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 April 2, 2017
Commission File Number 0-9286
COCA‑COLA BOTTLING CO. CONSOLIDATED
(Exact name of registrant as specified in its charter)
Delaware
56-0950585
(State or other jurisdiction ofincorporation or organization)
(I.R.S. EmployerIdentification No.)
4100 Coca‑Cola Plaza,Charlotte, North Carolina 28211
(Address of principal executive offices) (Zip Code)
(704) 557-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
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 issuer's classes of common stock, as of the latest practicable date.
Class
Outstanding at April 30, 2017
Common Stock, $1.00 Par Value
7,141,447
Class B Common Stock, $1.00 Par Value
2,192,722
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED APRIL 2, 2017
INDEX
Page
PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Consolidated Statements of Operations
2
Consolidated Statements of Comprehensive Income
3
Consolidated Balance Sheets
4
Consolidated Statements of Changes in Equity
5
Consolidated Statements of Cash Flows
6
Notes to Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
31
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
48
Item 4.
Controls and Procedures
PART II – OTHER INFORMATION
Legal Proceedings
50
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
51
Signatures
53
PART I - FINANCIAL INFORMATION
Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
First Quarter
(in thousands, except per share data)
2017
2016
Net sales
$
865,702
625,456
Cost of sales
533,681
381,558
Gross profit
332,021
243,898
Selling, delivery and administrative expenses
318,413
231,497
Income from operations
13,608
12,401
Interest expense, net
9,470
9,361
Other expense, net
12,246
17,151
Loss before income taxes
(8,108
)
(14,111
Income tax benefit
(3,691
(5,078
Net loss
(4,417
(9,033
Less: Net income attributable to noncontrolling interest
634
1,008
Net loss attributable to Coca-Cola Bottling Co. Consolidated
(5,051
(10,041
Basic net loss per share based on net income attributable to Coca-Cola Bottling Co. Consolidated:
Common Stock
(0.54
(1.08
Weighted average number of Common Stock shares outstanding
7,141
Class B Common Stock
Weighted average number of Class B Common Stock shares outstanding
2,178
2,157
Diluted net loss per share based on net income attributable to Coca-Cola Bottling Co. Consolidated:
Weighted average number of Common Stock shares outstanding – assuming dilution
9,319
9,298
Weighted average number of Class B Common Stock shares outstanding – assuming dilution
Cash dividends per share:
0.25
See Accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Other comprehensive income, net of tax:
Defined benefit plans reclassification including pension costs:
Actuarial gains
496
455
Prior service benefits
Postretirement benefits reclassification included in benefits costs:
398
360
Prior service costs
(458
(516
Foreign currency translation adjustment
10
Other comprehensive income, net of tax
442
313
Comprehensive loss
(3,975
(8,720
Less: Comprehensive income attributable to noncontrolling interest
Comprehensive loss attributable to Coca-Cola Bottling Co. Consolidated
(4,609
(9,728
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
April 2, 2017
January 1, 2017
ASSETS
Current Assets:
Cash and cash equivalents
31,940
21,850
Accounts receivable, trade
293,291
271,661
Allowance for doubtful accounts
(5,245
(4,448
Accounts receivable from The Coca-Cola Company
76,179
67,591
Accounts receivable, other
21,342
29,770
Inventories
180,052
143,553
Prepaid expenses and other current assets
61,604
63,834
Total current assets
659,163
593,811
Property, plant and equipment, net
924,177
812,989
Leased property under capital leases, net
32,121
33,552
Other assets
92,421
86,091
Franchise rights
-
533,040
Goodwill
149,383
144,586
Other identifiable intangible assets, net
807,555
245,415
Total assets
2,664,820
2,449,484
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of obligations under capital leases
7,699
7,527
Accounts payable, trade
135,027
116,821
Accounts payable to The Coca-Cola Company
134,441
135,155
Other accrued liabilities
150,749
133,885
Accrued compensation
29,251
60,880
Accrued interest payable
9,144
3,639
Total current liabilities
466,311
457,907
Deferred income taxes
156,460
174,854
Pension and postretirement benefit obligations
126,473
126,679
Other liabilities
513,683
378,572
Obligations under capital leases
39,194
41,194
Long-term debt
1,002,309
907,254
Total liabilities
2,304,430
2,086,460
Commitments and Contingencies (Note 13)
Equity:
Common Stock, $1.00 par value: authorized – 30,000,000 shares; issued – 10,203,821 shares
10,204
Class B Common Stock, $1.00 par value: authorized – 10,000,000 shares; issued – 2,820,836 and 2,799,816 shares, respectively
2,819
2,798
Capital in excess of par value
120,417
116,769
Retained earnings
294,132
301,511
Accumulated other comprehensive loss
(92,455
(92,897
Treasury stock, at cost: Common Stock – 3,062,374 shares
(60,845
Treasury stock, at cost: Class B Common Stock – 628,114 shares
(409
Total equity of Coca-Cola Bottling Co. Consolidated
273,863
277,131
Noncontrolling interest
86,527
85,893
Total equity
360,390
363,024
Total liabilities and equity
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Common
Stock
Class B
Capital
in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock - Common Stock
Stock - Class B
Total
Equity
of Coca-Cola Bottling Co. Consolidated
Non-
controlling
Interest
Balance on January 1, 2017
Net income (loss)
Cash dividends paid:
Common ($0.25 per share)
(1,785
Class B Common ($0.25 per share)
(543
Issuance of 21,020 shares of Class B Common Stock
21
3,648
3,669
Balance on April 2, 2017
Balance on January 3, 2016
2,777
113,064
260,672
(82,407
243,056
79,376
322,432
(538
Issuance of 20,920 shares of Class B Common Stock
3,705
3,726
Balance on April 3, 2016
248,308
(82,094
234,731
80,384
315,115
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense
32,987
23,363
Amortization of intangibles
1,994
1,027
(15,495
Loss on sale of property, plant and equipment
810
417
Proceeds from conversion of Legacy Territory bottling agreements
87,066
Amortization of debt costs
268
575
Stock compensation expense
2,060
1,627
Fair value adjustment of acquisition related contingent consideration
Change in current assets less current liabilities (exclusive of acquisition)
4,463
(38,926
Change in other noncurrent assets (exclusive of acquisition)
(4,038
(2,391
Change in other noncurrent liabilities (exclusive of acquisition)
(1,439
13
26
Total adjustments
120,935
(6,184
Net cash provided by (used in) operating activities
116,518
(15,217
Cash Flows from Investing Activities:
Acquisition of Expansion Territories, net of cash acquired
(139,958
(100,907
Additions to property, plant and equipment (exclusive of acquisition)
(41,580
(36,785
Glacéau distribution agreement consideration
(15,598
Investment in CONA Services LLC
(134
(1,204
Proceeds from the sale of property, plant and equipment
211
131
Net cash used in investing activities
(197,059
(138,765
Cash Flows from Financing Activities:
Borrowings under Revolving Credit Facility
120,000
140,000
Payment of Revolving Credit Facility
(150,000
Proceeds from issuance of Senior Notes
125,000
Cash dividends paid
(2,328
(2,323
Payment of acquisition related contingent consideration
(4,959
Principal payments on capital lease obligations
(1,828
(1,726
(213
92
Net cash provided by financing activities
90,631
131,084
Net increase (decrease) in cash
10,090
(22,898
Cash at beginning of period
55,498
Cash at end of period
32,600
Significant noncash investing and financing activities:
Issuance of Class B Common Stock in connection with stock award
Additions to property, plant and equipment accrued and recorded in accounts payable, trade
9,436
8,873
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Significant Accounting Policies and New Accounting Pronouncements
The consolidated financial statements include the accounts of Coca‑Cola Bottling Co. Consolidated and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The consolidated 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 financial position as of April 2, 2017 and January 1, 2017.
The results of operations for the 13 weeks ended April 2, 2017 (“first quarter” of fiscal 2017 or “Q1 2017”) and the 13 weeks ended April 3, 2016 (“first quarter” of fiscal 2016).
Comprehensive income for the first quarter of fiscal 2017 and the first quarter of fiscal 2016.
Changes in equity for the first quarter of fiscal 2017 and the first quarter of fiscal 2016.
The cash flows for the first quarter of fiscal 2017 and the first quarter of fiscal 2016.
The consolidated 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 financial statements included in the Company's Annual Report on Form 10‑K for the fiscal year ended January 1, 2017 filed with the U.S. Securities and Exchange Commission (the “SEC”).
The preparation of consolidated 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 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 the year ended January 1, 2017 under the caption “Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Part II, Item 7, 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 first 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 Employees 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 reporting 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 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 financial statements.
Recently Issued Pronouncements
In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. 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 significant impact on its consolidated 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 financial statements will depend on the facts and circumstances of any specific future transactions.
In February 2016, the FASB issued ASU 2016-02 “Leases.” The new guidance 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 year. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated 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.” The new guidance 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 reporting 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 financial statements.
Over the past several years, the FASB has issued several accounting standards for revenue recognition:
ASU 2014‑09 “Revenue from Contracts with Customers” was issued in May 2014, which was originally going to be effective for annual and interim periods beginning after December 15, 2016.
ASU 2015-14 “Revenue from Contracts with Customers, Deferral of the Effective Date” was issued in July 2015, which deferred the effective date to annual and interim periods beginning after December 15, 2017.
ASU 2016-08 “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net)” was issued in March 2016, which amends certain aspects of the May 2014 new guidance.
ASU 2016-11 “Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16, Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting” was issued in April 2016, which amends certain aspects of the May 2014 new guidance.
ASU 2016-12 “Revenue From Contracts With Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” was issued in May 2016, which amends certain aspects of the May 2014 new guidance.
ASU 2016-20 “Technical Corrections and Improvements to Topic 606: Revenue From Contracts With Customers” was issued in December 2016 and clarifies the new revenue standard and corrects unintended application of the guidance.
The Company does not plan to early adopt this guidance. The Company has started its evaluation process to assess the impact of the new guidance on the Company’s consolidated financial statements and to determine whether to adopt a full retrospective approach or a modified retrospective approach. The evaluation process includes tasks such as performing an initial scoping analysis to identify key revenue streams, reviewing current revenue-based contracts and evaluating revenue recognition requirements in order to prepare a high-level road map and implementation work plan. Based on the Company’s preliminary review, it does not expect this guidance to have a material impact on net sales. As the Company completes its overall assessment, the Company is also identifying and preparing 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-owned subsidiary of The Coca‑Cola Company, to significantly expand the Company’s distribution and manufacturing operations. This
8
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”).
2016 Expansion Transactions
During 2016, the Company acquired distribution rights and related assets for the following 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 the 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.” The 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 the territory 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 the 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, which will remain subject to adjustment in accordance with the terms and conditions of the September 2015 APA and the October 2015 APA.
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 the territory 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 served by CCR through CCR’s facilities and equipment located in Baltimore, Hagerstown and Cumberland, Maryland, and (ii) the October 2015 APA, by acquiring the 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) a distribution 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 the Expansion Territories served by CCR through CCR’s facilities and equipment located in Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky, and (ii) a manufacturing asset purchase agreement entered into by the Company and CCR in September 2016 (the “September 2016 Manufacturing APA”), by acquiring the 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.
9
The fair value of acquired assets and assumed liabilities of the 2016 Expansion Transactions as of the acquisition dates is summarized as follows:
January
Expansion
Transactions
April 1,
Transaction
April 29,
October
Cash
179
219
161
150
709
10,159
3,748
13,850
18,513
46,270
2,775
1,945
3,774
4,181
12,675
1,121
1,162
1,126
1,327
4,736
Property, plant and equipment
46,149
54,135
58,679
68,182
227,145
Other assets (including deferred taxes)
2,351
1,541
5,151
611
9,654
9,396
1,962
7,791
7,063
26,212
Other identifiable intangible assets
1,300
23,450
66,500
91,250
Total acquired assets
73,430
64,712
113,982
166,527
418,651
Current liabilities (acquisition related contingent consideration)
361
742
1,307
3,318
5,728
Other current liabilities
591
4,231
5,482
7,165
17,469
650
266
2,635
761
3,662
Other liabilities (acquisition related contingent consideration)
6,144
23,924
35,561
57,066
122,695
Total assumed liabilities
7,746
29,163
44,985
68,310
150,204
The goodwill for the 2016 Expansion Transactions is all included in the Nonalcoholic Beverages segment and is primarily attributed to operational synergies and the workforce acquired. Goodwill of $6.0 million and $13.1 million is expected to be deductible for tax purposes for the January 2016 Expansion Transactions and the October 2016 Expansion Transactions, respectively. No goodwill is expected to be deductible for the April 1, 2016 Expansion Transaction or the April 29, 2016 Expansion Transactions.
The fair value of the acquired identifiable intangible assets as of the acquisition dates is as follows:
January 2016
April 29, 2016
October 2016
Total 2016
Estimated
Useful Lives
Distribution agreements
750
22,000
63,900
86,650
40 years
Customer lists
550
1,450
2,600
4,600
12 years
Total acquired identifiable intangible assets
Q1 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 the Expansion Facilities and related manufacturing assets located in Indianapolis and Portland, Indiana. Collectively, these are the “Q1 2017 Expansion Transactions.” The details of the Q1 2017 Expansion Transactions are included below.
Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana Expansion Territories Acquisitions (“January 2017 Expansion Transaction”)
The September 2016 Distribution APA contemplated, in part, the Company’s acquisition of distribution rights and related assets in the territory 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 on January 27, 2017, 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 the Expansion Territories served by CCR through CCR’s facilities and equipment located in Bloomington and Indianapolis, Indiana and Columbus and Mansfield, Ohio, and (ii) the September 2016 Manufacturing APA, by acquiring the 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.
The fair value of acquired assets and assumed liabilities of the Q1 2017 Expansion Transactions as of the acquisition date is summarized as follows:
January 2017
March 2017
Total Q1 2017
107
318
5,953
21,050
27,003
1,089
5,235
6,324
1,042
1,807
2,849
25,708
82,692
108,400
846
3,593
4,439
1,112
3,737
4,849
10,650
20,400
31,050
46,507
138,725
185,232
727
1,921
2,648
665
1,827
2,492
115
128
13,408
26,260
39,668
14,915
30,021
44,936
The goodwill for the Q1 2017 Expansion Transactions is included in the Nonalcoholic Beverages segment and is primarily attributed to operational synergies and the workforce acquired. No goodwill is expected to be deductible for tax purposes for the January 2017 Expansion Transaction or the March 2017 Expansion Transactions.
The fair value of the acquired identifiable intangible assets as of the acquisition date is as follows:
9,300
18,900
28,200
1,350
1,500
2,850
The Company has preliminarily allocated the purchase price of the 2016 Expansion Transactions and the Q1 2017 Expansion Transactions to the individual acquired assets and assumed liabilities. The valuations are subject to adjustment as additional information is obtained.
The anticipated amount the Company could pay annually under the acquisition related contingent consideration arrangements for the Expansion Transactions is in the range of $20 million to $36 million.
11
Q1 2017 and 2016 Expansion Transactions Financial Results
The financial results of the Q1 2017 Expansion Transactions and the 2016 Expansion Transactions have been included in the Company’s consolidated financial statements from their respective acquisition or exchange dates. These Expansion Transactions contributed the following amounts to the Company’s consolidated statement of operations:
Net sales from 2016 Expansion Transactions
238,660
35,311
Net sales from Q1 2017 Expansion Transactions
26,246
Total impact to net sales
264,906
Operating income from 2016 Expansion Transactions
4,354
1,206
Operating income from Q1 2017 Expansion Transactions
96
Total impact to income from operations
4,450
The Company incurred transaction related expenses for the Expansion Transactions of $0.7 million in the first quarter of 2017 and $0.9 million in the first quarter of 2016. These expenses are included within Selling, delivery and administrative expenses on the Consolidated Statements of Operations.
Q1 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 current year acquisitions had occurred as of the beginning of each period presented. 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 each period presented. 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 Q1 2017 Expansion Transactions and the 2016 Expansion Transactions.
Net sales as reported
Pro forma adjustments (unaudited)
85,447
308,023
Net sales pro forma (unaudited)
951,149
933,479
Income from operations as reported
5,810
10,427
Income from operations pro forma (unaudited)
19,418
22,828
3.Inventories
Inventories consisted of the following:
Finished products
119,252
90,259
Manufacturing materials
25,088
23,196
Plastic shells, plastic pallets and other inventories
35,712
30,098
Total inventories
The growth in the inventory balance at April 2, 2017, as compared to January 1, 2017, is primarily a result of inventory acquired through the completion of the Q1 2017 Expansion Transactions.
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4.Property, Plant and Equipment, Net
The principal categories and estimated useful lives of property, plant and equipment were as follows:
Estimated Useful Lives
Land
76,022
68,541
Buildings
217,218
201,247
8-50 years
Machinery and equipment
268,718
229,119
5-20 years
Transportation equipment
332,496
316,929
4-20 years
Furniture and fixtures
82,022
78,219
3-10 years
Cold drink dispensing equipment
521,128
484,771
5-17 years
Leasehold and land improvements
112,855
112,393
Software for internal use
107,221
105,405
Construction in progress
28,873
14,818
Total property, plant and equipment, at cost
1,746,553
1,611,442
Less: Accumulated depreciation and amortization
822,376
798,453
The growth in the property, plant and equipment balance at April 2, 2017, as compared to January 1, 2017, is primarily a result of property, plant and equipment acquired through the completion of the Q1 2017 Expansion Transactions.
Depreciation and amortization expense, which includes amortization expense for leased property under capital leases, was $33.0 million in the first quarter of 2017 and $23.4 million in the first quarter of 2016.
5.Franchise Rights
There was no material activity for franchise rights for the first quarter of 2016. A reconciliation of the activity for franchise rights for the first quarter of 2017 is as follows:
Conversion from franchise rights to distribution rights
(533,040
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 (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 Territory”) to distribution rights within Other identifiable assets, net on the consolidated financial statements. Prior to this conversion, the Company’s franchise rights resided entirely within the Nonalcoholic Beverage segment.
6.Goodwill
A reconciliation of the activity for goodwill for the first quarter of 2017 and the first quarter of 2016 is as follows:
Measurement period adjustment
(52
117,954
Q1 2016 Expansion Transactions
16,935
422
135,311
The Company’s goodwill reside entirely within the Nonalcoholic Beverage segment. The Company performs its annual impairment test of goodwill as of the first day of the fourth quarter. During the first quarter of 2017, the Company did not experience any triggering events or changes in circumstances indicating the carrying amounts of the Company’s goodwill exceeded fair values.
7.Other Identifiable Intangible Assets, Net
Other identifiable intangible assets consisted of the following:
Cost
Accumulated Amortization
Total, net
803,770
9,208
794,562
20-40 years
Customer lists and other identifiable intangible assets
18,788
5,795
12,993
12-20 years
Total other identifiable intangible assets
822,558
15,003
242,486
7,498
234,988
15,938
5,511
258,424
13,009
A reconciliation of the activity for other identifiable intangible assets for the first quarter of 2017 and the first quarter of 2016 is as follows:
Distribution
Agreements
Customer Lists and Other Identifiable Intangible Assets
Total Other Identifiable Intangible Assets
Conversion to distribution rights from franchise rights
Other distribution agreements
44
Additional accumulated amortization
(1,710
(284
(1,994
129,786
6,662
136,448
(850
(177
(1,027
129,686
7,035
136,721
Concurrent with its entrance into the Final CBA, the Company converted its franchise rights for the Legacy Territory to distribution rights, with an estimated useful life of 40 years, during the first quarter of 2017.
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8.Other Accrued Liabilities
Other accrued liabilities consisted of the following:
Accrued insurance costs
31,233
28,248
Accrued marketing costs
26,861
24,714
Checks and transfers yet to be presented for payment from zero balance cash accounts
21,894
19,326
Employee and retiree benefit plan accruals
21,139
23,858
Current portion of acquisition related contingent consideration
20,201
15,782
Accrued taxes (other than income taxes)
5,739
2,836
Current deferred proceeds from conversion of Legacy Territory bottling agreements
2,176
All other accrued liabilities
21,506
19,121
Total other accrued liabilities
9.Debt
Following is a summary of the Company’s debt:
Maturity
Rate
Paid
Public /
Non-public
April 2,
January 1,
Revolving Credit Facility
2019
Variable
Varies
122,000
152,000
Term Loan
2021
300,000
Senior Notes
2023
3.28%
Semi-annually
7.00%
Public
110,000
2025
3.80%
350,000
Unamortized discount on Senior Notes(1)
(512
(570
(76
(78
Debt issuance costs
(4,103
(4,098
Total debt
Less: Current portion of debt
(1)
The Senior Notes due 2019 were issued at 98.238% of par and the Senior Notes due 2025 were issued at 99.975% of par.
The Company had capital lease obligations of $46.9 million on April 2, 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 used the proceeds toward repayment of outstanding indebtedness under the Revolving Credit Facility and for other general corporate purposes. The Company may request Prudential to consider the purchase of additional senior unsecured notes of the Company under the 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, 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.
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
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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, dependent on the Company’s credit rating, at the Company’s option. The Company used the proceeds from the Term Loan Facility toward repayment of outstanding indebtedness under the Revolving Credit Facility and toward repayment of the $164.8 million of Senior Notes that matured on June 15, 2016.
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 April 2, 2017. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.
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.
10.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 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 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 statements of operations.
Classification of Gain (Loss)
Commodity hedges
698
842
(371
198
Total gain (loss)
327
1,040
The following table summarizes the fair values and classification in the consolidated balance sheets of derivative instruments held by the Company:
Balance Sheet Classification
Assets:
Commodity hedges at fair market value
1,616
1,289
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 balance sheets and the net amounts of derivative liabilities are recognized in other accrued liabilities or other liabilities in the consolidated balance sheets. The following table summarizes the Company’s gross derivative assets and gross derivative liabilities in the consolidated balance sheets:
Gross derivative assets
1,621
1,297
Gross derivative liabilities
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The following table summarizes the Company’s outstanding commodity derivative agreements:
Notional amount of outstanding commodity derivative agreements
11,731
13,146
Latest maturity date of outstanding commodity derivative agreements
December 2017
Subsequent to the end of the first quarter of 2017, the Company entered into additional agreements to hedge certain commodity costs for 2017. The notional amount of these agreements was $38.1 million.
11.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:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The following 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.
Financial Instrument
Fair Value
Level
Method and Assumptions
Deferred compensation plan assets and liabilities
Level 1
The fair values of the Company's non-qualified deferred compensation plan for certain executives and other highly compensated employees has associated assets and liabilities, which are held in mutual funds and are based on the quoted market value of the securities held within the mutual funds.
Commodity hedging agreements
Level 2
The fair values for the Company’s commodity hedging agreements are based on current settlement values at each balance sheet date. The fair values of the commodity hedging agreements at each balance sheet date represent the estimated amounts the Company would have received or paid upon termination of these agreements. Credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair value of derivative financial instruments.
Non-public variable rate debt
The carrying amounts of the Company’s variable rate borrowings approximate their fair values due to variable interest rates with short reset periods.
Non-public fixed rate debt
The fair values of the Company’s fixed rate non-public debt are based on estimated current market prices.
Public debt securities
The fair values of the Company’s public debt securities are based on estimated current market prices.
Acquisition related contingent consideration
Level 3
The fair values of acquisition related contingent consideration are based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data.
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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:
Carrying
Amount
Deferred compensation plan assets
27,485
Liabilities:
Deferred compensation plan liabilities
421,266
422,000
124,785
456,258
481,200
303,952
24,903
451,222
452,000
456,032
475,800
253,437
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 territory expansion 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:
Opening balance - Level 3 liability
136,570
Increase due to acquisitions
42,316
31,171
Payments/current payables
(4,047
(6,959
Fair value adjustment
Ending balance - Level 3 liability
177,933
The Company recorded an unfavorable fair value adjustment to the contingent consideration liability of $12.2 million during the first quarter of 2017, which was primarily a result of the final settlement of territory values for the Paducah and Pikeville, Kentucky Expansion Territory acquisitions and the Norfolk, Fredericksburg and Staunton, Virginia, and Elizabeth City, North Carolina Expansion Territory acquisitions, which closed in May 2015 and October 2015, respectively. The Company recorded an unfavorable fair value adjustment to the contingent consideration liability of $17.2 million during the first quarter of 2016, which was driven
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primarily by a change in projected future operating results of the acquired Expansion Territories subject to sub-bottling fees. These adjustments were recorded in other expense, net on the Company’s consolidated statements of operations.
12.Other Liabilities
Other liabilities consisted of the following:
Non-current portion of acquisition related contingent consideration
283,751
237,655
Accruals for executive benefit plans
126,756
123,078
Non-current deferred proceeds from conversion of Legacy Territory bottling agreements
84,890
18,286
17,839
Total other liabilities
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 $87.1 million fee from CCR. This 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 April 2, 2017, $2.2 million was recorded in accrued liabilities and $84.9 million was recorded to other liabilities on the consolidated financial statements.
13.Commitments and Contingencies
Manufacturing Cooperatives
The Company is a shareholder of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative in Bishopville, South Carolina from which it is obligated to purchase 17.5 million cases of finished product on an annual basis through June 2024. All eight shareholders of the cooperative 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. The Company purchased 6.7 million cases and 6.5 million cases of finished product from SAC in the first quarter of 2017 and the first quarter of 2016, respectively.
The Company is also a shareholder of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative from which it is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories.
The Company has an equity ownership in both SAC and Southeastern. The following table summarizes the Company’s purchases from these manufacturing cooperatives:
Purchases from SAC
33,634
33,222
Purchases from Southeastern
23,336
16,968
Total purchases from manufacturing cooperatives
56,970
50,190
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:
Guaranteed portion of debt - SAC
17,947
23,297
Guaranteed portion of debt - Southeastern
10,184
9,277
Total guaranteed portion of debt - manufacturing cooperatives
28,131
32,574
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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:
South Atlantic
Canners, Inc.
Southeastern
Container
Total Manufacturing
Cooperatives
Maximum guaranteed debt
23,938
25,251
49,189
Equity investments(1)
4,102
17,768
21,870
Maximum total exposure, including equity investments
28,040
43,019
71,059
Recorded in other assets on the Company’s consolidated balance sheets.
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 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 has been identified as of April 2, 2017, and there was no impairment 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 $29.7 million on both April 2, 2017 and January 1, 2017.
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. The future payments related to these contractual arrangements as of April 2, 2017 amounted to $84.1 million and expire at various dates through 2026.
The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes the ultimate disposition of these matters will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.
The Company is subject to 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 financial statements.
14.Income Taxes
The Company’s effective tax rate, as calculated by dividing income tax benefit by loss before income taxes, for the first quarter of 2017 and the first quarter of 2016 was 45.5% and 36.0%, respectively. The increase in the effective tax rate benefit was primarily driven by a reduction in the valuation allowance resulting from the Company’s assessment of its ability to use certain loss carryforwards, partially offset by the repricing of net deferred tax liabilities as a result of the Expansion Territories being located in higher tax rate jurisdictions.
The Company’s effective tax rate, as calculated by dividing income tax benefit by loss before income taxes minus net income attributable to noncontrolling interest, for the first quarter of 2017 and the first quarter of 2016 was 42.2% and 33.6%, respectively.
The Company had uncertain tax positions, including accrued interest, of $3.0 million on April 2, 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
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positions may change in the next 12 months, the Company does not expect such change would have a significant impact on the consolidated financial statements.
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.
15.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 first quarter of 2017 and the first quarter of 2016 is as follows:
Pre-tax Activity
Tax Effect
Net pension activity:
Actuarial loss
(72,393
807
(311
(71,897
(61
(3
(57
Net postretirement benefits activity:
(24,111
648
(250
(23,713
3,679
(746
288
3,221
(11
(2
(9
Total AOCI(L)
720
(278
January 3, 2016
April 3, 2016
(68,243
741
(286
(67,788
(74
(19,825
587
(227
(19,465
5,744
(840
324
5,228
(5
510
(197
A summary of the impact of AOCI(L) on the income statement line items is as follows:
First Quarter 2017
Net Pension
Activity
Net Postretirement
Benefits Activity
Foreign Currency
Translation Adjustment
155
(20
135
Selling, delivery & administrative expenses
659
585
Subtotal pre-tax
814
(98
Income tax expense
314
(38
278
Total after tax effect
500
(60
First Quarter 2016
75
37
673
(215
473
748
(253
289
(97
197
459
(156
16.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 each year 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 each year is as follows:
Fiscal Year
Date of approval for award
March 7, 2017
March 8, 2016
Fiscal year of service covered by award
2015
Shares settled in cash to satisfy tax withholding obligations
18,980
19,080
Increase in Class B Common Stock shares outstanding
21,020
20,920
Total Class B Common Stock awarded
40,000
Compensation expense for 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:
(in thousands, except share price)
Total compensation expense
Share price for compensation expense
206.02
162.69
Share price date for compensation expense
March 31, 2017
April 1, 2016
17.Benefit Plans
Pension Plans
There are two Company-sponsored pension plans. The primary Company-sponsored pension plan (the “Primary Plan”) was frozen as of 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 pension plan for collectively bargained employees 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:
Service cost
28
Interest cost
2,979
3,031
Expected return on plan assets
(3,399
(3,458
Recognized net actuarial loss
Amortization of prior service cost
Net periodic pension cost
544
349
The Company did not make any contributions to the Company-sponsored pension plans during the first quarter of 2017. Anticipated contributions to the two Company-sponsored pension plans will be in the range of $10 to $12 million during 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 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.
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The components of net periodic postretirement benefit cost were as follows:
572
350
911
778
Net periodic postretirement benefit cost
1,385
875
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 on behalf of such employees. Subsequent to the end of the first quarter of 2017, 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 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 the contribution rates to the Teamsters Plan, with additional increases occurring annually, as part of a rehabilitation plan. 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, 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.
18.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 April 2, 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.
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The following table and the subsequent descriptions summarize the significant transactions between the Company and The Coca‑Cola Company:
Payments made by the Company to The Coca-Cola Company for:
Concentrate, syrup, sweetener and other purchases
226,726
123,186
Customer marketing programs
57,794
29,142
Cold drink equipment parts
5,621
4,561
Payments made by The Coca-Cola Company to the Company for:
Marketing funding support payments
16,836
15,626
Fountain delivery and equipment repair fees
7,850
5,643
Facilitating the distribution of certain brands and packages to other Coca-Cola bottlers
2,093
1,488
Presence marketing funding support on the Company’s behalf
656
481
Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company
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:
Purchases from CCR
40,357
60,443
Sales to CCR
27,163
13,087
Sales to CCR for transporting CCR's product
839
5,046
As discussed above in Note 2 to the consolidated financial statements, the Company and CCR have entered into and closed various Expansion Transactions to acquire Expansion Territories previously served by CCR and Expansion Facilities previously owned by CCR. The following table summarizes the definitive agreements and closing dates for each of the Expansion Transactions completed by the Company as of April 2, 2017:
Expansion Territories
Definitive
Agreement Date
Acquisition /
Exchange Date
Johnson City and Morristown, Tennessee
May 7, 2014
May 23, 2014
Knoxville, Tennessee
August 28, 2014
October 24, 2014
Cleveland and Cookeville, Tennessee
December 5, 2014
January 30, 2015
Louisville, Kentucky and Evansville, Indiana
December 17, 2014
February 27, 2015
Paducah and Pikeville, Kentucky
February 13, 2015
May 1, 2015
Lexington, Kentucky for Jackson, Tennessee Exchange
October 17, 2014
Norfolk, Fredericksburg and Staunton, Virginia and Elizabeth City, North Carolina
September 23, 2015
October 30, 2015
Easton and Salisbury, Maryland and Richmond and Yorktown, Virginia
January 29, 2016
Alexandria, Virginia and Capitol Heights and La Plata, Maryland
Baltimore, Hagerstown and Cumberland, Maryland
Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky
September 1, 2016
1
October 28, 2016
Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana
January 27, 2017
Indianapolis and Bloomington, Indiana and Columbus and Mansfield, Ohio
As amended by Amendment No. 1, dated January 27, 2017.
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Expansion Facilities
Acquisition Date
Annapolis, Maryland Make-Ready Center
Sandston, Virginia
Silver Spring and Baltimore, Maryland
Cincinnati, Ohio
Indianapolis and Portland, Indiana
As part of the Distribution Territory Expansion Transactions, the Company has entered into a Final CBA, as described above in Note 2 to the consolidated financial statements. 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 $304.0 million on April 2, 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, which were each converted into the Final CBA as of March 31, 2017, were zero during the first quarter of 2017 and $5.0 million during the first quarter of 2016.
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 $5.2 million on April 2, 2017 and $7.4 million on January 1, 2017.
In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $0.5 million in the first quarter of 2017 and $0.2 million in the first quarter of 2016.
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 April 2, 2017, the NPSG Board consisted of The Coca‑Cola‑Company, the Company and six 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. 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
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Regional Producing Bottler 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 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 $0.1 million during the first quarter of 2017 and $1.2 million during the first quarter of 2016.
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 its comprehensive beverage agreements 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 $2.5 million during the first quarter of 2017 and $1.4 million during the first quarter 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 $14.0 million on April 2, 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 $1.0 million in both the first quarter of 2017 and the first quarter 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 $14.9 million on April 2, 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 $1.1 million in both the first quarter of 2017 and the first quarter of 2016.
19.Net Loss Per Share
The following table sets forth the computation of basic net loss per share and diluted net loss per share under the two-class method:
Numerator for basic and diluted net loss per Common Stock and Class B Common Stock share:
Less dividends:
1,785
543
538
Total undistributed earnings
(7,379
(12,364
Common Stock undistributed earnings – basic
(5,654
(9,496
Class B Common Stock undistributed earnings – basic
(1,725
(2,868
Total undistributed earnings – basic
Common Stock undistributed earnings – diluted
Class B Common Stock undistributed earnings – diluted
Total undistributed earnings – diluted
Numerator for basic net loss per Common Stock share:
Dividends on Common Stock
Numerator for basic net loss per Common Stock share
(3,869
(7,711
Numerator for basic net loss per Class B Common Stock share:
Dividends on Class B Common Stock
Numerator for basic net loss per Class B Common Stock share
(1,182
(2,330
Numerator for diluted net loss per Common Stock share:
Dividends on Class B Common Stock assumed converted to Common Stock
Numerator for diluted net loss per Common Stock share
Numerator for diluted net loss per Class B Common Stock share:
Numerator for diluted net loss per Class B Common Stock share
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Denominator for basic net loss per Common Stock and Class B Common Stock share:
Common Stock weighted average shares outstanding – basic
Class B Common Stock weighted average shares outstanding – basic
Denominator for diluted net loss per Common Stock and Class B Common Stock share:
Common Stock weighted average shares outstanding – diluted (assumes conversion of Class B Common Stock to Common Stock)
Class B Common Stock weighted average shares outstanding – diluted
Basic net loss per share:
Diluted net loss per share:
The 40,000 unvested performance units granted to Mr. Harrison during the first quarter of 2017 pursuant to the Performance Unit Award Agreement were excluded from the calculation of diluted net loss per share for the first quarter of 2017, as the effect of these awards would have been anti-dilutive.
NOTES TO TABLE
For purposes of the diluted net loss per share computation for Common Stock, all shares of Class B Common Stock are assumed to be converted; therefore, 100% of undistributed earnings is allocated to Common Stock.
(2)
For purposes of the diluted net loss per share computation for Class B Common Stock, weighted average shares of Class B Common Stock are assumed to be outstanding for the entire period and not converted.
(3)
Denominator for diluted net loss per share for Common Stock and Class B Common Stock includes the dilutive effect of shares relative to the Performance Unit Award.
20.Supplemental Disclosures of Cash Flow Information
Changes in current assets and current liabilities affecting cash flows were as follows:
Accounts receivable, trade, net
(20,833
(22,283
(5,714
(25,093
8,428
(2,777
(7,778
8,554
7,710
23,607
17,219
14,884
15,374
9,548
(4,691
(30,020
(23,966
5,505
7,359
21.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.
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:
Net sales:
Nonalcoholic Beverages
832,395
606,928
All Other
76,792
45,709
Eliminations(1)
(43,485
(27,181
Consolidated net sales
Income from operations:
11,534
10,968
2,074
1,433
Consolidated income from operations
Depreciation and amortization:
33,002
22,908
1,979
1,482
Consolidated depreciation and amortization
34,981
24,390
Capital expenditures (exclusive of acquisition):
31,197
24,994
4,114
6,658
Consolidated capital expenditures
31,652
Total assets:
2,562,969
2,349,284
107,608
105,785
(5,757
(5,585
Consolidated total assets
The entire net sales elimination for each year presented represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are either recognized at fair market value or cost depending on the nature of the transaction. Asset eliminations relate to eliminations of intercompany receivables and payables between the Nonalcoholic Beverages and All Other segments.
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Net sales by product category were as follows:
Bottle/can sales(1):
Sparkling beverages (carbonated)
479,760
352,670
Still beverages (noncarbonated, including energy products)
256,058
166,190
Total bottle/can sales
735,818
518,860
Other sales:
Sales to other Coca-Cola bottlers
64,730
50,210
Post-mix and other
65,154
56,386
Total other sales
129,884
106,596
Total net sales
During the second quarter of 2016, energy products were moved from the category of sparkling beverages to still beverages, which has been reflected in all periods presented. Total bottle/can sales remain unchanged in prior periods.
22.Subsequent Events
On April 13, 2017, the Company and CCR entered into (i) a distribution asset purchase agreement (the “April 2017 Distribution APA”) regarding 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 Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio, and (ii) a manufacturing asset purchase agreement (the “April 2017 Manufacturing APA”) regarding the Company’s acquisition of an Expansion Facility and related manufacturing assets previously owned by CCR in Twinsburg, Ohio. On April 28, 2017, the Company completed the transactions contemplated by the April 2017 Distribution APA and the April 2017 Manufacturing APA. At closing, the Company paid a cash purchase price of $87.7 million, which remains subject to adjustment in accordance with the terms of the April 2017 Distribution APA and the April 2017 Manufacturing APA. The Company has not completed the preliminary allocation of the purchase price to the individual acquired assets and assumed liabilities for these transactions. The transactions will be accounted for as a business combination under FASB ASC 805.
On April 11, 2017, the Company and The Coca‑Cola Company entered into a non-binding letter of intent which contemplates the Company exchanging certain of its exclusive distribution rights and related 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.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 financial statements of the Company and the accompanying notes to the consolidated financial statements.
The Company’s fiscal year generally ends on the Sunday closest to December 31 of each year. The consolidated financial statements presented are:
Comprehensive income for the first quarter of fiscal 2017 (“2017”) and the first quarter of fiscal 2016 (“2016”).
The consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries including Piedmont Coca‑Cola Bottling Partnership (“Piedmont”). Piedmont is the Company’s only subsidiary with a significant noncontrolling interest. The 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 (the “Distribution Territory Expansion Transactions”), as well as the acquisition of regional manufacturing facilities previously owned by CCR (the “Expansion Facilities”) and related manufacturing assets (the “Manufacturing Facility Expansion Transactions” and, together with the Distribution Territory Expansion Transactions, the “Expansion Transactions”).
As of April 2, 2017, the Expansion Transactions completed and the respective net cash paid amounts are as follows:
Expansion Territories / Expansion Facilities Acquired
Net Cash Paid
(In Millions)
12.2
30.9
13.2
18.0
7.0
15.3
26.7
5.4
Easton and Salisbury, Maryland, Richmond and Yorktown, Virginia, and Sandston, Virginia Expansion Facility
65.7
*
35.6
Baltimore, Hagerstown and Cumberland, Maryland, and Silver Spring and Baltimore, Maryland Expansion Facilities
69.0
Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky and Cincinnati, Ohio Expansion Facility
98.2
31.6
Indianapolis and Bloomington, Indiana and Columbus and Mansfield, Ohio and Indianapolis and Portland, Indiana Expansion Facilities
108.7
These net cash paid amounts are subject to a final post-closing adjustment and, as a result, may either increase or decrease.
The financial results of the Expansion Territories and the Expansion Facilities have been included in the Company’s consolidated financial statements from their respective acquisition or exchange dates. These Expansion Territories and Expansion Facilities contributed the following amounts to the Company’s consolidated statement of operations during the first quarter of 2017 and the first quarter of 2016:
2017(1)
2016(2)
Includes the results of the Q1 2017 Expansion Transactions, as defined below, and the Expansion Territories and Expansion Facilities acquired in fiscal 2016 (the “2016 Expansion Transactions”).
Includes the results of the portion of the 2016 Expansion Transactions completed through April 3, 2016.
A summary of the Expansion Transactions completed by the Company prior to the first quarter of 2017 is included in the Company’s Annual Report on Form 10-K filed with the SEC on March 14, 2017. During the first quarter of 2017, the Company closed the following Expansion Transactions with CCR:
Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana Expansion Territories Acquisitions (the “January 2017 Expansion Transaction”)
On January 27, 2017, the Company acquired distribution rights for certain cross-licensed brands previously distributed in the territories by CCR and related assets for Expansion Territories served by distribution facilities 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.
This transaction is 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 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 Facility Acquisitions (“March 2017 Expansion Transactions”)
On March 31, 2017, the Company acquired distribution rights for certain cross-licensed brands previously distributed in the territories by CCR and related assets for Expansion Territories served by distribution facilities 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 is pursuant to the September 2016 Distribution APA. The March 2017 Expansion Facilities acquisition is 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.
Together, the January 2017 Expansion Transaction and the March 2017 Expansion Transactions, are the “Q1 2017 Expansion Transactions.”
Amendment to September 2016 Distribution APA
On January 27, 2017, the Company and CCR amended the September 2016 Distribution APA to, among other things, accelerate (i) the anticipated date for the closing of the March 2017 Expansion Transactions from October 2017 to March 2017, and (ii) the Company’s acquisition of territory served by a distribution facility in Terre Haute, Indiana from the March 2017 Expansion Transactions to the January 2017 Expansion Transaction.
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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 (the “Final CBA”) on March 31, 2017, 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 March 2017 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.
Other than the Covered Beverages, Related Products and expressly permitted existing cross-licensed brands, the Final CBA provides that, subject to certain limited exceptions, the Company will not be permitted to produce, manufacture, prepare, package, distribute, sell, deal in or otherwise use or handle any Beverages, Beverage Components (as such terms are defined in the Final CBA) or other beverage products unless otherwise consented to by The Coca‑Cola Company. The Final CBA has a term of ten years and is renewable by the Company indefinitely for successive additional terms of ten years each unless earlier terminated as provided therein.
The Final CBA includes:
(i)
the need to obtain The Coca‑Cola Company’s prior approval of a potential purchaser of the Company or its aggregate businesses directly and primarily related to the marketing, promotion, distribution and sale of certain beverages of The Coca‑Cola Company,
(ii)
the right of The Coca‑Cola Company to terminate the Final CBA in the event of an uncured default by the Company,
(iii)
the requirement that the Company maintain an annual equivalent case volume per capita change rate that is not less than one standard deviation below the median of such rates for all U.S. Coca‑Cola bottlers for such period, and
(iv)
the requirement that the Company make minimum, ongoing capital expenditures at a specified level.
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 this Quarterly Report on Form 10-Q (this “Report”).
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 (the “Final RMA”) on March 31, 2017, 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 March 2017 Expansion Facilities for distribution by the Company for its own account in accordance with the Final CBA and 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 in accordance with the Final RMA.
Under the Final RMA, The Coca‑Cola Company will, from time to time, unilaterally establish the prices (or certain elements of the formula used to determine the prices) that the Company charges for sales of Authorized Covered Beverages to The Coca‑Cola Company or to certain U.S. Coca‑Cola bottlers. Subject to the right of The Coca‑Cola Company to terminate the Final RMA in the event of an uncured default by the Company, the Final RMA has a term that continues for the duration of the term of the Final CBA. Other than Authorized Covered Beverages, certain cross-licensed brands that the Company is permitted to distribute under the Final CBA, and certain other expressly permitted cross-licensed brands, the Final RMA provides that the Company will not manufacture any Beverages, Beverage Components or other beverage products unless otherwise consented to by The Coca‑Cola Company.
The Final RMA includes:
the requirement that the Company’s aggregate business directly and primarily related to the manufacture of Authorized Covered Beverages, permitted cross-licensed brands and other beverages and beverage products for The Coca‑Cola Company be subject to the same agreed upon sale process provisions included in the Final CBA, which include the need to obtain The Coca‑Cola Company’s prior approval of a potential purchaser of such manufacturing business,
the right of The Coca‑Cola Company to terminate the Final RMA under certain circumstances, including in the event of an uncured default by the Company under the Final CBA or an uncured breach by the Company of any of its material obligations under the Final RMA or the NPSG Governance Agreement entered into by the Company, The Coca‑Cola Company and certain
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other Coca‑Cola bottlers on October 30, 2015 regarding the governance of the national product supply system, as described in the Company’s Current Report on Form 8-K filed November 2, 2015 and filed as Exhibit 10.1 thereto, and
the requirement that the Company make minimum, ongoing capital expenditures at a specified level. 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 this Report.
The Final RMA is similar in many respects to the initial regional manufacturing agreements entered into by the Company and The Coca‑Cola Company for the Expansion Facilities the Company previously acquired from CCR (the “Initial RMAs”), a copy of which was filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 5, 2016 (the “May 2016 Form 8-K”). As described below under “Bottling Agreement and RMA Conversions,” each of the Company’s Initial RMAs has been amended, restated and converted into the Final RMA as of March 31, 2017.
Bottling Agreement and RMA Conversions
Upon the consummation of the March 31, 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 September 2015 Form 8-K 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 will not apply with regards to the Legacy Territories.
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 is 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 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.
Piedmont Final Comprehensive Beverage Agreement
In connection with the Bottling Agreement Conversion, the existing Bottling Agreements between The Coca‑Cola Company and Piedmont, a partnership formed by a wholly-owned subsidiary of the Company and a wholly-owned subsidiary of The Coca‑Cola Company to distribute and market finished bottle, can and fountain beverage products under trademarks of The Coca‑Cola Company and other third-party licensors in portions of the Legacy Territories located in North Carolina, South Carolina, Virginia and Georgia (the “Piedmont Territories”), also were amended, restated and converted into a final comprehensive beverage agreement (the “Piedmont CBA”).
Pursuant to the Piedmont CBA, The Coca‑Cola Company granted Piedmont certain exclusive rights to distribute, promote, market and sell the Covered Beverages and Related Products distinguished by the Trademarks in the Piedmont Territories. The Piedmont CBA is substantially similar to the Final CBA and, as with the treatment of the Legacy Territories under the Final CBA, there is no requirement for Piedmont to make quarterly sub-bottling payments to CCR for the Piedmont Territories. Piedmont did not enter into a Final RMA with The Coca‑Cola Company, as Piedmont does not own any regional manufacturing facilities. A summary of the Piedmont CBA is provided in the April 2017 Form 8-K and the Piedmont CBA is filed as Exhibit 10.6 to this Report.
Omnibus Letter Agreement
On March 31, 2017, the Company, certain of its subsidiaries and The Coca‑Cola Company entered into a letter agreement (the “Omnibus Letter Agreement”) pursuant to which the parties agreed that, for purposes of determining compliance with (i) the
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equivalent case volume per capita change rate obligation under the Final CBA, the Piedmont CBA and any other comprehensive beverage agreements between The Coca‑Cola Company and a subsidiary of the Company (collectively, the “CCBCC Group CBAs”) (the “Equivalent Case Volume Obligation”) and (ii) the capital expenditures obligation under the CCBCC Group CBAs and the Final RMA (the “Capital Expenditures Obligation”), the equivalent case volume per capita and the capital expenditures of the Company and its subsidiaries, in both instances, will be calculated in the aggregate. For instance, the Capital Expenditures Obligation will apply to the entire territory covered by the CCBCC Group CBAs and the Final RMA in the aggregate, and not with respect to any individual territory under a particular agreement, and will include all expenditures in such respect made by the Company and its subsidiaries.
In addition, the Omnibus Letter Agreement provides that a breach of the Equivalent Case Volume Obligation or the Capital Expenditures Obligation would result in a default of the CCBCC Group CBAs and/or of the Final RMA, as applicable. Further, pursuant to the Omnibus Letter Agreement, the Company and The Coca‑Cola Company also agreed that the Final RMA supersedes the letter agreement entered into by the Company and The Coca‑Cola Company on April 29, 2016, as described in the May 2016 Form 8-K, and consequently, terminated such letter agreement as of March 31, 2017. A summary of the Omnibus Letter Agreement is provided in the April 2017 Form 8-K, and the Omnibus Letter Agreement was filed as Exhibit 10.1 thereto.
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 (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. On March 31, 2017, upon the Company’s acquisition of the March 2017 Expansion Facilities, the parties agreed to apply $22.9 million of the total Expansion Facilities Discount, which represents 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. The portion of the Expansion Facilities Discount attributable to each of the remaining Expansion Facilities to be acquired by the Company will be applied at the closing of each such future transaction.
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 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 this Report.
Amended and Restated Ancillary Business Letter
On March 31, 2017, the Company and The Coca‑Cola Company amended and restated the letter agreement dated October 30, 2015, a copy of which was filed as Exhibit 10.2 to the November 2015 Form 8-K (as amended and restated, the “A&R Ancillary Business Letter”), to grant the Company advance waivers to acquire or develop certain lines of business involving the preparation, distribution, sale, dealing in or otherwise using or handling of certain beverage products that would otherwise be prohibited under the Final CBA or any similar agreement. Subject to certain limited exceptions described therein, the Company is prohibited from acquiring or developing any line of business inside or outside of its territories governed by the Final CBA or any similar agreement during the term of a focus period expiring January 1, 2020 (the “Focus Period”) without the consent of The Coca‑Cola Company, which consent may not be unreasonably withheld.
After the expiration of the Focus Period, only the acquisition or development by the Company of (i) any grocery, quick service restaurant, or convenience and petroleum store business engaged in the sale of Beverages, Beverage Components and other beverage products not otherwise authorized or permitted by the Final CBA, or (ii) any other line of business for which beverage activities otherwise prohibited under the Final CBA represent more than a certain threshold of net sales will require the consent of The Coca‑Cola Company (which consent may not be unreasonably withheld) under the A&R Ancillary Business Letter, subject to certain limited exceptions described therein. A summary of the A&R Ancillary Business Letter is provided in the April 2017 Form 8‑K, and the A&R Ancillary Business Letter was filed as Exhibit 10.2 thereto.
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Cleveland Letter of Intent
On February 6, 2017, the Company and The Coca‑Cola Company entered into a non-binding letter of intent (the “February 2017 LOI”) pursuant to which CCR would grant the Company certain exclusive rights for the distribution, promotion, marketing and sale of beverage products owned and licensed by The Coca‑Cola Company in territory in and around Cleveland, Ohio (the “Cleveland Territory”) currently served by another unaffiliated Coca‑Cola bottler. The February 2017 LOI contemplates that CCR would acquire this distribution business in the Cleveland Territory from the existing Coca‑Cola bottler immediately prior to selling it to the Company. A summary of the February 2017 LOI was provided in the Company’s Current Report on Form 8-K filed February 7, 2017, and the February 2017 LOI was filed as Exhibit 99.2 thereto.
Pursuant to the February 2017 LOI, the Company and The Coca‑Cola Company also amended their non-binding letter of intent dated February 8, 2016, as described in the Company’s Current Report on Form 8-K filed with the SEC on February 10, 2016 and filed as Exhibit 99.2 thereto, to remove the portion of the distribution territory located in northern West Virginia served by CCR’s distribution facilities in Wheeling and Fairmont, West Virginia from the Distribution Territory Expansion Transaction contemplated by such letter of intent and agreed that CCR will sell the distribution rights and assets associated with such territory to another unaffiliated Coca‑Cola bottler.
Our Business and the Nonalcoholic Beverage Industry
Coca‑Cola Bottling Co. Consolidated, a Delaware corporation, produces, markets and distributes nonalcoholic beverages in 16 states. 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 92% of our total bottle/can volume to retail customers consist 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 exchange 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 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.
In the second quarter of 2016, energy products were moved from the category of sparkling beverages to still beverages, which has been reflected in all periods presented. Total bottle/can sales remain unchanged in prior periods.
The nonalcoholic beverage market is highly competitive. Competitive products include nonalcoholic sparkling beverages and still beverages, which are noncarbonated beverages such as bottled water, energy drinks, tea, ready to drink coffee, enhanced water, juices
36
and sports drinks. 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. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality. 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.
Areas of Emphasis
Key priorities for the Company include territory and manufacturing expansion, 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 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.
Distribution Cost Management: Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs were $91.0 million in the first quarter of 2017 and $64.4 million in the first quarter 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:
bulk delivery for large supermarkets, mass merchandisers and club stores;
advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premises accounts; and
full service delivery for its full service vending customers.
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
First Quarter Results
Our results of operations for the first quarter of 2017 and the first quarter of 2016 are highlighted in the table below and discussed in the following paragraphs:
Change
% Change
240,246
38.4%
152,123
39.9
88,123
36.1
86,916
37.5
1,207
9.7
109
1.2
(4,905
(28.6
6,003
(42.5
1,387
(27.3
4,616
(51.1
(374
(37.1
4,990
(49.7
Items Impacting Operations and Financial Condition
The following items affect the comparability of the financial results:
$264.9 million in net sales and $4.5 million of operating income related to the Expansion Territories and Expansion Facilities;
$7.7 million of expenses related to acquiring and transitioning Expansion Territories and Expansion Facilities; and
$12.2 million recorded in other expense as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to the Expansion Territories.
$35.3 million in net sales and $1.2 million of operating income related to the Expansion Territories;
$17.2 million recorded in other expense as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to the Expansion Territories;
$6.4 million of expenses related to acquiring and transitioning Expansion Territories; and
$4.0 million of additional expense related to increased charitable contributions.
Net Sales
Net sales increased $240.2 million, or 38.4%, to $865.7 million in the first quarter of 2017, as compared to $625.5 million in the first quarter of 2016. The increase in net sales was primarily attributable to the following (in millions):
Attributable to:
229.6
Net sales increase related to the Q1 2017 Expansion Transactions and the 2016 Expansion Transactions
12.6
2.6% increase in bottle/can sales volume to retail customers in the Legacy Territory, the 2014 Expansion Territories and the 2015 Expansion Territories, primarily driven by an increase in still beverages
(2.4
Decrease in sales price per unit to other Coca-Cola bottlers
0.4
240.2
Total increase in net sales
The Company’s bottle/can sales to retail customers accounted for approximately 85% of the Company’s total net sales in the first quarter of 2017, as compared to approximately 83% in the first quarter of 2016. Bottle/can net pricing is based on the invoice price
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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
Bottle/Can
Sales Volume
Product Category
Increase
Sparkling beverages
71.4
%
72.9
35.5
Still beverages (including energy products)
28.6
27.1
45.9
Total bottle/can sales volume
100.0
38.3
Bottle/can volume to retail customers, excluding the Q1 2017 Expansion Transactions and the 2016 Expansion Transactions, increased 2.6%, which represented a 1.3% increase in sparkling beverages and a 6.0% increase in still beverages in the first quarter of 2017, as compared to the first quarter 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 quarter of 2017, approximately 66% of the Company’s bottle/can volume to retail customers was sold for future consumption, while the remaining bottle/can volume to retail customers was sold for immediate consumption.
The following table summarizes the percentage of the Company’s total bottle/can volume and the percentage of the Company’s total net sales, which are all included in the Nonalcoholic Beverages operating segment, attributed to its largest customers:
Customer
Wal-Mart Stores, Inc.
Approximate percent of the Company's total Bottle/can volume
Approximate percent of the Company's total Net sales
The Kroger Company
Food Lion, LLC
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 $152.1 million, or 39.9%, to $533.7 million in the first quarter of 2017, as compared to $381.6 million in the first quarter of 2016. The increase in cost of sales was primarily attributable to the following (in millions):
146.9
Cost of sales increase related to the Q1 2017 Expansion Transactions and the 2016 Expansion Transactions
7.3
(4.0
Decrease in external transportation cost of sales
1.9
152.1
Total increase in cost of sales
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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 The Coca‑Cola Company and other beverage companies, which includes direct payments to the Company and payments to customers for marketing programs, was $24.4 million in the first quarter of 2017, as compared to $20.4 million in the first 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.
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 $86.9 million, or 37.5%, to $318.4 million in the first quarter of 2017, as compared to $231.5 million in the first quarter of 2016. S,D&A expenses as a percentage of net sales decreased to 36.8% in the first quarter of 2017 from 37.0% in the first quarter of 2016. The increase in S,D&A expenses was primarily attributable to the following (in millions):
44.0
Increase in employee salaries including bonus and incentives due to additional personnel added from the Expansion Transactions
8.3
Increase in employee benefit costs primarily due to additional group insurance expense and 401(k) employer matching contributions for employees from the Expansion Transactions
6.1
Increase in depreciation and amortization of property, plant and equipment primarily due to depreciation for fleet and vending equipment from the Expansion Transactions
4.1
Increase in marketing expense primarily due to increased spending for media and cold drink sponsorships
3.9
Increase in employer payroll taxes primarily due to additional personnel added from the Expansion Transactions
7.9
Other individually immaterial expense increases primarily related to the Expansion Transactions
Other individually immaterial increases
86.9
Total increase in S,D&A expenses
Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations are included in S,D&A expenses and totaled $91.0 million in the first quarter of 2017 and $64.4 million in the first quarter of 2016.
Interest Expense, Net
Interest expense, net, increased $0.1 million, or 1.2%, to $9.5 million in the first quarter of 2017, as compared to $9.4 million in the first quarter of 2016.
Other Expense, Net
Other expense, net, included a noncash charge of $12.2 million in the first quarter of 2017 and $17.2 million in the first quarter of 2016 as a result of fair value adjustments of the Company’s contingent consideration liability related to the Expansion Territories. The adjustment in the first quarter of 2017 was primarily a result of the final settlement of territory values for the Paducah and Pikeville, Kentucky Expansion Territory acquisitions and the Norfolk, Fredericksburg and Staunton, Virginia, and Elizabeth City, North Carolina Expansion Territory acquisitions, which closed in May 2015 and October 2015, respectively. The adjustment in the first quarter of 2016 was driven primarily by a change in projected future operating results of the acquired Expansion Territories subject to sub-bottling fees.
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Each reporting period, the Company adjusts its contingent consideration liability related to the newly-acquired 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, which include long-term interest rates; projected future operating results; and final settlements of territory values. These future expected sub-bottling payments extend through the life of the related distribution asset acquired in each distribution territory expansion transaction, which is generally 40 years. In addition, the Company is required to pay quarterly the current portion of the sub-bottling fee.
Income Tax Benefit
The Company’s effective tax rate, calculated by dividing income tax benefit by loss before income taxes, was 45.5% for the first quarter of 2017 and 36.0% for the first quarter of 2016. The increase in the effective tax rate benefit was primarily driven by a reduction in the valuation allowance resulting from the Company’s assessment of its ability to use certain loss carryforwards, partially offset by the repricing of net deferred tax liabilities as a result of the Expansion Territories being located in higher tax rate jurisdictions. The Company’s effective tax rate, calculated by dividing income tax benefit by loss before income taxes minus net income attributable to noncontrolling interest, was 42.2% for the first quarter of 2017 and 33.6% for the first 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 $0.6 million in the first quarter of 2017 and $1.0 million in the first quarter of 2016.
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was $0.4 million in the first quarter of 2017 and $0.3 million in the first quarter 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 (“FASB”) Accounting Standards Codification 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 entire net sales elimination for each year presented represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are either recognized at fair market value or cost depending on the nature of the transaction.
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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.
The following tables reconcile reported GAAP results to comparable results (non-GAAP) for the first quarter of 2017 and the first quarter of 2016:
Net
sales
Income
from operations
Income (loss) before
income taxes
Net income
(loss)
Basic net income
(loss) per share
Reported results (GAAP)
Fair value adjustments for commodity hedges
(327
(201
(0.02
2017 & 2016 acquisitions impact
(264,906
(4,450
(2,732
(0.29
Expansion Transaction expenses
7,652
4,698
0.49
7,519
0.81
Total reconciling items
2,875
15,121
9,284
0.99
Comparable results (non-GAAP)
600,796
16,483
7,013
4,233
0.45
(1,040
(640
(0.07
2016 acquisitions impact
(35,311
(1,206
(742
(0.08
6,423
3,950
0.43
Special charitable contribution
4,000
2,460
0.26
Impact of changes in product supply governance
(2,213
(1,361
(0.15
10,548
1.14
5,964
23,115
14,215
1.53
590,145
18,365
9,004
4,174
Financial Condition
Total assets increased to $2.66 billion on April 2, 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 $185.2 million from January 1, 2017. In addition, the Company had additions to property, plant and equipment of $41.6 million during the first quarter of 2017, which excludes $108.4 million in property, plant and equipment acquired in the Q1 2017 Expansion Transactions.
Net working capital, defined as current assets less current liabilities, was $192.9 million on April 2, 2017, which was an increase of $56.9 million from January 1, 2017.
Significant changes in net working capital on April 2, 2017 from January 1, 2017 were as follows:
An increase in accounts receivable, trade of $21.6 million primarily as a result of accounts receivable from the Q1 2017 Expansion Transactions.
An increase of $8.6 million in accounts receivable from The Coca‑Cola Company, primarily as a result of activity from the Q1 2017 Expansion Transactions and the timing of payments.
An increase in inventories of $36.5 million primarily as a result of inventories from the Q1 2017 Expansion Transactions.
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An increase in accounts payable, trade of $18.2 million primarily as a result of purchases from the Q1 2017 Expansion Transactions.
An increase in other accrued liabilities of $16.9 million primarily due to timing of payments.
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, including the proposed acquisition of previously announced additional Expansion Territories and Expansion Facilities, 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 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 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 facility in an aggregate principal amount of up to $175 million.
The Company currently believes all banks participating in the Company’s 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 $122.0 million on April 2, 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, dependent on the Company’s credit rating, at the Company’s option. 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.
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.
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
43
or results of operations. There were no changes in these credit ratings during the first quarter of 2017 from the prior year and the credit ratings are currently stable. As of April 2, 2017, the Company’s credit ratings were as follows:
Long-Term Debt
Standard & Poor’s
BBB
Moody’s
Baa2
Net debt and capital lease obligations were summarized as follows:
Debt
Capital lease obligations
46,893
48,721
Total debt and capital lease obligations
1,049,202
955,975
Less: Cash and cash equivalents
Total net debt and capital lease obligations (1)
1,017,262
934,125
The non-GAAP measure “Total net debt and capital lease obligations” is used to provide investors with additional information which management believes is helpful in the evaluation of the Company’s capital structure and financial leverage. This non-GAAP financial information is not presented elsewhere in this report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.
The Company is subject to interest rate risk on its floating rate debt, including the Company’s $450 million Revolving Credit Facility and its $300 million 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 April 2, 2017, interest expense for the next twelve months would increase by approximately $4.2 million.
The Company’s only Level 3 asset or liability is the 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. Following is a summary of the Level 3 activity:
Cash Sources and Uses
The primary sources of cash for the Company in the first quarter of 2017 were debt financings and a one-time fee paid to the Company by CCR as part of the Final CBA. The primary uses of cash in the first quarter of 2017 were acquisitions of Expansion Territories and Expansion Facilities and additions to property, plant and equipment. The primary source of cash for the Company in the first quarter of 2016 was debt financings. The primary uses of cash in the first quarter of 2016 were debt repayments, acquisitions of Expansion Territories and Expansion Facilities and additions to property, plant and equipment. A summary of cash-based activity is as follows:
Cash Sources:
Bottling conversion agreement fee
Cash provided by operating activities(1)
29,465
Refund of income tax payments
10,180
224
249
Total cash sources
361,755
150,429
Cash Uses:
150,000
Acquisition of Expansion Territories and Expansion Facilities, net of cash acquired
139,958
100,907
41,580
36,785
15,598
134
1,204
2,328
2,323
1,828
1,726
Cash used in operating activities(1)
25,423
4,959
239
Total cash uses
351,665
173,327
Excludes income tax refunds and payments, the glacéau distribution agreement consideration and the bottling conversion agreement fee. This line item is a non-GAAP measure and is used to provide investors with additional information which management believes is helpful in the evaluation of the Company’s cash sources and uses. This non-GAAP financial information is not presented elsewhere in this report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.
Cash Flows From Operating Activities
During the first quarter of 2017, cash provided by operating activities was $116.5 million, which was an increase of $131.7 million, as compared to the first quarter of 2016. In addition to the cash generated from the newly acquired Expansion Territories, the increase was 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 quarter of 2017, cash used in investing activities was $197.1 million, which was an increase of $58.3 million, as compared to the first quarter of 2016. The increase was driven primarily by $140.0 million in cash used to finance the Expansion Transactions.
Additions to property, plant and equipment during the first quarter of 2017 were $41.6 million, of which $9.4 million were accrued in accounts payable, trade. These additions exclude $108.4 million in property, plant and equipment acquired in the Q1 2017 Expansion Transactions. Additions to property, plant and equipment during the first quarter of 2017 were funded with cash flows from operations and available credit facilities. The Company anticipates additions to property, plant and equipment for the remaining three quarters of 2017 will be in the range of $150 million to $200 million, excluding any additional Expansion Transactions expected to close in 2017.
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In addition to the Expansion Transactions, the Company made a $15.6 million payment to The Coca‑Cola Company during the first quarter of 2017 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.
Additions to property, plant and equipment during the first quarter of 2016 were $36.8 million, of which $8.9 million were accrued in accounts payable, trade. These additions exclude $103.8 million in property, plant and equipment acquired in the 2016 Expansion Transactions completed during the first quarter of 2016.
Cash Flows From Financing Activities
During the first quarter of 2017, cash provided by financing activities was $90.6 million, which was a decrease of $40.5 million, as compared to the first quarter of 2016. The decrease was driven primarily by a reduction in net borrowings on the Revolving Credit Facility. The one-time fee paid to the Company by CCR in connection with the conversion of the Company’s bottling agreements to the Final CBA contributed to this reduction.
During the first quarter of 2017, the Company had no cash payments 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 $20 million to $36 million.
See Note 1 to the consolidated 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 $28.1 million of debt for these entities as of April 2, 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.
As of April 2, 2017, the Company’s maximum exposure, if both of these cooperatives borrowed up to their aggregate borrowing capacity, would have been $71.1 million, including the Company’s equity interests. See Note 13 to the consolidated financial statements for additional information.
Hedging Activities
The Company enters into derivative instruments to hedge certain commodity purchases. Fees paid by the Company for derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment of cost of sales or S,D&A expenses.
The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. The net impact of the commodity hedges on cost of sales was a decrease of $1.0 million in the first quarter of 2017 and a decrease of $0.2 million in the first quarter of 2016. The net impact of the commodity hedges on SD&A expenses was an increase of $0.3 million in both the first quarter of 2017 and the first quarter of 2016.
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
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contributions, estimated sub-bottling liability payments; or statements regarding the outcome or impact of certain new accounting pronouncements and pending or threatened litigation.
the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements;
the Company’s expectation that certain amounts of goodwill will, or will not, be deductible for tax purposes;
the Company’s belief that the manufacturing cooperatives whose debt the Company guarantees have sufficient assets and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss from the Company’s guarantees and that the cooperatives will perform their obligations under their debt commitments;
the Company’s belief that the ultimate disposition of various claims and legal proceedings which have arisen in the ordinary course of its business will not have a material adverse effect on its financial condition, cash flows or results of operations and that no material amount of loss in excess of recorded amounts is reasonably possible as a result of these claims and legal proceedings;
the Company’s belief that it is competitive in its territories with respect to the principal methods of competition in the nonalcoholic beverage industry;
the Company’s belief that certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance including information which the Company believes is helpful in the evaluation of its capital structure and financial leverage;
the Company’s belief that it has sufficient sources of capital available to refinance its maturing debt, finance its business plan, including the proposed acquisition of previously announced additional Expansion Territories and Expansion Facilities, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months;
the Company’s belief that all of the banks participating in the Company’s Revolving Credit Facility have the ability to and will meet any funding requests from the Company;
the Company’s estimate of the useful lives of certain acquired intangible assets and property, plant and equipment;
the Company’s estimate that a 10% increase in the market price of certain commodities over the current market prices would cumulatively increase costs during the next 12 months by approximately $43.2 million, assuming no change in volume;
the Company’s expectation that the amount of uncertain tax positions may change over the next 12 months but will not have a significant impact on the consolidated financial statements;
the Company’s expectation that certain territories of CCR will be sold to bottlers that are neither members of CONA nor users of the CONA System;
the Company’s belief that innovation of both new brands and packages will continue to be important to the Company’s overall revenue;
the Company’s expectations as to the timing of certain Expansion Transaction closings;
the Company’s belief that the amount it could pay annually under the acquisition related contingent consideration arrangements for the Expansion Transactions will be in the range of $20 million to $36 million;
the Company’s belief that the covenants in the Company’s Revolving Credit Facility, Term Loan Facility and Private Shelf Facility will not restrict its liquidity or capital resources;
the Company’s belief that other parties to certain of its contractual arrangements will perform their obligations;
the Company’s belief that contributions to the two Company-sponsored pension plans will be in the range of $10 million to $12 million in 2017;
the Company’s expectation that it will not withdraw from its participation in the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund;
the Company’s expectation that additions to property, plant and equipment for the remaining three quarters of 2017 will be in the range of $150 million to $200 million, excluding any additional Expansion Transactions expected to close in 2017;
the Company’s belief that key priorities include territory and manufacturing expansion, revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity; and
the Company’s hypothetical calculation that, if market interest rates average 1% more over the next twelve months than the interest rates as of April 2, 2017, interest expense for the next twelve months would increase by approximately $4.2 million, assuming no changes in the Company’s financial structure.
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 of our Annual Report on Form 10-K for the year ended January 1, 2017, as well as other factors discussed throughout this Report, including, without limitation, the factors described under “Significant Accounting Policies” in Part I – Item 2 above, 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.
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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 Securities and Exchange Commission.
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 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 Company’s $450 million Revolving Credit Facility and its $300 million 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 April 2, 2017, interest expense for the next twelve months would increase by approximately $4.2 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 $43.2 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.
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 April 2, 2017.
There has been no change in the Company’s internal control over financial reporting during the quarter ended April 2, 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
Legal Proceedings.
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 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.
Risk Factors.
There have been no material changes to the factors disclosed in Part I, Item 1A Risk Factors in the Company’s Annual Report on Form 10‑K for the year ended January 1, 2017.
Unregistered Sales of Equity Securities and Use of Proceeds.
Purchase of Equity Securities
The following table provides information about repurchase of the Company’s Common Stock during the quarter ended April 2, 2017:
Period
Number of Shares Purchased(1)
Average Price
Paid per
Share ($)
Total Number of
Shares Purchased
as Part of Publicly
Announced Program
Approximate Dollar
Value of Shares that
May Be Purchased
Under the Program
January 2, 2017 through January 29, 2017
January 30, 2017 through February 26, 2017
February 27, 2017 through April 2, 2017
174.55
Represents shares of Common Stock withheld for income tax purposes in connection with the vesting of 40,000 shares of restricted Class B Common Stock issued to J. Frank Harrison, III, in connection with his services as Chairman of the Board of Directors and Chief Executive Officer of the Company during fiscal 2016 pursuant to the Performance Unit Award Agreement.
Exhibits.
Number
Description
Incorporated by Reference
or Filed Herewith
2.1+
Amendment No. 1 to Asset Purchase Agreement, dated January 27, 2017, by and between the Company and Coca-Cola Refreshments USA, Inc.
Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on January 27, 2017 (File No. 0-9286).
3.1
Restated Certificate of Incorporation of the Company.
Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 (File No. 0-9286).
3.2
Amended and Restated Bylaws of the Company.
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on August 25, 2016 (File No. 0-9286).
The registrant, by signing this report, agrees to furnish the Securities and Exchange Commission, upon its request, a copy of any instrument which defines the rights of holders of long-term debt of the registrant and its consolidated subsidiaries which authorizes a total amount of securities not in excess of 10 percent of the total assets of the registrant and its subsidiaries on a consolidated basis.
10.1
Note Purchase and Private Shelf Agreement, dated June 10, 2016, by and among the Company, PGIM, Inc. and the other parties thereto.
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 20, 2017 (File No. 0-9286).
10.2
Omnibus Letter Agreement, dated March 31, 2017, by and between the Company and Coca‑Cola Refreshments USA, Inc.
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 4, 2017 (File No. 0-9286).
10.3
Amended and Restated Ancillary Business Letter, dated March 31, 2017, by and between the Company and The Coca‑Cola Company.
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 4, 2017 (File No. 0-9286).
10.4*
Amendment No. 2 to the CONA Services LLC Limited Liability Company Agreement, effective February 22, 2017, by and among the Company, The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc. and the other bottlers named therein.
Filed herewith.
10.5*
Comprehensive Beverage Agreement, dated March 31, 2017, by and between the Company, The Coca‑Cola Company and Coca‑Cola Refreshments USA, Inc.
10.6*
Comprehensive Beverage Agreement, dated March 31, 2017, by and between Piedmont Coca‑Cola Bottling Partnership and The Coca‑Cola Company.
10.7*
Regional Manufacturing Agreement, dated March 31, 2017, by and between the Company and The Coca‑Cola Company.
10.8*
Expansion Facilities Discount and Legacy Facilities Credit Letter Agreement, dated March 31, 2017, by and between the Company and The Coca‑Cola Company.
Ratio of Earnings to Fixed Charges.
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K.
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Financial statements (unaudited) from the quarterly report on Form 10-Q of Coca-Cola Bottling Co. Consolidated for the quarter ended April 2, 2017, filed on May 11, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Operations; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Changes in Equity; (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.
+ 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.
* Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.
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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.
(REGISTRANT)
Date: May 11, 2017
By:
/s/ Clifford M. Deal, III
Clifford M. Deal, III
Senior Vice President, Chief Financial Officer
(Principal Financial Officer of the Registrant)
/s/ William J. Billiard
William J. Billiard
Senior Vice President, Chief Accounting Officer
(Principal Accounting Officer of the Registrant)