 

 

The Company incurred transaction related expenses for these Expansion Transactions of $5.6 million in the first three quarters of 2017 and $5.1 million in the first three quarters of 2016. These expenses are included within selling, delivery and administrative expenses on the consolidated condensed statements of operations.

 

YTD 2017 Expansion Transactions and 2016 Expansion Transactions Pro Forma Financial Information

 

The purpose of the pro forma is to present the net sales and the income from operations of the combined entity as though the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions had occurred as of the beginning of 2016. The pro forma combined net sales and income from operations do not necessarily reflect what the combined Company’s net sales and income from operations would have been had the acquisitions occurred at the beginning of 2016. The pro forma financial information also may not be useful in predicting the future financial results of the combined company. The actual results may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

 

The following tables represent the Company’s unaudited pro forma net sales and unaudited pro forma income from operations for the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions.

 

 

 

 

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3.Inventories

 

Inventories consisted of the following:

 

 

There was $12.5 million of inventories related to territory exchanges and acquisitions that closed on October 2, 2017, which was classified as held for sale as of October 1, 2017. Refer to Note 24 for additional information.

 

The growth in the inventories balance at October 1, 2017, as compared to January 1, 2017, is primarily a result of inventory acquired through the completion of the YTD 2017 Expansion Transactions.

 

4.Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

 

There was $1.6 million of prepaid expenses and other current assets related to territory exchanges and acquisitions that closed on October 2, 2017, which was classified as held for sale as of October 1, 2017. Refer to Note 24 for additional information.

 

The growth in the prepaid expenses and other current assets balance at October 1, 2017, as compared to January 1, 2017, is primarily a result of a $56.5 million payment during the third quarter of 2017 toward the purchase price of the October 2017 Expansion Transactions (as defined in Note 24), which closed subsequent to the end of the third quarter of 2017.

 

5.Property, Plant and Equipment, Net

 

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

 

 

There was $38.4 million of property, plant and equipment, net related to territory exchanges and acquisitions that closed on October 2, 2017, which was classified as held for sale as of October 1, 2017. Refer to Note 24 for additional information.

 

 

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The growth in the property, plant and equipment, net balance at October 1, 2017, as compared to January 1, 2017, is primarily a result of property, plant and equipment acquired through the completion of the YTD 2017 Expansion Transactions and property, plant and equipment acquired through the normal course of business.

 

Depreciation and amortization expense, which includes both amortization expense for leased property under capital leases and amortization of the deferred liability associated with the fee received from CCR upon conversion of the Company’s bottling agreements to the Final CBA (as defined in Note 6) on March 31, 2017, was $38.4 million in the third quarter of 2017, $30.0 million in the third quarter of 2016, $108.7 million in the first three quarters of 2017 and $79.9 million in the first three quarters of 2016.

 

6.Franchise Rights

 

A reconciliation of the activity for franchise rights for the first three quarters of 2017 and the first three quarters of 2016 is as follows:

 

 

In connection with the closing of the March 2017 Expansion Transactions, the Company, The Coca-Cola Company and CCR entered into a comprehensive beverage agreement (as amended, the “Final CBA”) on March 31, 2017, and concurrently converted the Company’s franchise rights within the territories in which the Company distributed Coca‑Cola products prior to beginning the Expansion Transactions (the “Legacy Territories”) to distribution agreements, net on the consolidated condensed financial statements. Prior to this conversion, the Company’s franchise rights resided entirely within the Nonalcoholic Beverage segment.

 

During the second quarter of 2016, the Company recorded $5.5 million in franchise rights for an Expansion Territory previously served by CCR’s facilities and equipment located in Lexington, Kentucky, which the Company acquired in an exchange transaction with CCR on May 1, 2015 (the “Lexington Asset Exchange Transaction”).

 

7.Goodwill

 

A reconciliation of the activity for goodwill for the first three quarters of 2017 and the first three quarters of 2016 is as follows:

 

 

⁽¹⁾ The 2016 Expansion Transactions completed during the first three quarters of 2016 are the “Q1, Q2 and Q3 2016 Expansion Transactions.”

 

The Company’s goodwill resides entirely within the Nonalcoholic Beverage segment. The Company performs its annual impairment test of goodwill as of the first day of the fourth quarter of each fiscal year. There was $12.7 million of goodwill related to territory exchanges and acquisitions that closed on October 2, 2017, which was classified as held for sale as of October 1, 2017 and will be omitted from the Company’s annual impairment test of goodwill. Refer to Note 24 for additional information. During the first three quarters of 2017, the

 

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Company did not experience any additional triggering events or changes in circumstances indicating the carrying amounts of the Company’s goodwill exceeded fair values.

 

8.Distribution Agreements, Net

 

Distribution agreements, net, which have an estimated useful life of 20 to 40 years, consisted of the following:

 

 

A reconciliation of the activity for distribution agreements, net for the first three quarters of 2017 and the first three quarters of 2016 is as follows:

 

 

There was $63.3 million of distribution agreements, net related to territory exchanges and acquisitions that closed on October 2, 2017, which was classified as held for sale as of October 1, 2017. Refer to Note 24 for additional information.

 

Concurrent with its entrance into the Final CBA in the first quarter of 2017, the Company converted its franchise rights for the Legacy Territories to distribution rights, with an estimated useful life of 40 years.

 

9.Customer Lists and Other Identifiable Intangible Assets, Net

 

Customer lists and other identifiable intangible assets, net, which have an estimated useful life of 12 to 20 years, consisted of the following:

 

 

A reconciliation of the activity for customer lists and other identifiable intangible assets, net for the first three quarters of 2017 and the first three quarters of 2016 is as follows:

 

 

 

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10.Other Accrued Liabilities

 

Other accrued liabilities consisted of the following:

 

 

There was $5.3 million of other accrued liabilities related to territory exchanges and acquisitions that closed on October 2, 2017, which was classified as held for sale as of October 1, 2017. Refer to Note 24 for additional information.

 

11.Debt

 

Following is a summary of the Company’s debt:

 

 

 

The Company had capital lease obligations of $43.1 million on October 1, 2017 and $48.7 million on January 1, 2017. The Company mitigates its financing risk by using multiple financial institutions and only entering into credit arrangements with institutions with investment grade credit ratings. The Company monitors counterparty credit ratings on an ongoing basis.

 

On February 27, 2017, the Company sold $125 million aggregate principal amount of senior unsecured notes due 2023 to PGIM, Inc. (“Prudential”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated June 10, 2016 between the Company, Prudential and the other parties thereto (the “Private Shelf Facility”). These notes bear interest at 3.28%, payable semi-annually in arrears on February 27 and August 27 of each year, and will mature on February 27, 2023 unless earlier redeemed by the Company. The Company may request Prudential to consider the purchase of additional senior unsecured notes of the Company under the Private Shelf Facility in an aggregate principal amount of up to $175 million.

 

In October 2014, the Company entered into a five-year unsecured revolving credit facility (the “Revolving Credit Facility”), and in April 2015, the Company exercised an accordion feature which established a $450 million aggregate maximum borrowing capacity on the Revolving Credit Facility. The $450 million borrowing capacity includes up to $50 million available for the issuance of letters of credit. Borrowings under the Revolving Credit Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, 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 0.15% of the lenders’ aggregate commitments under the Revolving Credit Facility. The Revolving Credit Facility has a scheduled maturity date of October 16, 2019.

 

 

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In June 2016, the Company entered into a five-year term loan agreement for a senior unsecured term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $300 million, maturing June 7, 2021. The Company may request additional term loans under the agreement, provided the Company’s aggregate borrowings under the Term Loan Facility do not exceed $500 million. Borrowings under the Term Loan Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit rating.

 

The Revolving Credit Facility, the Term Loan Facility and the Private Shelf Facility include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreements. The Company was in compliance with these covenants as of October 1, 2017.

 

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 the indebtedness by the Company’s subsidiaries in excess of certain amounts.

 

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

 

12.Derivative Financial Instruments

 

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

 

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

 

The following table summarizes pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification of such changes in the consolidated condensed statements of operations.

 

 

The following table summarizes the fair values and classification in the consolidated condensed balance sheets of derivative instruments held by the Company:

 

 

The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. Accordingly, the net amounts of derivative assets are recognized in either prepaid expenses and other current assets or other assets in the Company’s consolidated condensed balance sheets and the net amounts of derivative liabilities are

 

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recognized in other accrued liabilities or other liabilities in the consolidated condensed balance sheets. The following table summarizes the Company’s gross derivative assets and gross derivative liabilities in the consolidated condensed balance sheets:

 

 

The following table summarizes the Company’s outstanding commodity derivative agreements:

 

 

13.Fair Values of Financial Instruments

 

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

 

 

The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were no transfers of assets or liabilities between levels in any period presented.

 

 

 

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The following tables summarize, by assets and liabilities, the carrying amounts and fair values by level of the Company’s deferred compensation plan, commodity hedging agreements, debt and acquisition related contingent consideration:

 

 

 

Under the Final CBA, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell specified covered beverages and beverage products in the Expansion Territories. This acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the Expansion Territories to fair value by discounting future expected sub-bottling payments required under the Final CBA using the Company’s estimated WACC. These future expected sub-bottling payments extend through the life of the related distribution assets acquired in each Expansion Territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the amounts that will be paid in the future under the Final CBA, and current sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration and could materially impact the amount of noncash expense (or income) recorded each reporting period.

 

The acquisition related contingent consideration is the Company’s only Level 3 asset or liability. A reconciliation of the Level 3 activity is as follows:

 

 

The fair value adjustments to the acquisition related contingent consideration liability during the third quarter of 2017 and the first three quarters of 2017 were primarily driven by a change in the risk-free interest rate. The fair value adjustments to the acquisition related contingent consideration liability during the third quarter and first three quarters of 2016 were primarily driven by a change in

 

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the projected future operating results of the Expansion Territories subject to sub-bottling fees and changes in the risk-free interest rate. These adjustments were recorded in other income (expense), net on the Company’s consolidated condensed statements of operations.

 

The anticipated amount the Company could pay annually under the acquisition related contingent consideration arrangements for the Expansion Transactions is in the range of $19 million to $37 million.

 

14.Other Liabilities

 

Other liabilities consisted of the following:

 

 

Pursuant to a territory conversion agreement entered into by the Company, The Coca‑Cola Company and CCR in September 2015 (as amended), upon the conversion of the Company’s bottling agreements to the Final CBA on March 31, 2017, the Company received a one-time fee from CCR, which, after final adjustments made during the second quarter of 2017, totaled $91.5 million. This one-time fee was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years. As of October 1, 2017, $2.3 million of this fee was recorded in other accrued liabilities, $88.0 million of this fee was recorded to other liabilities and $1.2 million was amortized during the first three quarters of 2017 on the consolidated condensed financial statements.

 

15.Commitments and Contingencies

 

Manufacturing Cooperatives

 

The Company is a shareholder of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative in Bishopville, South Carolina. All eight shareholders of SAC are Coca‑Cola bottlers and each has equal voting rights. The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Proceeds from management fees received from SAC were $6.9 million in the first three quarters of 2017 and $7.0 million in the first three quarters of 2016.

 

The Company is obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. The Company purchased 22.6 million cases and 23.2 million cases of finished product from SAC in the first three quarters of 2017 and the first three quarters of 2016, respectively.

 

The Company is also a shareholder 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.

 

The following table summarizes the Company’s purchases from these manufacturing cooperatives:

 

 

The Company guarantees a portion of SAC’s and Southeastern’s debt, which resulted primarily from the purchase of production equipment and facilities and expires at various dates through 2023. The amounts guaranteed were as follows:

 

 

 

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In the event either of these cooperatives fails to fulfill its commitments under the related debt, the Company would be responsible for payments to the lenders up to the level of the guarantees. The following table summarizes the Company’s maximum exposure under these guarantees if these cooperatives had borrowed up to their aggregate borrowing capacity:

 

 

 

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.

 

The Company holds no assets as collateral against the SAC or Southeastern guarantees, the fair value of which is immaterial to the Company’s consolidated condensed financial statements. The Company monitors its investments in SAC and Southeastern and would be required to write down its investment if an impairment was identified and the Company determined it to be other than temporary. No impairment of the Company’s investments in SAC or Southeastern was identified as of October 1, 2017, and there was no impairment identified in 2016.

 

Other Commitments and Contingencies

 

The Company has standby letters of credit, primarily related to its property and casualty insurance programs. These letters of credit totaled $35.6 million on October 1, 2017 and $29.7 million on January 1, 2017.

 

The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of October 1, 2017, the future payments related to these contractual arrangements, which expire at various dates through 2030, amounted to $124.4 million.

 

The Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on its results of operations, financial position or cash flows. The Company maintains liability insurance for certain risks that is subject to certain self-insurance limits.

 

The Company is subject to audits by tax 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 likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the consolidated condensed financial statements.

 

16.Income Taxes

 

The Company’s effective tax rate, as calculated by dividing income tax expense by income before income taxes, was 34.8% for the first three quarters of 2017 and 35.6% for the first three quarters of 2016. The decrease in the effective tax rate was primarily driven by a reduction in the valuation allowance resulting from the Company’s assessment of its ability to use certain loss carryforwards and a reduction to the Company’s uncertain tax positions resulting from the expiration of the statute of limitations.

 

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, was 38.8% for the first three quarters of 2017 and 39.4% for the first three quarters of 2016.

 

The Company had uncertain tax positions, including accrued interest, of $1.8 million on October 1, 2017 and $2.9 million on January 1, 2017, all of which would affect the Company’s effective tax rate if recognized. While it is expected 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 condensed financial statements.

 

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Prior tax years beginning in year 2002 remain open to examination by the Internal Revenue Service, and various tax years beginning in year 1998 remain open to examination by certain state tax jurisdictions due to loss carryforwards.

 

17.Accumulated Other Comprehensive Income (Loss)

 

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

 

A summary of AOCI(L) for the third quarter of 2017 and the third quarter of 2016 is as follows:

 

 

A summary of AOCI(L) for the first three quarters of 2017 and the first three quarters of 2016 is as follows:

 

 

 

 

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A summary of the impact of AOCI(L) on certain statement of operations line items is as follows:

 

 

 

 

 

18.Capital Transactions 

 

During the first quarter of each year, the Compensation Committee of the Company’s Board of Directors determines whether any shares of the Company’s Class B Common Stock should be issued to J. Frank Harrison, III, in connection with his services for the prior year as Chairman of the Board of Directors and Chief Executive Officer of the Company, pursuant to a performance unit award agreement approved in 2008 (the “Performance Unit Award Agreement”). As permitted under the terms of the Performance Unit Award Agreement, a number of shares were settled in cash in 2017 and 2016 to satisfy tax withholding obligations in connection with the vesting of the performance units. The remaining number of shares increased the total shares of Class B Common Stock outstanding. A summary of the awards issued in 2017 and 2016 is as follows:

 

 

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Compensation expense for the awards issued pursuant to the Performance Unit Award Agreement, recognized on the share price of the last trading day prior to the end of the fiscal period, was as follows:

 

 

19.Pension and Postretirement Benefit Obligations

 

Pension Plans

 

There are two Company-sponsored pension plans. The primary Company-sponsored pension plan (the “Primary Plan”) was frozen on June 30, 2006 and no benefits accrued to participants after this date. The second Company-sponsored pension plan (the “Bargaining Plan”) is for certain employees under collective bargaining agreements. Benefits under the Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarial determined amounts and are limited to the amounts currently deductible for income tax purposes.

 

The components of net periodic pension cost were as follows:

 

 

The Company contributed $10.0 million to the Primary Plan and $1.6 million to the Bargaining Plan during the third quarter of 2017. The Company does not anticipate making additional contributions to the Company-sponsored pension plans during the fourth quarter of 2017.

 

Postretirement Benefits

 

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

 

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

 

 

There was $14.7 million postretirement benefit obligations related to territory exchanges and acquisitions that closed on October 2, 2017, which was classified as held for sale as of October 1, 2017. Refer to Note 24 for additional information.

 

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Multi-Employer Benefits

 

Certain employees of the Company whose employment is covered under collective bargaining agreements participate in a multi-employer pension plan, the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund (the “Teamsters Plan”). The Company makes monthly contributions to the Teamsters Plan on behalf of such employees. Certain collective bargaining agreements covering the Teamsters Plan expired on April 29, 2017. These agreements were renewed and will now expire in April 2020. The remainder of these agreements will expire on July 26, 2018.

 

The risks of participating in the Teamsters Plan are different from single-employer plans as contributed assets are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the Teamsters Plan, the unfunded obligations of the Teamsters Plan may be borne by the remaining participating employers. If the Company chooses to stop participating in the Teamsters Plan, the Company could be required to pay the Teamsters Plan a withdrawal liability based on the underfunded status of the Teamsters Plan. The Company does not anticipate withdrawing from the Teamsters Plan.

 

In 2015, the Company increased its contribution rates to the Teamsters Plan, with additional increases occurring annually, as part of a rehabilitation plan, which was incorporated into the renewal of collective bargaining agreements with the unions effective April 28, 2014 and adopted by the Company as a rehabilitation plan effective January 1, 2015. This is a result of the Teamsters Plan being certified by its actuary as being in “critical” status for the plan year beginning January 1, 2013.

 

20.Related Party Transactions

 

The Coca‑Cola Company

 

The Company’s business consists primarily of the production, marketing and distribution of nonalcoholic beverages of The Coca‑Cola Company, which is the sole owner of the secret formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.

 

As of October 1, 2017, The Coca‑Cola Company owned approximately 35% of the Company’s total outstanding Common Stock, representing approximately 5% of the total voting power of the Company’s Common Stock and Class B Common Stock voting together. As long as The Coca‑Cola Company holds the number of shares of Common Stock it currently owns, it has the right to have a designee proposed by the Company for nomination to the Company’s Board of Directors, and J. Frank Harrison, III, the Chairman of the Board and the Chief Executive Officer of the Company, and trustees of certain trusts established for the benefit of certain relatives of J. Frank Harrison, Jr. have agreed to vote the shares of the Company’s Class B Common Stock which they control, representing approximately 86% of the total voting power of the Company’s combined Common Stock and Class B Common Stock, in favor of such designee. The Coca‑Cola Company does not own any shares of the Company’s Class B Common Stock.

 

The following table and the subsequent descriptions summarize the significant transactions between the Company and The Coca‑Cola Company:

 

 

 

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Coca‑Cola Refreshments USA, Inc.

 

The Company has a production arrangement with CCR to buy and sell finished products at cost. In addition, the Company transports product for CCR to the Company’s and other Coca-Cola bottlers’ locations. The following table summarizes purchases and sales under these arrangements between the Company and CCR:

 

 

As discussed above in Note 2, the Company and CCR have completed a number of Expansion Transactions to acquire Expansion Territories and related distribution assets previously served by CCR and Expansion Facilities and related manufacturing assets previously owned by CCR. The following tables summarize the definitive agreements and closing dates for each of the Expansion Transactions completed by the Company as of October 1, 2017:

 

 

 

 

As part of the Expansion Transactions for the Expansion Territories, the Company entered into the Final CBA, as described above in Note 6. Under the Final CBA, the Company makes a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in the Expansion Territories. The quarterly sub-bottling payment is based on gross profit derived from sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, beverage product or certain cross-licensed brands. The liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future sub-bottling payments was $308.9 million on October 1, 2017 and $253.4 million on January 1, 2017. Payments to CCR under the Final CBA, including payments under the Company’s initial comprehensive beverage agreements that were converted into the Final CBA as of March 31, 2017, were $11.7 million during the first three quarters of 2017 and $10.5 million during the first three quarters of 2016.

 

 

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Glacéau Distribution Termination Agreement

 

On January 1, 2017, the Company obtained the rights to market, promote, distribute and sell glacéau vitaminwater, glacéau smartwater and glacéau vitaminwater zero drops in certain geographic territories including the District of Columbia and portions of Delaware, Maryland and Virginia, pursuant to an agreement entered into by the Company, The Coca‑Cola Company and CCR in June 2016. Pursuant to the agreement, the Company made a payment of $15.6 million during the first quarter of 2017 to The Coca‑Cola Company, which represented a portion of the total payment made by The Coca‑Cola Company to terminate a distribution arrangement with a prior distributor in this territory.

 

Coca‑Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”)

 

Along with all other Coca‑Cola bottlers in the United States, including CCR, the Company is a member of CCBSS, a company formed in 2003 for the purpose of facilitating various procurement functions and distributing certain specified beverage products of The Coca‑Cola Company with the intention of enhancing the efficiency and competitiveness of the Coca‑Cola bottling system in the United States.

 

CCBSS negotiates the procurement for the majority of the Company’s raw materials, excluding concentrate, and the Company receives a rebate from CCBSS for the purchase of these raw materials. The Company had rebates due from CCBSS of $17.3 million on October 1, 2017 and $7.4 million on January 1, 2017, which were classified as accounts receivable, other in the consolidated condensed financial statements.

 

In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $2.0 million in the first three quarters of 2017 and $0.6 million in the first three quarters of 2016, which were classified as selling, delivery and administrative (“S,D&A”) expense in the consolidated condensed financial statements.

 

National Product Supply Group Governance Agreement (“NPSG Governance Agreement”)

 

The NPSG Governance Agreement was executed in October 2015 by The Coca‑Cola Company and three other Coca‑Cola bottlers, including CCR, who are Regional Producing Bottlers (“RPBs”) in The Coca‑Cola Company’s national product supply system. Pursuant to the NPSG Governance Agreement, The Coca‑Cola Company and the RPBs have formed a national product supply group (the “NPSG”) and agreed to certain binding governance mechanisms, including a governing board (the “NPSG Board”) comprised of a representative of (i) the Company, (ii) The Coca‑Cola Company and (iii) each other RPB. As The Coca‑Cola Company continues its multi-year refranchising effort of its North American bottling territories, additional RPBs may be added to the NPSG Board. As of October 1, 2017, the NPSG Board consisted of The Coca‑Cola‑Company, the Company and seven other RPBs, including CCR.

 

The stated objectives of the NPSG include, among others, (i) Coca‑Cola system strategic infrastructure investment and divestment planning; (ii) network optimization of all plant to distribution center sourcing; and (iii) new product/packaging infrastructure planning. The NPSG Board makes and/or oversees and directs certain key decisions regarding the NPSG, including decisions regarding the management and staffing of the NPSG and the funding for its ongoing operations.

 

The Company is obligated to pay a certain portion of the costs of operating the NPSG. The Company incurred NPSG operating costs of $0.8 million in the first three quarters of 2017 and $0.3 million in the first three quarters of 2016, which were classified as S,D&A expense in the consolidated condensed financial statements.. Pursuant to the decisions of the NPSG Board made from time to time and subject to the terms and conditions of the NPSG Governance Agreement, the Company and each other RPB will make investments in their respective manufacturing assets and will implement Coca‑Cola system strategic investment opportunities consistent with the NPSG Governance Agreement.

 

CONA Services LLC (“CONA”)

 

The Company is a member of CONA, an entity formed with The Coca‑Cola Company and certain Coca‑Cola bottlers to provide business process and information technology services to its members. Under the CONA limited liability company agreement executed January 27, 2016 (as amended or restated from time to time, the “CONA LLC Agreement”), the Company and other members of CONA are required to make capital contributions to CONA if and when approved by CONA’s board of directors, which is comprised of representatives of the members. The Company currently has the right to designate one of the members of CONA’s board of directors and has a percentage interest in CONA of approximately 19%. The Company made capital contributions to CONA of $2.0 million during the first three quarters of 2017 and $7.2 million during the first three quarters of 2016, which were classified as other assets in the consolidated condensed financial statements.

 

 

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The Company is subject to a Master Services Agreement (the “Master Services Agreement”) with CONA, pursuant to which CONA agreed to make available, and the Company became authorized to use, the Coke One North America system (the “CONA System”), a uniform information technology system developed to promote operational efficiency and uniformity among North American Coca‑Cola bottlers. As part of making the CONA System available to the Company, CONA provides certain business process and information technology services to the Company, including the planning, development, management and operation of the CONA System in connection with the Company’s direct store delivery of products (collectively, the “CONA Services”).

 

Pursuant to the Master Services Agreement, CONA agreed to make available, and authorized the Company to use, the CONA System in connection with the distribution, sale, marketing and promotion of nonalcoholic beverages the Company is authorized to distribute under the Final CBA or any other agreement with The Coca‑Cola Company (the “Beverages”) in the territories the Company serves (the “Territories”), subject to the provisions of the CONA LLC Agreement and any licenses or other agreements relating to products or services provided by third parties and used in connection with the CONA System.

 

In exchange for the Company’s right to use the CONA System and right to receive the CONA Services under the Master Services Agreement, the Company is charged quarterly service fees by CONA based on the number of physical cases of Beverages distributed by the Company during the applicable period in the Territories where the CONA Services have been implemented (the “Service Fees”). Upon the earlier of (i) all members of CONA beginning to use the CONA System in all territories in which they distribute products of The Coca‑Cola Company (excluding certain territories of CCR that are expected to be sold to bottlers that are neither members of CONA nor users of the CONA System), or (ii) December 31, 2018, the Service Fees will be changed to be an amount per physical case of Beverages distributed in any portion of the Territories equal to the aggregate costs incurred by CONA to maintain and operate the CONA System and provide the CONA Services divided by the total number of cases distributed by all of the members of CONA, subject to certain exceptions. The Company is obligated to pay the Service Fees under the Master Services Agreement even if it is not using the CONA System for all or any portion of its operations in the Territories. The Company incurred CONA Services Fees of $9.2 million during the first three quarters of 2017 and $5.2 million during the first three quarters of 2016.

 

Snyder Production Center (“SPC”)

 

The Company leases the SPC and an adjacent sales facility, which are located in Charlotte, North Carolina, from Harrison Limited Partnership One (“HLP”). HLP is directly and indirectly owned by trusts of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, Sue Anne H. Wells, a director of the Company, and Deborah H. Everhart, a former director of the Company, are trustees and beneficiaries. Morgan H. Everett, Vice President and a director of the Company, is a permissible, discretionary beneficiary of the trusts that directly or indirectly own HLP. The SPC lease expires on December 31, 2020. The principal balance outstanding under this capital lease was $12.4 million on October 1, 2017 and $14.7 million on January 1, 2017. The annual base rent the Company is obligated to pay under the lease is subject to an adjustment for an inflation factor. Rental payments related to this lease were $3.1 million in the first three quarters of 2017 and $3.0 million in the first three quarters of 2016.

 

Company Headquarters

 

The Company leases its headquarters office facility and an adjacent office facility from Beacon Investment Corporation (“Beacon”). The lease expires on December 31, 2021. J. Frank Harrison, III is Beacon’s majority shareholder and Morgan H. Everett is a minority shareholder. The principal balance outstanding under this capital lease was $13.5 million on October 1, 2017 and $15.5 million on January 1, 2017. The annual base rent the Company is obligated to pay under the lease is subject to adjustment for increases in the Consumer Price Index. Rental payments related to this lease were $3.3 million in the first three quarters of 2017 and $3.2 million in the first three quarters of 2016.

 

 

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21.Net Income Per Share

 

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

 

 

 

 

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NOTES TO TABLE

 

 

22.Supplemental Disclosures of Cash Flow Information

 

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

 

 

23.Segments

 

The Company evaluates segment reporting in accordance with FASB Accounting Standards Codification (“ASC”) 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operation Decision Maker (“CODM”). The Company has concluded the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as a group, represent the CODM.

 

 

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The Company believes four operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated revenues, operating income, and assets. The remaining three operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and therefore have been combined into “All Other.”

 

The Company’s segment results are as follows:

 

 

 

 

 

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Net sales by product category were as follows:

 

 

 

24.Subsequent Events

 

On October 2, 2017, the Company closed the following transactions and entered into the following agreements, each as described in the Company’s Current Report on Form 8‑K filed with the SEC on October 4, 2017.

 

Acquisition of Arkansas Expansion Territory and Memphis and West Memphis Expansion Facilities in exchange for the Company’s Deep South and Somerset Territory and Mobile Facility (“CCR Exchange Transaction”)

 

On October 2, 2017, the Company (i) acquired from CCR certain of CCR’s exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territory located in central and southern Arkansas and two regional manufacturing facilities previously owned by CCR in Memphis, Tennessee and West Memphis, Arkansas and related manufacturing assets and certain associated liabilities (collectively, the “CCR Exchange Business”) in exchange for which the Company (ii) transferred to CCR certain of the Company’s exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territory located in portions of southern Alabama, southeastern Mississippi, southwestern Georgia and northwestern Florida and in and around Somerset, Kentucky, as well as a regional manufacturing facility previously owned by the Company in Mobile, Alabama and related manufacturing assets and certain associated liabilities (collectively, the “Deep South and Somerset Exchange Business”), pursuant to an asset exchange agreement between the Company, certain of its wholly-owned subsidiaries and CCR dated September 29, 2017 (the “CCR Asset Exchange Agreement”).

 

During the third quarter of 2017, the Company paid CCR $16.9 million toward the closing of the CCR Exchange Transaction, representing an estimate of the difference between the value of the CCR Exchange Business acquired by the Company and the value of the Deep South and Somerset Exchange Business acquired by CCR, which such amount remains subject to final resolution pursuant to the CCR Asset Exchange Agreement. As it is impracticable at the time of the filing of this report, the Company has not yet completed the calculation to allocate the purchase price to the individual acquired assets and assumed liabilities or to determine the fair value associated with the acquired assets and assumed liabilities related to this transaction. Additionally, the Company has not completed the calculations to determine whether a gain or loss will occur as a result of the CCR Exchange Transaction, however, following the Company’s preliminary assessment, the Company expects to record a gain related to this transaction during the fourth quarter of 2017. This transaction will be accounted for as a business combination under FASB ASC 805.

 

The payment for the CCR Exchange Transaction reflects the agreement of the Company and The Coca‑Cola Company to apply the remaining $4.8 million of the aggregate valuation adjustment discount of $33.1 million on the purchase price for the Expansion Facilities (the “Expansion Facilities Discount”), pursuant to a letter agreement between them dated March 31, 2017 in connection with the Company’s acquisitions of the Expansion Facilities and the impact on transaction value from certain adjustments made by The Coca‑Cola Company to the authorized pricing under the Final RMA (as defined below) on sales of certain beverages produced by the Company at the Expansion Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers (the “Manufacturing Facilities Letter Agreement”), representing the portion of the Expansion Facilities Discount applicable to the two

 

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Expansion Facilities acquired in the CCR Exchange Transaction. Following the closing of the CCR Exchange Transaction, no amounts remain outstanding under the Manufacturing Facilities Letter Agreement.

 

Acquisition of Memphis Expansion Territory (“Memphis Territory Acquisition”)

 

On October 2, 2017, the Company acquired from CCR certain of CCR’s rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products as well as certain cross-licensed brands in and around Memphis, Tennessee (the “Memphis Territory”), including in portions of northwestern Mississippi and eastern Arkansas, pursuant to an asset exchange agreement between the Company and CCR dated September 29, 2017 (the “Memphis Purchase Agreement”).

 

During the third quarter of 2017, the Company paid CCR $39.6 million toward the closing of the Memphis Territory Acquisition, which represents the cash purchase price and remains subject to adjustment in accordance with the terms of the Memphis Purchase Agreement. As it is impracticable at the time of the filing of this report, the Company has not yet completed the calculation to allocate the purchase price to the individual acquired assets and assumed liabilities or to determine the fair value associated with the acquired assets and assumed liabilities related to this transaction. This transaction will be accounted for as a business combination under FASB ASC 805.

 

Acquisition of Spartanburg and Bluffton Expansion Territory in exchange for the Company’s Florence and Laurel Territory and Piedmont’s Northeastern Georgia Territory (“United Exchange Transactions”)

 

On October 2, 2017, the Company and Piedmont Coca‑Cola Bottling Partnership, a non-wholly owned subsidiary of the Company (“Piedmont”), completed transactions in which (i) the Company acquired from Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to the Company, certain of United’s exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territories located in and around Spartanburg, South Carolina and a portion of United’s territory located in and around Bluffton, South Carolina and Piedmont acquired from United similar rights, assets and liabilities, and working capital in the remainder of United’s Bluffton, South Carolina territory (collectively, the “United Distribution Business”), in exchange for which (ii) the Company transferred to United certain of the Company’s exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territory located in parts of northwestern Alabama, south-central Tennessee and southeastern Mississippi previously served by the Company’s distribution centers located in Florence, Alabama and Laurel, Mississippi (collectively, the “Florence and Laurel Distribution Business”) and Piedmont transferred to United similar rights, assets and liabilities, and working capital of Piedmont’s in territory located in parts of northeastern Georgia (the “Northeastern Georgia Distribution Business”), pursuant to an asset exchange agreement between the Company, certain of its wholly-owned subsidiaries and United dated September 29, 2017 (the “United Asset Exchange Agreement”) and an asset exchange agreement between Piedmont and United dated September 29, 2017 (the “Piedmont – United Asset Exchange Agreement”). Each of the United Asset Exchange Agreement  and the Piedmont – United Asset Exchange Agreement provides that, to the extent the value of the portion of the United Distribution Business acquired by the Company or Piedmont, as applicable, is not equal to the value of the Florence and Laurel Distribution Business or the Northeastern Georgia Distribution Business, as applicable, acquired by United (as such values are finally determined under the United Asset Exchange Agreement or the Piedmont – United Asset Exchange Agreement), the party receiving assets and distribution rights with the greater value is obligated to make a cash payment to the other party equal to the difference between the values.

 

At closing, the Company and Piedmont paid United a net cash purchase price of $3.4 million, representing an estimate of (i) the difference between the value of the portion of the United Distribution Business acquired by the Company and the value of the Florence and Laurel Distribution Business acquired by United, plus (ii)  the difference between the value of the portion of the United Distribution Business acquired by Piedmont and the value of the Northeastern Georgia Distribution Business acquired by United, which such amounts remain subject to final resolution pursuant to the United Asset Exchange Agreement and the Piedmont – United Asset Exchange Agreement, respectively.

 

As it is impracticable at the time of the filing of this report, the Company has not yet completed the calculation to allocate the purchase price to the individual acquired assets and assumed liabilities or to determine the fair value associated with the acquired assets and assumed liabilities related to these transactions. Additionally, the Company has not completed the calculations to determine whether a gain or loss will occur as a result of the United Exchange Transactions, however, following the Company’s preliminary assessment, the Company expects to record a gain related to these transactions during the fourth quarter of 2017. These transactions will be accounted for as a business combination under FASB ASC 805.

 

 

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Amendments to Final Comprehensive Beverage Agreements and Final Regional Manufacturing Agreement

 

On October 2, 2017, in connection with the CCR Exchange Transaction, the Memphis Territory Acquisition and the United Exchange Transactions (collectively, the “October 2017 Expansion Transactions”), (i) the Company, Piedmont and CCBC of Wilmington, Inc., a subsidiary of the Company, entered into an amendment to comprehensive beverage agreements (the “CBA Amendment”) with The Coca‑Cola Company and CCR to amend each of the final comprehensive beverage agreements between The Coca‑Cola Company and CCR, on the one hand, and each of the Company, Piedmont and CCBC of Wilmington, Inc., on the other hand, and (ii) the Company and The Coca‑Cola Company entered into an amendment (the “RMA Amendment”) to the final regional manufacturing agreement among them dated March 31, 2017 (as amended, the “Final RMA”), each to reflect the effects of the October 2017 Expansion Transactions. In the CBA Amendment, the Company agreed to make a quarterly sub-bottling payment to CCR with respect to the Memphis Territory on a continuing basis, based on sales of certain beverages and beverage products that are sold under the same trademarks that identify a Covered Beverage, Related Product (as those terms are defined in the Final CBA) or certain cross-licensed brands. Summaries of the Final CBA and the Final RMA are provided in the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2017 and the Company intends to file the CBA Amendment and the RMA Amendment with its Annual Report on Form 10-K for the fiscal year ending December 31, 2017.

 

As of October 1, 2017, the business being exchanged in the CCR Exchange Transaction, which is included in the Nonalcoholic Beverages segment, met the accounting guidance criteria to be classified as held for sale. As such, the Company evaluated the assets and liabilities to determine whether the carrying value exceeded the fair value less any costs to sell based on the agreed-upon sale price. No impairments were recorded as of October 1, 2017 and the aggregate assets and liabilities held for sale have been presented as separate line items in the consolidated condensed balance sheet. The business being exchanged in the CCR Exchange Transaction did not meet the accounting guidance criteria to be classified as discontinued operations. The remaining October 2017 Expansion Transactions were not considered material for additional disclosure.

 

Following is a summary of the CCR Exchange Transaction balances included in assets held for sale and liabilities held for sale:

 

 

 

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Bottling Co. Consolidated (together with its majority-owned subsidiaries, the “Company,” “we” or “our”) should be read in conjunction with the consolidated condensed financial statements of the Company and the accompanying notes to the consolidated condensed financial statements.

 

The Company’s fiscal year generally ends on the Sunday closest to December 31 of each year. The consolidated condensed financial statements presented are:

 

 

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

 

Expansion Transactions

 

As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company has engaged in a series of transactions since April 2013 with The Coca‑Cola Company and Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, to significantly expand the Company’s distribution and manufacturing operations. This expansion includes acquisition of the rights to serve additional distribution territories previously served by CCR (the “Expansion Territories”) and related distribution assets, as well as the acquisition of regional manufacturing facilities previously owned by CCR (the “Expansion Facilities”) and related manufacturing assets (collectively, the “Expansion Transactions”). As of October 1, 2017, the Expansion Transactions completed and the respective net cash paid amounts were as follows:

 

 

 

 

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The financial results of the Expansion Territories and the Expansion Facilities have been included in the Company’s consolidated condensed financial statements from their respective acquisition or exchange dates. These Expansion Territories and Expansion Facilities contributed the following amounts to the Company’s consolidated condensed statement of operations:

 

 

 

Expansion Transactions

 

A summary of the Expansion Transactions completed by the Company prior to 2017 is included in the Company’s Annual Report on Form 10-K for 2016. During the first three quarters of 2017, the Company closed the following Expansion Transactions with CCR:

 

Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana Expansion Territories Acquisitions (“January 2017 Expansion Transaction”)

 

On January 27, 2017, the Company acquired distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana, for a cash purchase price of approximately $31.6 million, which remains subject to post-closing adjustment.

 

The January 2017 Expansion Transaction was completed pursuant to the distribution asset purchase agreement entered into by the Company and CCR on September 1, 2016, as described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on September 6, 2016 (the “September 2016 Form 8‑K”) and filed as Exhibit 2.1 thereto (as amended by Amendment No. 1 to Asset Purchase Agreement filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 27, 2017, the “September 2016 Distribution APA”).

 

Bloomington and Indianapolis, Indiana and Columbus and Mansfield, Ohio Expansion Territories Acquisitions and Indianapolis and Portland, Indiana Expansion Facilities Acquisitions (“March 2017 Expansion Transactions”)

 

On March 31, 2017, the Company acquired distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Indianapolis and Bloomington, Indiana and Columbus and Mansfield, Ohio (the “March 2017 Expansion Territories”). In addition, on March 31, 2017, the Company acquired two Expansion Facilities located in Indianapolis and Portland, Indiana and related manufacturing assets (the “March 2017 Expansion Facilities”). The Company completed these two acquisitions for a cash purchase price of approximately $108.7 million, which remains subject to post-closing adjustment.

 

The March 2017 Expansion Territories acquisition was completed pursuant to the September 2016 Distribution APA and the March 2017 Expansion Facilities acquisition was completed pursuant to the manufacturing asset purchase agreement entered into by the Company and CCR on September 1, 2016 (the “September 2016 Manufacturing APA”), as described in the September 2016 Form 8‑K and filed as Exhibit 2.2 thereto.

 

Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio Expansion Territories Acquisitions and Twinsburg, Ohio Expansion Facility Acquisition (“April 2017 Expansion Transactions”)

 

On April 28, 2017, the Company acquired distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio (the “April 2017 Expansion Territories”). In addition, on April 28, 2017, the Company acquired an Expansion Facility located in Twinsburg, Ohio and related manufacturing assets (the “April 2017 Expansion Facility”). The Company completed these two acquisitions for a cash purchase price of approximately $87.7 million, which remains subject to post-closing adjustment.

 

The April 2017 Expansion Territories acquisition was completed pursuant to the distribution asset purchase agreement entered into by the Company and CCR on April 13, 2017, and the April 2017 Expansion Facility acquisition was completed pursuant to the

 

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manufacturing asset purchase agreement entered into by the Company and CCR on April 13, 2017, as described in the Company’s Current Report on Form 8-K filed with the SEC on April 17, 2017 and filed as Exhibits 2.1 and 2.2, respectively, thereto.

 

Together, the January 2017 Expansion Transaction, the March 2017 Expansion Transactions and the April 2017 Expansion Transactions are the “YTD 2017 Expansion Transactions.”

 

Final Comprehensive Beverage Agreement

 

In connection with the closings for the March 2017 Expansion Territories described above, the Company, The Coca‑Cola Company and CCR entered into a comprehensive beverage agreement on March 31, 2017 (as amended, the “Final CBA”), pursuant to which CCR granted the Company certain exclusive rights to distribute, promote, market and sell the Covered Beverages and Related Products distinguished by the Trademarks (as such terms are defined in the Final CBA) in the Expansion Territories, in exchange for the Company agreeing to make a quarterly sub-bottling payment to CCR on a continuing basis, based on gross profit derived from sales of certain beverages and beverage products that are sold under the same trademarks that identify a Covered Beverage, Related Product or certain “cross-licensed” beverage brands not owned or licensed by The Coca‑Cola Company.

 

As described below under “Bottling Agreement and RMA Conversions,” each of the Company’s initial comprehensive beverage agreements with The Coca‑Cola Company and CCR for the Expansion Territories the Company previously acquired from CCR (the “Initial CBAs”) and other Bottling Agreements (as defined below) has been amended, restated and converted into the Final CBA as of March 31, 2017. A summary of the Final CBA is provided in the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2017 (the “April 2017 Form 8-K”), and the Final CBA is filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 11, 2017 (the “Q1 2017 Form 10-Q”). A copy of an amendment to the Final CBA entered into by the Company, The Coca‑Cola Company and CCR on April 28, 2017 to add the April 2017 Expansion Territories to the territories covered by the Final CBA is filed as Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 8, 2017 (the “Q2 2017 Form 10-Q”).

 

Final Regional Manufacturing Agreement

 

In connection with the closings for the March 2017 Expansion Facilities described above, the Company and The Coca‑Cola Company entered into a regional manufacturing agreement on March 31, 2017 (as amended, the “Final RMA”), pursuant to which The Coca‑Cola Company granted the Company the rights to manufacture, produce and package Authorized Covered Beverages (as defined in the Final RMA) at the Expansion Facilities (i) for distribution by the Company for its own account in accordance with the Final CBA, and (ii) for sale by the Company to certain other U.S. Coca‑Cola bottlers and to the Coca‑Cola North America division of The Coca‑Cola Company, at prices unilaterally established by The Coca‑Cola Company from time to time, in accordance with the Final RMA.

 

As described below under “Bottling Agreement and RMA Conversions,” each of the Company’s initial regional manufacturing agreements with The Coca‑Cola Company for the Expansion Facilities the Company previously acquired from CCR (the “Initial RMAs”) has been amended, restated and converted into the Final RMA as of March 31, 2017. A summary of the Final RMA is provided in the April 2017 Form 8-K, and the Final RMA is filed as Exhibit 10.7 to the Q1 2017 Form 10-Q. A copy of an amendment to the Final RMA entered into by the Company and The Coca‑Cola Company on April 28, 2017 to add the April 2017 Expansion Facility to the regional manufacturing facilities covered by the Final RMA is filed as Exhibit 10.2 to the Q2 2017 Form 10-Q.

 

Bottling Agreement and RMA Conversions

 

Upon the consummation of the March 2017 Expansion Transactions, each of the Company’s existing bottling agreements for The Coca‑Cola Company beverage brands, including each of the Company’s Initial CBAs, master bottle contracts, allied bottle contracts and other bottling agreements with The Coca‑Cola Company or CCR that authorize the Company to produce and/or distribute the Covered Beverages or Related Products (collectively, the “Bottling Agreements”), were automatically amended, restated and converted into the Final CBA (the “Bottling Agreement Conversion”) pursuant to the territory conversion agreement entered into by the Company, The Coca‑Cola Company and CCR on September 23, 2015, as described in the Company’s Current Report on Form 8‑K filed September 28, 2015 and filed as Exhibit 10.1 thereto (as amended by the First Amendment to Territory Conversion Agreement filed as Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed with the SEC on March 18, 2016, the “Territory Conversion Agreement”). The Bottling Agreement Conversion included all of the Company’s Bottling Agreements for the Expansion Territories and for all other territories in the United States where the Company (or one of its affiliates) has rights to market, promote, distribute and sell beverage products owned or licensed by The Coca‑Cola Company (the “Legacy Territories”), provided that the sub-bottling payment required under the Final CBA does not apply with regards to the Legacy Territories.

 

 

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Concurrent with the Bottling Agreement Conversion on March 31, 2017, each of the Company’s Initial RMAs were also automatically amended, restated and converted, pursuant to their terms, into the Final RMA (the “RMA Conversion”). The Final RMA also provides the Company the rights to manufacture, produce and package Authorized Covered Beverages at the Company’s four legacy manufacturing facilities (the “Legacy Facilities”), which rights were previously granted to the Company pursuant to certain Bottling Agreements that have now been amended, restated and converted into the Final CBA as part of the Bottling Agreement Conversion.

 

Pursuant to the Territory Conversion Agreement, on March 31, 2017, CCR paid the Company and its subsidiaries a one-time fee, which was subject to final adjustment, of $87.1 million upon the Bottling Agreement Conversion, an amount equivalent to 0.5 times the EBITDA the Company and its subsidiaries generated during the twelve-month period ended January 1, 2017 from sales in the Legacy Territories of Beverages (as defined in the Final CBA) either (i) owned by The Coca‑Cola Company or licensed to The Coca‑Cola Company and sublicensed to the Company and its subsidiaries, or (ii) owned by or licensed to Monster Energy Company on which the Company and its subsidiaries pay, and The Coca‑Cola Company receives, a facilitation fee. During the second quarter of 2017, the fee was finalized and increased by $4.4 million, for a total of $91.5 million.

 

Expansion Facilities Discount and Legacy Facilities Credit Letter Agreement

 

In connection with the Company’s acquisitions of the Expansion Facilities and the impact on transaction value from certain adjustments made by The Coca‑Cola Company to the authorized pricing under the Final RMA on sales of Authorized Covered Beverages produced by the Company at the Expansion Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers, the Company and The Coca‑Cola Company also entered into a letter agreement on March 31, 2017 (as amended, the “Manufacturing Facilities Letter Agreement”), pursuant to which The Coca‑Cola Company agreed to provide the Company with an aggregate valuation adjustment discount of $33.1 million (the “Expansion Facilities Discount”) on the purchase prices for the Expansion Facilities.

 

The parties agreed to apply $22.9 million of the total Expansion Facilities Discount upon the Company’s acquisition of the March 2017 Expansion Facilities, representing the portion of the Expansion Facilities Discount applicable to (i) the March 2017 Expansion Facilities and (ii) the Expansion Facilities previously acquired by the Company from CCR, and agreed to apply an additional $5.4 million of the total Expansion Facilities Discount upon the Company’s acquisition of the April 2017 Expansion Facility. The parties agreed to apply the remaining $4.8 million of the total Expansion Facilities Discount upon the Company’s acquisition of two additional Expansion Facilities as part of the CCR Exchange Transaction (as discussed below) on October 2, 2017, after which time no amounts remain outstanding under the Manufacturing Facilities Letter Agreement.

 

The Manufacturing Facilities Letter Agreement also establishes a mechanism to compensate the Company with a payment or credit for the net economic impact to the Legacy Facilities of the changes made by The Coca‑Cola Company to the authorized pricing under the Final RMA on sales of Authorized Covered Beverages produced by the Company at the Legacy Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers versus the Company’s historical returns for products produced at the Legacy Facilities prior to the RMA Conversion (the “Legacy Facilities Credit”).

 

The Coca‑Cola Company and the Company amended the formula for the calculation of the Legacy Facilities Credit pursuant to an amendment dated June 22, 2017 (the “Amendment to the Manufacturing Facilities Letter Agreement”) and have agreed to work together to calculate the Legacy Facilities Credit as promptly as reasonably practicable. A summary of the Manufacturing Facilities Letter Agreement is provided in the April 2017 Form 8-K, and the Manufacturing Facilities Letter Agreement is filed as Exhibit 10.8 to the Q1 2017 Form 10-Q. A copy of the Amendment to the Manufacturing Facilities Letter Agreement is filed as Exhibit 10.3 to the Q2 2017 Form 10-Q.

 

Somerset Letter of Intent

 

On April 11, 2017, the Company and The Coca‑Cola Company entered into a non-binding letter of intent (the “April 2017 LOI”), which contemplates the Company exchanging certain of its exclusive distribution rights and associated assets and working capital relating to the distribution, promotion, marketing and sale of beverage products owned and licensed by The Coca-Cola Company and certain cross-licensed brands in territory located in south-central Kentucky currently served by the Company’s distribution center located in Somerset, Kentucky for certain like kind assets of CCR as part of the exchange transactions contemplated by the non-binding letter of intent entered into by the Company and The Coca-Cola Company on June 14, 2016, as described in the Company’s Current Report on Form 8-K filed with the SEC on June 16, 2016 and filed as Exhibit 99.2 thereto. A summary of the April 2017 LOI was provided in the Company’s Current Report on Form 8-K filed with the SEC on April 12, 2017, and a copy of the April 2017 LOI was filed as Exhibit 99.1 thereto. Subsequent to the end of the third quarter of 2017, on October 2, 2017, the Company closed the transaction contemplated by the April 2017 LOI.

 

 

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CCR Asset Exchange Agreement

 

On September 29, 2017, the Company, certain of its wholly-owned subsidiaries and CCR entered into an asset exchange agreement (the “CCR Asset Exchange Agreement”) that provides (i) the Company would acquire from CCR certain of CCR’s exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territory located in central and southern Arkansas and two regional manufacturing facilities previously owned by CCR in Memphis, Tennessee and West Memphis, Arkansas and related manufacturing assets and certain associated liabilities (collectively, the “CCR Exchange Business”) in exchange for (ii) the Company transferring to CCR certain of the Company’s exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territory located in portions of southern Alabama, southeastern Mississippi, southwestern Georgia and northwestern Florida and in and around Somerset, Kentucky as well as a regional manufacturing facility previously owned by the Company in Mobile, Alabama and related manufacturing assets and certain associated liabilities (collectively, the “Deep South and Somerset Exchange Business”). A summary of the CCR Asset Exchange Agreement was provided in the Company’s Current Report on Form 8-K filed October 4, 2017 (the “October 2017 Form 8-K”), and a copy of the CCR Asset Exchange Agreement was filed as Exhibit 2.1 thereto.

 

Subsequent to the end of the third quarter of 2017, on October 2, 2017, the Company closed the transactions contemplated by the CCR Asset Exchange Agreement (the “CCR Exchange Transaction”). During the third quarter of 2017, the Company paid CCR $16.9 million toward the closing of the CCR Exchange Transaction, representing an estimate of the difference between the value of the CCR Exchange Business acquired by the Company and the value of the Deep South and Somerset Exchange Business acquired by CCR, which such amount remains subject to final resolution pursuant to the CCR Asset Exchange Agreement. As it is impracticable at the time of the filing of this report, the Company has not yet completed the calculation to allocate the purchase price to the individual acquired assets and assumed liabilities or to determine the fair value associated with the acquired assets and assumed liabilities related to this transaction. Additionally, the Company has not completed the calculations to determine whether a gain or loss will occur as a result of the CCR Exchange Transaction, however, following the Company’s preliminary assessment, the Company expects to record a gain related to this transaction during the fourth quarter of 2017. This transaction will be accounted for as a business combination under FASB ASC 805.

 

The payment for the CCR Exchange Transaction reflects the agreement of the Company and The Coca‑Cola Company to apply the remaining $4.8 million of the Expansion Facilities Discount, pursuant to the Manufacturing Facilities Letter Agreement, representing the portion of the Expansion Facilities Discount applicable to the two Expansion Facilities acquired in the CCR Exchange Transaction. Following the closing of the CCR Exchange Transaction, no amounts remain outstanding under the Manufacturing Facilities Letter Agreement.

 

Memphis Purchase Agreement

 

On September 29, 2017, concurrent with the execution of the CCR Asset Exchange Agreement, the Company and CCR entered into an asset purchase agreement (the “Memphis Purchase Agreement”) pursuant to which the Company would acquire from CCR certain of its rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products as well as certain cross-licensed brands in and around Memphis, Tennessee, including in portions of northwestern Mississippi and eastern Arkansas. A summary of the Memphis Purchase Agreement was provided in the October 2017 Form 8-K, and a copy of the Memphis Purchase Agreement was filed as Exhibit 2.2 thereto.

 

Subsequent to the end of the third quarter of 2017, on October 2, 2017, the Company closed the transactions contemplated by the Memphis Purchase Agreement (the “Memphis Territory Acquisition”). During the third quarter of 2017, the Company paid CCR $39.6 million toward the closing of the Memphis Territory Acquisition, which represents the cash purchase price and remains subject to adjustment in accordance with the terms of the Memphis Purchase Agreement. As it is impracticable at the time of the filing of this report, the Company has not yet completed the calculation to allocate the purchase price to the individual acquired assets and assumed liabilities or to determine the fair value associated with the acquired assets and assumed liabilities related to this transaction. This transaction will be accounted for as a business combination under FASB ASC 805.

 

United Asset Exchange Agreement and Piedmont – United Asset Exchange Agreement

 

On September 29, 2017, the Company and United entered into an asset exchange agreement (the “United Asset Exchange Agreement”) that provides (i) the Company would acquire from United certain of its exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territory located in and around Spartanburg, South Carolina and in a

 

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portion of United’s territory located in and around Bluffton, South Carolina (collectively, the “United Distribution Business”) in exchange for (ii) the Company transferring to United certain of the Company’s exclusive rights, associated distribution assets and liabilities, and working capital relating to the distribution, promotion, marketing and sale of The Coca‑Cola Company-owned and -licensed beverage products and certain cross-licensed brands in territory located in parts of northwestern Alabama, south-central Tennessee and southeastern Mississippi previously served by the Company’s distribution centers located in Florence, Alabama and Laurel, Mississippi (collectively, the “Florence and Laurel Distribution Business”). A summary of the United Asset Exchange Agreement was provided in the October 2017 Form 8-K, and a copy of the United Asset Exchange Agreement was filed as Exhibit 2.3 thereto.

 

Concurrent with the execution of the United Asset Exchange Agreement, Piedmont Coca‑Cola Bottling Partnership, a non-wholly owned subsidiary of the Company (“Piedmont”), and United entered into an asset purchase agreement (the “Piedmont – United Asset Exchange Agreement”) that provides Piedmont would acquire from United the remainder of United’s Bluffton, South Carolina territory in exchange for Piedmont transferring to United certain of Piedmont’s territory located in northeastern Georgia (the “Northeastern Georgia Distribution Business”).

 

Subsequent to the end of the third quarter of 2017, on October 2, 2017, the Company and Piedmont closed the transactions contemplated by the United Asset Exchange Agreement and the Piedmont – United Asset Exchange Agreement (the “United Exchange Transactions” and, together with the CCR Exchange Transaction and the Memphis Territory Acquisition, the “October 2017 Expansion Transactions”). Each of the United Asset Exchange Agreement and the Piedmont – United Asset Exchange Agreement provides that, to the extent the value of the portion of the United Distribution Business acquired by the Company or Piedmont, as applicable, is not equal to the value of the Florence and Laurel Distribution Business or the Northeastern Georgia Distribution Business, as applicable, acquired by United (as such values are finally determined under the United Asset Exchange Agreement or the Piedmont – United Asset Exchange Agreement), the party receiving assets and distribution rights with the greater value is obligated to make a cash payment to the other party equal to the difference between the values.

 

At closing, the Company and Piedmont paid United a net cash purchase price of $3.4 million, representing an estimate of (i) the difference between the value of the portion of the United Distribution Business acquired by the Company and the value of the Florence and Laurel Distribution Business acquired by United, plus (ii) the difference between the value of the portion of the United Distribution Business acquired by Piedmont and the value of the Northeastern Georgia Distribution Business acquired by United, which such amounts remain subject to final resolution pursuant to the United Asset Exchange Agreement and the Piedmont – United Asset Exchange Agreement, respectively.

 

As it is impracticable at the time of the filing of this report, the Company has not yet completed the calculation to allocate the purchase price to the individual acquired assets and assumed liabilities or to determine the fair value associated with the acquired assets and assumed liabilities related to these transactions. Additionally, the Company has not completed the calculations to determine whether a gain or loss will occur as a result of the United Exchange Transactions, however, following the Company’s preliminary assessment, the Company expects to record a gain related to these transactions during the fourth quarter of 2017. These transactions will be accounted for as a business combination under FASB ASC 805.

 

As of October 1, 2017, the business being exchanged in the CCR Exchange Transaction met the accounting guidance criteria to be classified as held for sale. As such, the Company evaluated the assets and liabilities to determine whether the carrying value exceeded the fair value less any costs to sell based on the agreed-upon sale price. No impairments were recorded as of October 1, 2017 and the aggregate assets and liabilities held for sale have been presented as separate line items in the consolidated condensed balance sheet. The business being exchanged in the CCR Exchange Transaction did not meet the accounting guidance criteria to be classified as discontinued operations. The remaining transactions that closed on October 2, 2017 were not considered material for additional disclosure.

 

Our Business and the Nonalcoholic Beverage Industry

 

Coca‑Cola Bottling Co. Consolidated, a Delaware corporation, produces, markets and distributes nonalcoholic beverages in 14 states and the District of Columbia. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest independent Coca‑Cola bottler in the United States. Approximately 93% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage brands including Dr Pepper, Sundrop and Monster Energy. Our purpose is to honor God, serve others, pursue excellence and grow profitably. Our stock is traded on the NASDAQ Global Select Market under the symbol “COKE.”

 

We offer a range of flavors designed to meet the demands of our consumers. Our product offerings include both sparkling and still beverages. Sparkling beverages are carbonated beverages and the Company’s principal sparkling beverage is Coca‑Cola. Still

 

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beverages include energy products and noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks.

 

There are two main categories of sales, which include bottle/can sales and other sales. Bottle/can sales include products packaged in plastic bottles and aluminum cans. Other sales include sales to other Coca‑Cola bottlers and “post-mix” products. Post-mix 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.

 

Net sales by product category were as follows:

 

 

 

The nonalcoholic beverage market, which includes sparkling beverages and still beverages, is highly competitive. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of Pepsi-Cola and, in some regions, local bottlers 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. We believe we are competitive in our territories with respect to these methods of competition.

 

Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters of the fiscal year. We have, and believe CCR and other bottlers from whom we purchase finished goods have, adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

 

Areas of Emphasis

 

Key priorities for the Company include territory and manufacturing expansion, as discussed above, revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity.

 

Revenue Management:  Revenue management requires a strategy that 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 is expected to continue to be important to the Company’s overall revenue. Recent product introductions from the Company and The Coca‑Cola Company include new flavor varieties within certain brands such as Coca‑Cola Zero Sugar, Fanta Sparkling Fruit, Minute Maid Refreshment, Monster, Dasani Drops, NOS, and Dasani Sparkling. New packaging introductions over the last several years include the 253-ml bottle, the 1.25-liter bottle, the 7.5-ounce sleek can, the 2-liter contour bottle for Coca‑Cola products, and the 16-ounce bottle/24-ounce bottle package.

 

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Distribution Cost Management:  Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs, including warehouse costs, were $407.1 million in the first three quarters of 2017 and $285.3 million in the first three quarters of 2016. Management of these costs will continue to be a key area of emphasis for the Company.

 

The Company has three primary delivery systems: (i) bulk delivery for large supermarkets, mass merchandisers and club stores, (ii) advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premises accounts and (iii) full service delivery for its full service vending customers.

 

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.

 

Results of Operations

 

Third Quarter Results

 

Our results of operations for the third quarter of 2017 and the third quarter of 2016 are highlighted in the table below and discussed in the following paragraphs:

 

 

Items Impacting Operations and Financial Condition

 

The following items affect the comparability of the financial results:

 

Third Quarter 2017

 

 

Third Quarter 2016

 

 

 

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Net Sales

 

Net sales increased $313.5 million, or 36.9%, to $1.16 billion in the third quarter of 2017, as compared to $849.0 million in the third quarter of 2016. The increase in net sales was primarily attributable to the following (in millions):

 

 

The Company’s bottle/can sales to retail customers accounted for approximately 83% of the Company’s total net sales in the third quarter of 2017, as compared to approximately 84% in the third quarter of 2016. 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 as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

 

 

Bottle/can sales volume to retail customers, excluding the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions, increased 1.0% in the third quarter of 2017, which represented a 0.6% decrease in sparkling beverages and a 4.3% increase in still beverages as compared to the third quarter of 2016.

 

Cost of Sales

 

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

 

Cost of sales increased $230.4 million, or 44.1%, to $752.2 million in the third quarter of 2017, as compared to $521.8 million in the third quarter of 2016. The increase in cost of sales was primarily attributable to the following (in millions):

 

 

The following inputs represent a substantial portion of the Company’s total cost of sales: (i) sweeteners, (ii) packaging materials, including plastic bottles and aluminum cans, and (iii) finished products purchased from other vendors.

 

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

 

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The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $32.5 million in the third quarter of 2017, as compared to $27.1 million in the third quarter of 2016.

 

The Company’s cost of sales may not be comparable to other peer companies, as some peer companies 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, as described below.

 

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.

 

S,D&A expenses increased by $86.8 million, or 30.2%, to $374.2 million in the third quarter of 2017, as compared to $287.4 million in the third quarter of 2016. S,D&A expenses as a percentage of net sales decreased to 32.2% in the third quarter of 2017 from 33.8% in the third quarter of 2016. The increase in S,D&A expenses was primarily attributable to the following (in millions):

 

 

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, including warehouse costs, are included in S,D&A expenses and totaled $147.9 million in the third quarter of 2017 and $104.9 million in the third quarter of 2016.

 

Interest Expense, Net

 

Interest expense, net, increased $2.2 million, or 26.6%, to $10.7 million in the third quarter of 2017, as compared to $8.5 million in the third quarter of 2016. The increase was primarily a result of interest paid on additional borrowings to fund the 2017 Expansion Transactions.

 

Other Income, Net

 

Other income, net included noncash income of $5.3 million in the third quarter of 2017 and noncash income of $7.3 million in the third quarter of 2016, each as a result of fair value adjustments of the Company’s contingent consideration liability related to the Expansion Territories. The fair value adjustment to the acquisition related contingent consideration liability during the third quarter of 2017 was primarily driven by a change in the risk-free interest rate. The fair value adjustments to the acquisition related contingent consideration liability during the third quarter of 2016 was primarily driven by a change in the projected future operating results of the Expansion Territories subject to sub-bottling fees and changes in the risk-free interest rate.

 

Each reporting period, the Company adjusts its contingent consideration liability related to the Expansion Territories to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the Final CBA using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates; projected future operating results; and post-closing settlement of cash purchase prices for the Expansion Territories. These future

 

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expected sub-bottling payments extend through the life of the related distribution asset acquired in each Expansion Transaction for Expansion Territories, which is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.

 

Income Tax Expense

 

The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes, was 38.3% for the third quarter of 2017 and 33.9% for the third quarter of 2016. The increase in the effective tax rate was primarily driven by lower income before income taxes and an increase in non-deductible expenses. The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 40.4% for the third quarter of 2017 and 36.2% for the third quarter of 2016.

 

Noncontrolling Interest

 

The Company recorded net income attributable to noncontrolling interest, which is related to the portion of Piedmont owned by The Coca‑Cola Company, of $1.6 million in the third quarter of 2017 and $2.4 million in the third quarter of 2016.

 

Other Comprehensive Income, Net of Tax

 

Other comprehensive income, net of tax was $0.4 million in the third quarter of 2017 and $0.3 million in the third quarter of 2016. The increase was primarily a result of actuarial losses on the Company’s pension and postretirement benefit plans.

 

First Three Quarters Results

 

Our results of operations for the first three quarters of 2017 and the first three quarters of 2016 are highlighted in the table below and discussed in the following paragraphs:

 

 

Items Impacting Operations and Financial Condition

 

The following items affect the comparability of the financial results:

 

First Three Quarters 2017

 

 

 

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First Three Quarters 2016

 

 

Net Sales

 

Net sales increased $882.7 million, or 38.1%, to $3.20 billion in the first three quarters of 2017, as compared to $2.31 billion in the first three quarters of 2016. The increase in net sales was primarily attributable to the following (in millions):

 

 

The Company’s bottle/can sales to retail customers accounted for approximately 84% of the Company’s total net sales in both the first three quarters of 2017 and the first three quarters of 2016.

 

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

 

 

Bottle/can sales volume to retail customers, excluding the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions, increased 1.6% in the first three quarters of 2017, which represented a 0.5% increase in sparkling beverages and a 4.1% increase in still beverages as compared to the first three quarters of 2016.

 

The Company’s products are sold and distributed through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During the first three quarters of 2017, approximately 64% of the Company’s bottle/can sales volume to retail customers was sold for future consumption, while the remaining bottle/can sales volume to retail customers was sold for immediate consumption.

 

 

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The following table summarizes the percentage of the Company’s total bottle/can sales volume and the percentage of the Company’s total net sales, which are included in the Nonalcoholic Beverages operating segment, attributed to its largest customers:

 

 

Cost of Sales

 

Cost of sales increased $615.9 million, or 43.3%, to $2.04 billion in the first three quarters of 2017, as compared to $1.42 billion in the first three quarters of 2016. The increase in cost of sales was primarily attributable to the following (in millions):

 

 

Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $89.4 million in the first three quarters of 2017, as compared to $73.4 million in the first three quarters of 2016.

 

 

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S,D&A Expenses

 

S,D&A expenses increased by $276.6 million, or 35.3%, to $1.06 billion in the first three quarters of 2017, as compared to $783.9 million in the first three quarters of 2016. S,D&A expenses as a percentage of net sales decreased to 33.2% in the first three quarters of 2017 from 33.9% in the first three quarters of 2016. The increase in S,D&A expenses was primarily attributable to the following (in millions):

 

 

Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, totaled $407.1 million in the first three quarters of 2017 and $285.3 million in the first three quarters of 2016.

 

Interest Expense, Net

 

Interest expense, net, increased $3.0 million, or 10.8%, to $30.6 million in the first three quarters of 2017, as compared to $27.6 million in the first three quarters of 2016. The increase was primarily a result of interest paid on additional borrowings to fund the 2017 Expansion Transactions.

 

Other Expense, Net

 

Other expense, net included a noncash charge of $23.1 million in the first three quarters of 2017 and a noncash charge of $26.1 million in the first three quarters of 2016, each as a result of fair value adjustments of the Company’s contingent consideration liability related to the Expansion Territories. The fair value adjustment to the acquisition related contingent consideration liability during the first three quarters of 2017 was primarily driven by a change in the risk-free interest rate. The fair value adjustments to the acquisition related contingent consideration liability during the first three quarters of 2016 was primarily driven by a change in the projected future operating results of the Expansion Territories subject to sub-bottling fees and changes in the risk-free interest rate.

 

Other expense, net also included $9.4 million for net working capital and other fair value adjustments related to the January 2016 Expansion Transactions. As these adjustments were made beyond one year from the acquisition date, the Company recorded the adjustments through its consolidated condensed statements of operations. This amount remains payable to The Coca‑Cola Company.

 

 

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Income Tax Expense

 

The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes, was 34.8% for the first three quarters of 2017 and 35.6% for the first three quarters of 2016. The decrease in the effective tax rate was primarily driven by a reduction in the valuation allowance resulting from the Company’s assessment of its ability to use certain loss carryforwards and a reduction to the Company’s uncertain tax positions resulting from the expiration of the statute of limitations.

 

The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 38.8% for the first three quarters of 2017 and 39.4% for the first three quarters of 2016.

 

Noncontrolling Interest

 

The Company recorded net income attributable to noncontrolling interest, which is related to the portion of Piedmont owned by The Coca‑Cola Company, of $3.5 million in the first three quarters of 2017 and $5.1 million in the first three quarters of 2016.

 

Other Comprehensive Income, Net of Tax

 

Other comprehensive income, net of tax was $1.3 million in the first three quarters of 2017 and $0.9 million in the first three quarters of 2016. The increase was primarily a result of actuarial losses on the Company’s pension and postretirement benefit plans.

 

Segment Operating Results

 

The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board ASC 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operation Decision Maker (“CODM”). The Company has concluded the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as a group, represent the CODM.

 

The Company believes four operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated revenues, operating income, and assets. The remaining three operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and therefore have been combined into an “All Other” reportable segment.

 

The Company’s results for its two reportable segments are as follows:

 

 

 

Comparable /Adjusted Results

 

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). However, management believes certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting.

 

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The following tables reconcile reported GAAP results to comparable results (non-GAAP) for the third quarter of 2017 and the third quarter of 2016:

 

 

 

The following tables reconcile reported GAAP results to comparable results (non-GAAP) for the first three quarters of 2017 and the first three quarters of 2016:

 

 

 

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Following is an explanation of non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

Financial Condition

 

Total assets increased to $2.91 billion on October 1, 2017, from $2.45 billion on January 1, 2017. The increase in total assets is primarily attributable to the Expansion Transactions, contributing to an increase in total assets of $283.0 million from January 1, 2017. In addition, the Company had additions to property, plant and equipment of $115.0 million during the first three quarters of 2017, which excludes $161.2 million in property, plant and equipment acquired in the YTD 2017 Expansion Transactions.

 

Net working capital, defined as current assets less current liabilities, was $355.6 million on October 1, 2017, which was an increase of $219.7 million from January 1, 2017.

 

 

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Significant changes in net working capital on October 1, 2017 from January 1, 2017 were as follows:

 

 

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. The Company has obtained the majority of its long-term debt, other than capital leases, from public markets and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of these consolidated condensed financial statements. 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.

 

On February 27, 2017, the Company sold $125 million aggregate principal amount of senior unsecured notes due 2023 to PGIM, Inc. (“Prudential”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated June 10, 2016 between the Company, Prudential and the other parties thereto (the “Private Shelf Facility”). These notes bear interest at 3.28%, payable semi-annually in arrears on February 27 and August 27 of each year, and will mature on February 27, 2023 unless earlier redeemed by the Company. The Company used the proceeds toward repayment of outstanding indebtedness under the Revolving Credit Facility (as defined below) and for other general corporate purposes. The Company may request that Prudential consider the purchase of additional senior unsecured notes of the Company under the Private Shelf Facility in an aggregate principal amount of up to $175 million.

 

In October 2014, the Company entered into a five-year unsecured revolving credit facility (the “Revolving Credit Facility”), and in April 2015, the Company exercised an accordion feature which established a $450 million aggregate maximum borrowing capacity on the Revolving Credit Facility. The $450 million borrowing capacity includes up to $50 million available for the issuance of letters of credit. Borrowings under the Revolving Credit Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, 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 0.15% of the lenders’ aggregate commitments under the Revolving Credit Facility. The Revolving Credit Facility has a scheduled maturity date of October 16, 2019.

 

The Company currently believes all banks participating in the Revolving Credit Facility have the ability to and will meet any funding requests from the Company. The Company had outstanding borrowings on the Revolving Credit Facility of $247.0 million on October 1, 2017 and $152.0 million on January 1, 2017.

 

In June 2016, the Company entered into a five-year term loan agreement for a senior unsecured term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $300 million, maturing June 7, 2021. The Company may request additional term loans under the agreement, provided the Company’s aggregate borrowings under the Term Loan Facility do not exceed $500 million. Borrowings under the Term Loan Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit rating. The Company used $210 million of the proceeds from the Term Loan Facility to repay outstanding indebtedness under the Revolving Credit Facility. The Company then used the remaining proceeds, as well as borrowings under the Revolving Credit Facility, to repay the $164.8 million of Senior Notes that matured on June 15, 2016.

 

 

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The Revolving Credit Facility, the Term Loan Facility and the Private Shelf Facility include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreements. The Company was in compliance with these covenants as of October 1, 2017. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources for the next twelve months.

 

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.

 

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

 

The Company’s credit ratings are reviewed periodically by the respective rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material impact on the Company’s financial position or results of operations. There were no changes in these credit ratings during the first three quarters of 2017 from the prior year and the credit ratings are currently stable. As of October 1, 2017, the Company’s credit ratings were as follows:

 

 

Net debt and capital lease obligations were as follows:

 

 

 

The Company is subject to interest rate risk on its floating rate debt, including the Revolving Credit Facility and the Term Loan Facility. 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 October 1, 2017, interest expense for the next twelve months would increase by approximately $5.5 million.

 

The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability incurred as a result of the Expansion Transactions. There were no transfers from Level 1 or Level 2. Fair value adjustments were noncash, and therefore did not impact the Company’s liquidity or capital resources. The following is a summary of the Level 3 activity:

 

 

Cash Sources and Uses

 

The primary sources of cash for the Company in the first three quarters of 2017 were debt financings, a one-time fee paid to the Company by CCR pursuant to the Territory Conversion Agreement in connection with the conversion of the Bottling Agreements to

 

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the Final CBA and operating activities. The primary uses of cash in the first three quarters of 2017 were acquisitions of Expansion Territories and Expansion Facilities and additions to property, plant and equipment. The primary sources of cash for the Company in the first three quarters of 2016 were debt financings and operating activities. The primary uses of cash in the first three quarters of 2016 were acquisitions of Expansion Territories and Expansion Facilities, debt repayments and additions to property, plant and equipment. A summary of cash-based activity is as follows: 

 

 

 

Cash Flows From Operating Activities

 

During the first three quarters of 2017, cash provided by operating activities was $202.4 million, which was an increase of $74.3 million as compared to the first three quarters of 2016. In addition to the cash generated from the Expansion Territories, the increase was primarily driven by an $87.1 million, one-time fee paid to the Company by CCR pursuant to the Territory Conversion Agreement.

 

Cash Flows From Investing Activities

 

During the first three quarters of 2017, cash used in investing activities was $407.9 million, which was an increase of $101.8 million as compared to the first three quarters of 2016. The increase was driven primarily by $227.8 million in cash used to finance the Expansion Transactions, a $56.5 million payment toward the October 2017 Expansion Transactions and a $15.6 million payment to The Coca‑Cola Company in order to acquire rights to market, promote, distribute and sell glacéau products in certain geographic territories and for The Coca‑Cola Company to terminate a distribution arrangement with the prior distributor in these territories.

 

 

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Additions to property, plant and equipment during the first three quarters of 2017 were $115.0 million, of which $13.7 million were accrued in accounts payable, trade. These additions exclude $161.2 million in property, plant and equipment acquired in the YTD 2017 Expansion Transactions and $8.4 million in proceeds from cold drink equipment.

 

Additions to property, plant and equipment during the first three quarters of 2017 were funded with cash flows from operations and available credit facilities. The Company anticipates additions to property, plant and equipment for the remainder of 2017 will be in the range of $70 million to $95 million, excluding the October 2017 Expansion Transactions.

 

Additions to property, plant and equipment during the first three quarters of 2016 were $124.6 million, of which $8.8 million were accrued in accounts payable, trade. These additions exclude $159.0 million in property, plant and equipment acquired in the 2016 Expansion Transactions completed during the first three quarters of 2016.

 

Cash Flows From Financing Activities

 

During the first three quarters of 2017, cash provided by financing activities was $195.5 million, which was an increase of $18.9 million as compared to the first three quarters of 2016. The increase was primarily driven by borrowings, net of payments on debt facilities, across all debt instruments during the first three quarters of 2017 as compared to the first three quarters of 2016, which was driven by an increase in cash requirements to fund the 2017 Expansion Transactions.

 

During the first three quarters of 2017, the Company had cash payments of $11.7 million for acquisition related contingent consideration. The anticipated amount the Company could pay annually under the acquisition related contingent consideration arrangements for the Expansion Transactions is in the range of $19 million to $37 million.

 

Significant Accounting Policies

 

See Note 1 to the consolidated condensed financial statements for information on the Company’s significant accounting policies.

 

Off-Balance Sheet Arrangements

 

The Company is a member of two manufacturing cooperatives and has guaranteed $32.5 million of debt for these entities as of October 1, 2017. 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.

 

In the event either of these manufacturing cooperatives fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantees. As of October 1, 2017, the Company’s maximum exposure under these guarantees, if both cooperatives borrowed up to their aggregate borrowing capacity, would have been $74.3 million, including the Company’s equity interests. See Note 15 to the consolidated condensed financial statements for additional information.

 

Hedging Activities

 

The Company uses derivative financial instruments to manage its exposure to movements in certain commodity prices. 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 to 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 on the consolidated condensed statements of operations was as follows:

 

 

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Cautionary Information Regarding Forward-Looking Statements

 

Certain statements contained in this Report, or in other public filings, press releases, or other written or oral communications made by Coca‑Cola Bottling Co. Consolidated or its representatives, which are not historical facts, are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things, Company plans, activities or events which the Company expects will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance, including, but not limited to, the state of the economy, capital investment and financing plans, net sales, cost of sales, S,D&A expenses, gross profit, income tax rates, earnings per diluted share, dividends, pension plan contributions, estimated sub-bottling liability payments; or statements regarding the outcome or impact of certain new accounting pronouncements and pending or threatened litigation.

 

 

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These forward-looking statements may be identified by the use of the words “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” and other similar terms and expressions. Various risks, uncertainties and other factors may cause the Company’s actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for 2016, as well as other factors discussed throughout this Report, including, without limitation, the factors described under “Significant Accounting Policies” in our consolidated condensed financial statements, or in other filings or statements made by the Company. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.

 

Caution should be taken not to place undue reliance on the forward-looking statements included in this Report. The Company assumes no obligation to update any forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward-looking statements, these risks and uncertainties should be considered, together with the other risks described from time to time in the Company’s other reports and documents filed with the SEC.

 

Item 3.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 or speculative 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 floating rate debt, including the Revolving Credit Facility and the Term Loan Facility. 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 October 1, 2017, interest expense for the next twelve months would increase by approximately $5.5 million. This amount was determined by calculating the effect of the hypothetical interest rate on the Company’s 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 debt.

 

The Company’s acquisition related contingent consideration, which is adjusted to fair value at each reporting period, is also impacted by changes in interest rates. The risk-free interest rate used to estimate the Company’s WACC is a component of the discount rate used to calculate the present value of future cash flows due under the Final CBA related to the Expansion Territories. As a result, any changes in the underlying risk-free interest rates will impact the fair value of the acquisition related contingent consideration and could materially impact the amount of noncash expense (or income) recorded each reporting period.

 

Raw Material and Commodity Price Risk

 

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 to hedge commodity purchases. The Company periodically uses derivative commodity instruments in the management of this risk. The Company estimates 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 $54.8 million assuming no change in volume.

 

Fees paid by the Company for agreements to hedge commodity purchases are amortized over the corresponding period of the instruments. The Company accounts for commodity hedges on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or S,D&A expenses.

 

 

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Effects 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 2.1% in 2016, as compared to 0.7% in 2015. 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 in recent years have moved at a faster rate of change than 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, both of goods sold and S,D&A. Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover these 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.

 

Item 4.Controls and Procedures.

 

As of the end of the period covered by this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of October 1, 2017.

 

There has been no change in the Company’s internal control over financial reporting during the quarter ended October 1, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

 

The Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on its results of operations, financial position or cash flows. The Company maintains liability insurance for certain risks that is subject to certain self-insurance limits.

 

 

There have been no material changes in the Company’s risk factors from those disclosed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10‑K for 2016.

 

 

 

 

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+ Certain schedules and similar supporting attachments to this agreement have been omitted, and the Company agrees to furnish supplemental copies of any such schedules and similar supporting attachments to the Securities and Exchange Commission upon request.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

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