UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.DC 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 | June 30, 2019 |
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterlytransition period ended September 30, 2018from to
Commission File Number Number: 0-9286
COCA‑COLA BOTTLING CO. CONSOLIDATED, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 56-0950585 |
(State or other jurisdiction of |
| (I.R.S. Employer |
4100 Coca‑Cola Plaza Charlotte, NC | 28211 | |
(Address of principal executive offices) | (Zip Code) |
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)code: (704) 557-4400
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, $1.00 Par Value | COKE | The NASDAQ Global Select Market |
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 every Interactive Data File required to be submitted 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 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 | ☐ |
| Smaller reporting company | ☐ |
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| 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 numberAs of July 28, 2019, there were 7,141,447shares outstanding of each of the registrant’s classes of common stock, asCommon Stock, $1.00 par value, and 2,232,242 shares of the latest practicable date.registrant’s Class B Common Stock, $1.00 par value, outstanding.
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COCA‑COLA BOTTLING CO. CONSOLIDATED, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBERJUNE 30, 20182019
INDEX
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Item 1. |
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| 2 | |
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| Condensed Consolidated | 3 |
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| 4 | |
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| Condensed Consolidated | 5 |
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| Condensed Consolidated | 6 |
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| Notes to Condensed Consolidated | 7 |
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 6. |
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PART I - FINANCIALFINANCIAL INFORMATION
COCA‑COLA BOTTLING CO. CONSOLIDATED, INC.
CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
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| Third Quarter |
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| First Three Quarters |
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| Second Quarter |
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| First Half |
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(in thousands, except per share data) |
| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net sales |
| $ | 1,211,661 |
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| $ | 1,162,526 |
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| $ | 3,510,997 |
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| $ | 3,197,519 |
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| $ | 1,273,659 |
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| $ | 1,220,003 |
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| $ | 2,376,571 |
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| $ | 2,284,760 |
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Cost of sales |
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| 791,317 |
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| 752,202 |
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| 2,313,728 |
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| 2,039,996 |
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| 837,880 |
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| 815,295 |
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| 1,551,484 |
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| 1,522,411 |
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Gross profit |
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| 420,344 |
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| 410,324 |
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| 1,197,269 |
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| 1,157,523 |
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| 435,779 |
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| 404,708 |
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| 825,087 |
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| 762,349 |
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Selling, delivery and administrative expenses |
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| 375,940 |
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| 372,852 |
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| 1,152,183 |
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| 1,056,446 |
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| 368,565 |
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| 385,029 |
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| 737,719 |
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| 761,667 |
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Income from operations |
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| 44,404 |
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| 37,472 |
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| 45,086 |
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| 101,077 |
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| 67,214 |
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| 19,679 |
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| 87,368 |
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| 682 |
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Interest expense, net |
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| 12,827 |
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| 10,697 |
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| 37,617 |
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| 30,607 |
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| 11,995 |
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| 12,744 |
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| 24,881 |
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| 24,790 |
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Other income (expense), net |
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| 1,696 |
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| 3,884 |
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| (3,612 | ) |
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| (36,595 | ) | ||||||||||||||||
Gain on exchange transactions |
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| 10,170 |
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| - |
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| 10,170 |
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| - |
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Income before income taxes |
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| 43,443 |
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| 30,659 |
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| 14,027 |
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| 33,875 |
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Income tax expense |
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| 16,493 |
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| 11,748 |
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| 3,387 |
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| 11,800 |
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Net income |
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| 26,950 |
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| 18,911 |
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| 10,640 |
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| 22,075 |
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Other expense, net |
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| 31,181 |
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| 9,818 |
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| 47,032 |
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| 5,308 |
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Income (loss) before income taxes |
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| 24,038 |
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| (2,883 | ) |
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| 15,455 |
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| (29,416 | ) | ||||||||||||||||
Income tax expense (benefit) |
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| 7,182 |
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| (135 | ) |
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| 4,177 |
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| (13,106 | ) | ||||||||||||||||
Net income (loss) |
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| 16,856 |
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| (2,748 | ) |
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| 11,278 |
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| (16,310 | ) | ||||||||||||||||
Less: Net income attributable to noncontrolling interest |
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| 1,786 |
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| 1,595 |
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| 3,594 |
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| 3,462 |
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| 1,486 |
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| 1,185 |
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| 2,739 |
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| 1,808 |
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Net income attributable to Coca-Cola Bottling Co. Consolidated |
| $ | 25,164 |
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| $ | 17,316 |
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| $ | 7,046 |
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| $ | 18,613 |
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Net income (loss) attributable to Coca-Cola Consolidated, Inc. |
| $ | 15,370 |
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| $ | (3,933 | ) |
| $ | 8,539 |
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| $ | (18,118 | ) | ||||||||||||||||
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Basic net income per share based on net income attributable to Coca-Cola Bottling Co. Consolidated: |
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Basic net income (loss) per share based on net loss attributable to Coca-Cola Consolidated, Inc.: |
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Common Stock |
| $ | 2.69 |
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| $ | 1.86 |
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| $ | 0.75 |
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| $ | 2.00 |
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| $ | 1.64 |
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| $ | (0.42 | ) |
| $ | 0.91 |
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| $ | (1.94 | ) |
Weighted average number of Common Stock shares outstanding |
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| 7,141 |
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| 7,141 |
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| 7,141 |
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| 7,141 |
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| 7,141 |
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| 7,141 |
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| 7,141 |
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| 7,141 |
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Class B Common Stock |
| $ | 2.69 |
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| $ | 1.86 |
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| $ | 0.75 |
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| $ | 2.00 |
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| $ | 1.64 |
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| $ | (0.42 | ) |
| $ | 0.91 |
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| $ | (1.94 | ) |
Weighted average number of Class B Common Stock shares outstanding |
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| 2,213 |
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| 2,193 |
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| 2,208 |
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| 2,188 |
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| 2,232 |
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| 2,213 |
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| 2,225 |
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| 2,206 |
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Diluted net income per share based on net income attributable to Coca-Cola Bottling Co. Consolidated: |
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Diluted net income (loss) per share based on net loss attributable to Coca-Cola Consolidated, Inc.: |
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Common Stock |
| $ | 2.69 | �� |
| $ | 1.85 |
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| $ | 0.75 |
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| $ | 1.99 |
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| $ | 1.64 |
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| $ | (0.42 | ) |
| $ | 0.91 |
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| $ | (1.94 | ) |
Weighted average number of Common Stock shares outstanding – assuming dilution |
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| 9,405 |
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| 9,374 |
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| 9,400 |
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| 9,369 |
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| 9,421 |
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| 9,354 |
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| 9,415 |
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| 9,347 |
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Class B Common Stock |
| $ | 2.68 |
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| $ | 1.84 |
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| $ | 0.74 |
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| $ | 1.97 |
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| $ | 1.63 |
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| $ | (0.42 | ) |
| $ | 0.90 |
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| $ | (1.94 | ) |
Weighted average number of Class B Common Stock shares outstanding – assuming dilution |
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| 2,264 |
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| 2,233 |
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| 2,259 |
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| 2,228 |
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| 2,280 |
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| 2,213 |
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| 2,274 |
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| 2,206 |
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Cash dividends per share: |
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Common Stock |
| $ | 0.25 |
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| $ | 0.25 |
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| $ | 0.75 |
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| $ | 0.75 |
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| $ | 0.25 |
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| $ | 0.25 |
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| $ | 0.50 |
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| $ | 0.50 |
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Class B Common Stock |
| $ | 0.25 |
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| $ | 0.25 |
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| $ | 0.75 |
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| $ | 0.75 |
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| $ | 0.25 |
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| $ | 0.25 |
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| $ | 0.50 |
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| $ | 0.50 |
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See accompanying notes to condensed consolidated condensed financial statements.
COCA‑COLA BOTTLING CO. CONSOLIDATED, INC.
CONDENSED CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| Third Quarter |
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| First Three Quarters |
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| Second Quarter |
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| First Half |
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(in thousands) |
| 2018 |
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| 2017 |
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| 2018 |
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| 2017 |
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| 2019 |
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| 2018 |
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| 2019 |
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| 2018 |
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Net income |
| $ | 26,950 |
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| $ | 18,911 |
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| $ | 10,640 |
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| $ | 22,075 |
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Net income (loss) |
| $ | 16,856 |
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| $ | (2,748 | ) |
| $ | 11,278 |
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| $ | (16,310 | ) | ||||||||||||||||
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Other comprehensive income, net of tax: |
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Defined benefit plans reclassification including pension costs: |
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Actuarial gains |
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| 703 |
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| 496 |
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| 2,109 |
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| 1,487 |
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| 679 |
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| 703 |
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| 1,358 |
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| 1,406 |
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Prior service benefits |
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| 4 |
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| 4 |
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| 13 |
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| 13 |
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| 5 |
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| 5 |
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| 9 |
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| 9 |
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Postretirement benefits reclassification included in benefits costs: |
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Actuarial gains |
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| 376 |
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| 398 |
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| 1,128 |
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| 1,194 |
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| 147 |
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| 375 |
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| 295 |
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| 752 |
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Prior service costs |
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| (348 | ) |
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| (458 | ) |
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| (1,044 | ) |
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| (1,374 | ) |
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| (243 | ) |
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| (348 | ) |
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| (487 | ) |
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| (696 | ) |
Foreign currency translation adjustment |
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| (1 | ) |
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| 7 |
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| (7 | ) |
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| 23 |
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| 5 |
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| (9 | ) |
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| (4 | ) |
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| (6 | ) |
Other comprehensive income, net of tax |
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| 734 |
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| 447 |
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| 2,199 |
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| 1,343 |
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| 593 |
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| 726 |
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| 1,171 |
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| 1,465 |
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Comprehensive income |
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| 27,684 |
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| 19,358 |
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| 12,839 |
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| 23,418 |
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Comprehensive income (loss) |
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| 17,449 |
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| (2,022 | ) |
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| 12,449 |
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| (14,845 | ) | ||||||||||||||||
Less: Comprehensive income attributable to noncontrolling interest |
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| 1,786 |
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| 1,595 |
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| 3,594 |
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| 3,462 |
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| 1,486 |
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| 1,185 |
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| 2,739 |
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| 1,808 |
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Comprehensive income attributable to Coca-Cola Bottling Co. Consolidated |
| $ | 25,898 |
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| $ | 17,763 |
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| $ | 9,245 |
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| $ | 19,956 |
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Comprehensive income (loss) attributable to Coca-Cola Consolidated, Inc. |
| $ | 15,963 |
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| $ | (3,207 | ) |
| $ | 9,710 |
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| $ | (16,653 | ) |
See accompanying notes to condensed consolidated condensed financial statements.
COCA‑COLA BOTTLING CO. CONSOLIDATED, INC.
CONDENSED CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(in thousands, except share data) |
| September 30, 2018 |
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| December 31, 2017 |
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| June 30, 2019 |
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| December 30, 2018 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 9,337 |
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| $ | 16,902 |
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| $ | 5,692 |
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| $ | 13,548 |
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Accounts receivable, trade |
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| 432,384 |
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| 396,022 |
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| 460,911 |
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| 436,890 |
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Allowance for doubtful accounts |
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| (9,069 | ) |
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| (7,606 | ) |
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| (12,788 | ) |
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| (9,141 | ) |
Accounts receivable from The Coca-Cola Company |
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| 62,541 |
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| 65,996 |
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| 68,188 |
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| 44,915 |
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Accounts receivable, other |
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| 28,632 |
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| 38,960 |
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| 38,692 |
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| 30,493 |
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Inventories |
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| 229,892 |
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| 183,618 |
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| 230,898 |
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| 210,033 |
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Prepaid expenses and other current assets |
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| 91,514 |
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| 100,646 |
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| 72,327 |
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| 70,680 |
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Total current assets |
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| 845,231 |
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| 794,538 |
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| 863,920 |
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| 797,418 |
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Property, plant and equipment, net |
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| 998,117 |
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| 1,031,388 |
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| 962,402 |
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| 990,532 |
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Leased property under capital leases, net |
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| 25,208 |
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| 29,837 |
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Right of use assets - operating leases |
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| 102,151 |
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| - |
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Leased property under financing or capital leases, net |
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| 20,944 |
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| 23,720 |
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Other assets |
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| 119,193 |
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|
| 116,209 |
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| 113,033 |
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|
| 115,490 |
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Goodwill |
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| 165,903 |
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| 169,316 |
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| 165,903 |
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| 165,903 |
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Distribution agreements, net |
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| 901,831 |
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| 913,352 |
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|
| 888,238 |
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| 900,383 |
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Customer lists and other identifiable intangible assets, net |
|
| 16,941 |
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|
| 18,320 |
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|
| 15,562 |
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| 16,482 |
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Total assets |
| $ | 3,072,424 |
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| $ | 3,072,960 |
|
| $ | 3,132,153 |
|
| $ | 3,009,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of obligations under capital leases |
| $ | 8,438 |
|
| $ | 8,221 |
| ||||||||
Current portion of obligations under operating leases |
| $ | 14,771 |
|
| $ | - |
| ||||||||
Current portion of obligations under financing or capital leases |
|
| 9,019 |
|
|
| 8,617 |
| ||||||||
Accounts payable, trade |
|
| 186,706 |
|
|
| 197,049 |
|
|
| 181,418 |
|
|
| 152,040 |
|
Accounts payable to The Coca-Cola Company |
|
| 142,849 |
|
|
| 171,042 |
|
|
| 135,998 |
|
|
| 112,425 |
|
Other accrued liabilities |
|
| 153,609 |
|
|
| 185,530 |
|
|
| 197,101 |
|
|
| 250,246 |
|
Accrued compensation |
|
| 57,651 |
|
|
| 72,484 |
|
|
| 59,329 |
|
|
| 72,316 |
|
Accrued interest payable |
|
| 9,363 |
|
|
| 5,126 |
|
|
| 4,316 |
|
|
| 6,093 |
|
Total current liabilities |
|
| 558,616 |
|
|
| 639,452 |
|
|
| 601,952 |
|
|
| 601,737 |
|
Deferred income taxes |
|
| 123,248 |
|
|
| 112,364 |
|
|
| 131,498 |
|
|
| 127,174 |
|
Pension and postretirement benefit obligations |
|
| 98,738 |
|
|
| 118,392 |
|
|
| 87,300 |
|
|
| 85,682 |
|
Other liabilities |
|
| 600,310 |
|
|
| 620,579 |
|
|
| 641,556 |
|
|
| 609,135 |
|
Obligations under capital leases |
|
| 28,840 |
|
|
| 35,248 |
| ||||||||
Noncurrent portion of obligations under operating leases |
|
| 87,804 |
|
|
| - |
| ||||||||
Noncurrent portion of obligations under financing or capital leases |
|
| 22,182 |
|
|
| 26,631 |
| ||||||||
Long-term debt |
|
| 1,194,109 |
|
|
| 1,088,018 |
|
|
| 1,092,152 |
|
|
| 1,104,403 |
|
Total liabilities |
|
| 2,603,861 |
|
|
| 2,614,053 |
|
|
| 2,664,444 |
|
|
| 2,554,762 |
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock, $1.00 par value: 30,000,000 shares authorized; 10,203,821 shares issued |
|
| 10,204 |
|
|
| 10,204 |
|
|
| 10,204 |
|
|
| 10,204 |
|
Class B Common Stock, $1.00 par value: 10,000,000 shares authorized; 2,841,132 and 2,820,836 shares issued, respectively |
|
| 2,839 |
|
|
| 2,819 |
| ||||||||
Class B Common Stock, $1.00 par value: 10,000,000 shares authorized; 2,860,356 and 2,841,132 shares issued, respectively |
|
| 2,860 |
|
|
| 2,839 |
| ||||||||
Capital in excess of par value |
|
| 124,228 |
|
|
| 120,417 |
|
|
| 128,983 |
|
|
| 124,228 |
|
Retained earnings |
|
| 388,750 |
|
|
| 388,718 |
|
|
| 383,012 |
|
|
| 359,435 |
|
Accumulated other comprehensive loss |
|
| (92,003 | ) |
|
| (94,202 | ) |
|
| (95,814 | ) |
|
| (77,265 | ) |
Treasury stock, at cost: Common Stock – 3,062,374 shares |
|
| (60,845 | ) |
|
| (60,845 | ) |
|
| (60,845 | ) |
|
| (60,845 | ) |
Treasury stock, at cost: Class B Common Stock – 628,114 shares |
|
| (409 | ) |
|
| (409 | ) |
|
| (409 | ) |
|
| (409 | ) |
Total equity of Coca-Cola Bottling Co. Consolidated |
|
| 372,764 |
|
|
| 366,702 |
| ||||||||
Total equity of Coca-Cola Consolidated, Inc. |
|
| 367,991 |
|
|
| 358,187 |
| ||||||||
Noncontrolling interest |
|
| 95,799 |
|
|
| 92,205 |
|
|
| 99,718 |
|
|
| 96,979 |
|
Total equity |
|
| 468,563 |
|
|
| 458,907 |
|
|
| 467,709 |
|
|
| 455,166 |
|
Total liabilities and equity |
| $ | 3,072,424 |
|
| $ | 3,072,960 |
|
| $ | 3,132,153 |
|
| $ | 3,009,928 |
|
See accompanying notes to condensed consolidated condensed financial statements.
COCA‑COLA BOTTLING CO. CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| First Half |
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
| ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 11,278 |
|
| $ | (16,310 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation expense from property, plant and equipment and financing or capital leases |
|
| 79,316 |
|
|
| 82,658 |
|
Fair value adjustment of acquisition related contingent consideration |
|
| 43,268 |
|
|
| 3,957 |
|
Amortization of intangible assets and deferred proceeds, net |
|
| 11,512 |
|
|
| 11,249 |
|
Deferred income taxes |
|
| 4,324 |
|
|
| (16,286 | ) |
Loss on sale of property, plant and equipment |
|
| 4,017 |
|
|
| 4,295 |
|
Stock compensation expense |
|
| 2,045 |
|
|
| 1,728 |
|
Impairment of property, plant and equipment |
|
| 1,155 |
|
|
| - |
|
Amortization of debt costs |
|
| 752 |
|
|
| 730 |
|
Change in current assets less current liabilities |
|
| (78,842 | ) |
|
| (16,127 | ) |
Change in other noncurrent assets |
|
| 5,228 |
|
|
| 3,830 |
|
Change in other noncurrent liabilities |
|
| 4,071 |
|
|
| (2,493 | ) |
Other |
|
| 462 |
|
|
| 11 |
|
Total adjustments |
|
| 77,308 |
|
|
| 73,552 |
|
Net cash provided by operating activities |
| $ | 88,586 |
|
| $ | 57,242 |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment (exclusive of acquisitions) |
| $ | (57,581 | ) |
| $ | (85,279 | ) |
Other distribution agreements |
|
| (4,654 | ) |
|
| - |
|
Proceeds from the sale of property, plant and equipment |
|
| 823 |
|
|
| 3,047 |
|
Investment in CONA Services LLC |
|
| (486 | ) |
|
| (2,020 | ) |
Acquisition of distribution territories and regional manufacturing facilities, net of cash acquired and purchase price settlements |
|
| - |
|
|
| 4,706 |
|
Proceeds from cold drink equipment |
|
| - |
|
|
| 3,789 |
|
Net cash used in investing activities |
| $ | (61,898 | ) |
| $ | (75,757 | ) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
| $ | 206,339 |
|
| $ | 190,000 |
|
Payments on revolving credit facility |
|
| (186,339 | ) |
|
| (297,000 | ) |
Proceeds from issuance of senior notes |
|
| 100,000 |
|
|
| 150,000 |
|
Payments on term loan facility and senior notes |
|
| (132,500 | ) |
|
| - |
|
Payments of acquisition related contingent consideration |
|
| (12,836 | ) |
|
| (11,263 | ) |
Cash dividends paid |
|
| (4,682 | ) |
|
| (4,671 | ) |
Payments on financing or capital lease obligations |
|
| (4,261 | ) |
|
| (4,194 | ) |
Debt issuance fees |
|
| (265 | ) |
|
| (1,535 | ) |
Net cash provided by (used in) financing activities |
| $ | (34,544 | ) |
| $ | 21,337 |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
| $ | (7,856 | ) |
| $ | 2,822 |
|
Cash at beginning of period |
|
| 13,548 |
|
|
| 16,902 |
|
Cash at end of period |
| $ | 5,692 |
|
| $ | 19,724 |
|
|
|
|
|
|
|
|
|
|
Significant noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Right of use assets obtained in exchange for lease obligations |
| $ | 21,220 |
|
| $ | - |
|
Additions to property, plant and equipment accrued and recorded in accounts payable, trade |
|
| 10,292 |
|
|
| 4,178 |
|
Issuance of Class B Common Stock in connection with stock award |
|
| 4,776 |
|
|
| 3,831 |
|
See accompanying notes to condensed consolidated financial statements.
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands, except share data) |
| Common Stock |
|
| Class B Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock - Common Stock |
|
| Treasury Stock - Class B Common Stock |
|
| Total Equity of Coca-Cola Bottling Co. Consolidated |
|
| Non- controlling Interest |
|
| Total Equity |
|
| Common Stock |
|
| Class B Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Treasury Stock - Common Stock |
|
| Treasury Stock - Class B Common Stock |
|
| Total Equity of Coca-Cola Consolidated, Inc. |
|
| Non- controlling Interest |
|
| Total Equity |
| ||||||||||||||||||||
Balance on December 31, 2017 |
| $ | 10,204 |
|
| $ | 2,819 |
|
| $ | 120,417 |
|
| $ | 388,718 |
|
| $ | (94,202 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 366,702 |
|
| $ | 92,205 |
|
| $ | 458,907 |
|
| $ | 10,204 |
|
| $ | 2,819 |
|
| $ | 120,417 |
|
| $ | 388,718 |
|
| $ | (94,202 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 366,702 |
|
| $ | 92,205 |
|
| $ | 458,907 |
|
Net income (loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (18,118 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (18,118 | ) |
|
| 1,808 |
|
|
| (16,310 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,465 |
|
|
| - |
|
|
| - |
|
|
| 1,465 |
|
|
| - |
|
|
| 1,465 |
| ||||||||||||||||||||||||||||||||||||||||
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Common Stock ($0.50 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,570 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,570 | ) |
|
| - |
|
|
| (3,570 | ) | ||||||||||||||||||||||||||||||||||||||||
Class B Common Stock ($0.50 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,101 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,101 | ) |
|
| - |
|
|
| (1,101 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of 20,296 shares of Class B Common Stock |
|
| - |
|
|
| 20 |
|
|
| 3,811 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,831 |
|
|
| - |
|
|
| 3,831 |
| ||||||||||||||||||||||||||||||||||||||||
Balance on July 1, 2018 |
| $ | 10,204 |
|
| $ | 2,839 |
|
| $ | 124,228 |
|
| $ | 365,929 |
|
| $ | (92,737 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 349,209 |
|
| $ | 94,013 |
|
| $ | 443,222 |
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Balance on December 30, 2018 |
| $ | 10,204 |
|
| $ | 2,839 |
|
| $ | 124,228 |
|
| $ | 359,435 |
|
| $ | (77,265 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 358,187 |
|
| $ | 96,979 |
|
| $ | 455,166 |
| ||||||||||||||||||||||||||||||||||||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,046 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 7,046 |
|
|
| 3,594 |
|
|
| 10,640 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8,539 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8,539 |
|
|
| 2,739 |
|
|
| 11,278 |
|
Other comprehensive income, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,199 |
|
|
| - |
|
|
| - |
|
|
| 2,199 |
|
|
| - |
|
|
| 2,199 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,171 |
|
|
| - |
|
|
| - |
|
|
| 1,171 |
|
|
| - |
|
|
| 1,171 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock ($0.75 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,357 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,357 | ) |
|
| - |
|
|
| (5,357 | ) | ||||||||||||||||||||||||||||||||||||||||
Class B Common Stock ($0.75 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,657 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,657 | ) |
|
| - |
|
|
| (1,657 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of 20,296 shares of Class B Common Stock |
|
| - |
|
|
| 20 |
|
|
| 3,811 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,831 |
|
|
| - |
|
|
| 3,831 |
| ||||||||||||||||||||||||||||||||||||||||
Balance on September 30, 2018 |
| $ | 10,204 |
|
| $ | 2,839 |
|
| $ | 124,228 |
|
| $ | 388,750 |
|
| $ | (92,003 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 372,764 |
|
| $ | 95,799 |
|
| $ | 468,563 |
| ||||||||||||||||||||||||||||||||||||||||
Common Stock ($0.50 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,570 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,570 | ) |
|
| - |
|
|
| (3,570 | ) | ||||||||||||||||||||||||||||||||||||||||
Class B Common Stock ($0.50 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,112 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,112 | ) |
|
| - |
|
|
| (1,112 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of 19,224 shares of Class B Common Stock |
|
| - |
|
|
| 21 |
|
|
| 4,755 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,776 |
|
|
| - |
|
|
| 4,776 |
| ||||||||||||||||||||||||||||||||||||||||
Reclassification of stranded tax effects |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 19,720 |
|
|
| (19,720 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| ||||||||||||||||||||||||||||||||||||||||
Balance on June 30, 2019 |
| $ | 10,204 |
|
| $ | 2,860 |
|
| $ | 128,983 |
|
| $ | 383,012 |
|
| $ | (95,814 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 367,991 |
|
| $ | 99,718 |
|
| $ | 467,709 |
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on January 1, 2017 |
| $ | 10,204 |
|
| $ | 2,798 |
|
| $ | 116,769 |
|
| $ | 301,511 |
|
| $ | (92,897 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 277,131 |
|
| $ | 85,893 |
|
| $ | 363,024 |
| ||||||||||||||||||||||||||||||||||||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 18,613 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 18,613 |
|
|
| 3,462 |
|
|
| 22,075 |
| ||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,343 |
|
|
| - |
|
|
| - |
|
|
| 1,343 |
|
|
| - |
|
|
| 1,343 |
| ||||||||||||||||||||||||||||||||||||||||
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||
Common Stock ($0.75 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,356 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,356 | ) |
|
| - |
|
|
| (5,356 | ) | ||||||||||||||||||||||||||||||||||||||||
Class B Common Stock ($0.75 per share) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,639 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,639 | ) |
|
| - |
|
|
| (1,639 | ) | ||||||||||||||||||||||||||||||||||||||||
Issuance of 21,020 shares of Class B Common Stock |
|
| - |
|
|
| 21 |
|
|
| 3,648 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,669 |
|
|
| - |
|
|
| 3,669 |
| ||||||||||||||||||||||||||||||||||||||||
Balance on October 1, 2017 |
| $ | 10,204 |
|
| $ | 2,819 |
|
| $ | 120,417 |
|
| $ | 313,129 |
|
| $ | (91,554 | ) |
| $ | (60,845 | ) |
| $ | (409 | ) |
| $ | 293,761 |
|
| $ | 89,355 |
|
| $ | 383,116 |
| ||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated condensed financial statements.
COCA‑COLA BOTTLING CO. CONSOLIDATED, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| First Three Quarters |
| |||||
(in thousands) |
| 2018 |
|
| 2017 |
| ||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
| $ | 10,640 |
|
| $ | 22,075 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation expense |
|
| 123,542 |
|
|
| 108,697 |
|
Amortization of intangible assets and deferred proceeds, net |
|
| 16,954 |
|
|
| 11,596 |
|
Deferred income taxes |
|
| 9,903 |
|
|
| (24,741 | ) |
Gain on exchange transactions |
|
| (10,170 | ) |
|
| - |
|
Loss on sale of property, plant and equipment |
|
| 6,123 |
|
|
| 3,420 |
|
Impairment of property, plant and equipment |
|
| 299 |
|
|
| - |
|
Fair value adjustment of acquisition related contingent consideration |
|
| 1,584 |
|
|
| 23,140 |
|
Stock compensation expense |
|
| 4,494 |
|
|
| 6,473 |
|
Amortization of debt costs |
|
| 1,103 |
|
|
| 806 |
|
Proceeds from Territory Conversion Fee |
|
| - |
|
|
| 87,066 |
|
Change in current assets less current liabilities (exclusive of acquisitions) |
|
| (120,421 | ) |
|
| (19,036 | ) |
Change in other noncurrent assets (exclusive of acquisitions) |
|
| 724 |
|
|
| (13,391 | ) |
Change in other noncurrent liabilities (exclusive of acquisitions) |
|
| (18,762 | ) |
|
| (3,746 | ) |
Other |
|
| 17 |
|
|
| 66 |
|
Total adjustments |
|
| 15,390 |
|
|
| 180,350 |
|
Net cash provided by operating activities |
| $ | 26,030 |
|
| $ | 202,425 |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment (exclusive of acquisitions) |
| $ | (113,104 | ) |
| $ | (114,953 | ) |
Investment in CONA Services LLC |
|
| (2,098 | ) |
|
| (1,976 | ) |
Acquisition of distribution territories and regional manufacturing facilities, net of cash acquired and purchase price settlements |
|
| 1,811 |
|
|
| (227,769 | ) |
Proceeds from cold drink equipment |
|
| 3,789 |
|
|
| 8,400 |
|
Proceeds from the sale of property, plant and equipment |
|
| 3,555 |
|
|
| 493 |
|
Glacéau distribution agreement consideration |
|
| - |
|
|
| (15,598 | ) |
Prepayment of funds for October 2017 Expansion Transactions |
|
| - |
|
|
| (56,498 | ) |
Net cash used in investing activities |
| $ | (106,047 | ) |
| $ | (407,901 | ) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Payments on Revolving Credit Facility |
| $ | (322,000 | ) |
| $ | (238,000 | ) |
Borrowings under Revolving Credit Facility |
|
| 285,000 |
|
|
| 333,000 |
|
Proceeds from issuance of Senior Notes |
|
| 150,000 |
|
|
| 125,000 |
|
Payment of acquisition related contingent consideration |
|
| (18,312 | ) |
|
| (11,650 | ) |
Payment on Term Loan Facility |
|
| (7,500 | ) |
|
| - |
|
Cash dividends paid |
|
| (7,014 | ) |
|
| (6,995 | ) |
Principal payments on capital lease obligations |
|
| (6,191 | ) |
|
| (5,594 | ) |
Debt issuance fees |
|
| (1,531 | ) |
|
| (213 | ) |
Net cash provided by financing activities |
| $ | 72,452 |
|
| $ | 195,548 |
|
|
|
|
|
|
|
|
|
|
Net decrease in cash |
| $ | (7,565 | ) |
| $ | (9,928 | ) |
Cash at beginning of period |
|
| 16,902 |
|
|
| 21,850 |
|
Cash at end of period |
| $ | 9,337 |
|
| $ | 11,922 |
|
|
|
|
|
|
|
|
|
|
Significant noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Additions to property, plant and equipment accrued and recorded in accounts payable, trade |
| $ | 4,081 |
|
| $ | 13,724 |
|
Issuance of Class B Common Stock in connection with stock award |
|
| 3,831 |
|
|
| 3,669 |
|
See accompanying notes to consolidated condensed financial statements.
COCA‑COLA BOTTLING CO. CONSOLIDATED
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.Significant Accounting Policies and New Accounting Pronouncements
The condensed consolidated condensed financial statements include the accounts of Coca‑Cola Bottling Co. Consolidated, Inc. and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The condensed consolidated condensed financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented:
The financial position as of September 30, 2018 and December 31, 2017.
• | The financial position as of June 30, 2019 and December 30, 2018. |
The results of operations and comprehensive income for the 13 week periods ended September 30, 2018 (“third quarter” of fiscal 2018 (“2018”)) and October 1, 2017 (“third quarter” of fiscal 2017 (“2017”)), and the 39 week periods ended September 30, 2018 (“first three quarters” of 2018) and October 1, 2017 (“first three quarters” of 2017).
• | The results of operations and comprehensive income for the 13 week periods ended June 30, 2019 (the “second quarter” of fiscal 2019 (“2019”)) and July 1, 2018 (the “second quarter” of fiscal 2018 (“2018”)), and the 26 week periods ended June 30, 2019 (the “first half” of 2019) and July 1, 2018 (the “first half” of 2018). |
The changes in equity and cash flows for the first three quarters of 2018 and the first three quarters of 2017.
• | The changes in cash flows and equity for the first half of 2019 and the first half of 2018. |
The condensed consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10‑K for 20172018 filed with the Securities and Exchange Commission (the “SEC”).Commission.
The preparation of condensed consolidated condensed financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities theand 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 condensed consolidated condensed financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10‑K for 20172018 under the caption “Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements” in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” a discussion of the Company’s most critical accounting policies, which are those the Company believes to be the most important to the portrayal of its 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. 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 Accounting Pronouncements
In May 2014,February 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers,” (the “revenue recognition standard”). Subsequent to the issuance of ASU 2014‑09, the FASB issued several additional accounting standards for revenue recognition to update the effective date of the revenue recognition guidance and to provide additional clarification on the updated standard. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted the revenue recognition standard in the first quarter of 2018, as discussed in Note 2.
In January 2016, the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises the classification and measurement of investments in equity securities and the presentation of certain fair value changes in financial liabilities measured at fair value. The new guidance is effective for annual and interim periods beginning after December 31, 2017. The Company adopted this guidance in the first quarter of 2018 and there was no material impact to the Company’s consolidated condensed financial statements.
In January 2017, the FASB issued ASU 2017-01 “Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for annual periods beginning after December 15, 2017, including
interim periods within those periods. The Company adopted this guidance in the first quarter of 2018 and there was no material impact to the Company’s consolidated condensed financial statements.
In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Under the new guidance, entities should instead perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of the carrying amount over the fair value of the respective reporting unit. The new guidance is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted this guidance in the first quarter of 2018 and there was no material impact to the Company’s consolidated condensed financial statements.
In March 2017, the FASB issued ASU 2017‑07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that the service cost component of the Company’s net periodic pension cost and net periodic postretirement benefit cost be included in the same line item as other compensation costs arising from services rendered by employees, with the non-service cost components of net periodic benefit cost being classified outside of a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component is eligible for asset capitalization. The new guidance is effective for annual periods beginning after December 31, 2017, including interim periods within those annual periods. The Company adopted this guidance in the first quarter of 2018 using the practical expedient which allows entities to use information previously disclosed in their pension and other postretirement benefit plans note as the estimation basis to apply the retrospective presentation requirements in ASU 2017-07.
With the adoption of this guidance in the first quarter of 2018, the Company recorded the non-service cost component of net periodic benefit cost, which totaled $0.6 million in the third quarter of 2018 and $2.0 million in the first three quarters of 2018, to other income (expense), net in the consolidated condensed statements of operations. The Company reclassified $1.3 million from the third quarter of 2017 and $4.0 million from the first three quarters of 2017 of non-service cost components of net periodic benefit cost and other benefit plan charges from selling, delivery and administrative (“S,D&A”) expenses to other income (expense), net in the consolidated condensed statements of operations. The non-service cost component of net periodic benefit cost is included in the Nonalcoholic Beverages segment.
Recently Issued Pronouncements
In February 2018, the FASB issued ASU 2018‑02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which provides the option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. This standard is required to be applied either in the period of adoption or retrospectively to each period in which the changes in the U.S. federal corporate income tax rate pursuant to the Tax Act are recognized. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and can be early adopted. The Company is currently evaluating whether it will adopt this guidance.adopted ASU 2018‑02 in the first quarter of 2019 and recognized a cumulative effect adjustment to the opening balance of retained earnings in 2019. The cumulative effect adjustment increased retained earnings by $19.7 million.
In February 2016, the FASB issued ASU 2016-02, “Leases,” which(the “lease standard”). The lease standard requires lessees to recognize a right-to-use asset and a lease liability for virtually all leases (other than leases meeting the definition of a short-term lease). The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods beginning the following fiscal year. The Company anticipates adoptingadopted the new accounting standard on December 31, 2018,during the first dayquarter of fiscal 2019 using the optional transition method, which was approved by the FASB in March 2018 and allows companies the option to use the effective date as the date of initial application on transition and to not adjust comparative period financial information or make the new required disclosures for periods priormethod. See Note 9 to the effective date.
The Company has formed a project team, which is in the process of reviewing its existing lease portfolio, including certain service contractscondensed consolidated financial statements for embedded leases, to determine the size of the Company’s lease portfolio in order to evaluate the impact of this new guidanceadditional information on the Company’s consolidated condensed financial statements. The Company anticipates the impact of adopting this new guidance will be material to its consolidated condensed balance sheets. The impact on the Company’s consolidated condensed statements of operations is still being evaluated. As the impactadoption of the new guidance is non-cash in nature, the Company does not anticipate the impact of adopting this new guidance will be material to its consolidated condensed statements of cash flows. Additionally, the Company is evaluating the impacts of ASU 2016‑02 beyond accounting, including system, data and process changes required to comply with thislease standard. The Company anticipates implementing new controls and utilizing a lease accounting software application with the adoption of this new guidance and on a go-forward basis in order to properly approve, track and account for its entire lease portfolio.
2.Revenue RecognitionRelated 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 formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.
As of June 30, 2019, The Coca‑Cola Company owned approximately 27% of the Company’s total outstanding Common Stock and Class B Common Stock on a consolidated basis, 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 its 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 Chief Executive Officer of the Company, and trustees of certain trusts established for the benefit of certain relatives of J. Frank Harrison, Jr. have agreed to vote the shares of the Company’s Class B Common Stock which they control, representing approximately 86% of the total voting power of the Company’s combined Common Stock and Class B Common Stock, in favor of such designee. The Coca‑Cola Company does not own any shares of the Company’s Class B Common Stock.
The following table summarizes the significant transactions between the Company and The Coca‑Cola Company:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Payments made by the Company to The Coca-Cola Company for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrate, syrup, sweetener and other purchases |
| $ | 344,841 |
|
| $ | 328,689 |
|
| $ | 611,484 |
|
| $ | 571,157 |
|
Customer marketing programs |
|
| 39,221 |
|
|
| 41,475 |
|
|
| 72,513 |
|
|
| 76,057 |
|
Cold drink equipment parts |
|
| 7,067 |
|
|
| 8,089 |
|
|
| 14,049 |
|
|
| 14,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments made by The Coca-Cola Company to the Company for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing funding support payments |
| $ | 26,311 |
|
| $ | 22,656 |
|
| $ | 49,023 |
|
| $ | 42,693 |
|
Fountain delivery and equipment repair fees |
|
| 9,885 |
|
|
| 10,353 |
|
|
| 20,634 |
|
|
| 19,700 |
|
Presence marketing funding support on the Company’s behalf |
|
| 4,502 |
|
|
| 4,614 |
|
|
| 4,937 |
|
|
| 5,095 |
|
Facilitating the distribution of certain brands and packages to other Coca-Cola bottlers |
|
| 1,351 |
|
|
| 4,256 |
|
|
| 2,350 |
|
|
| 8,124 |
|
Cold drink equipment |
|
| - |
|
|
| 3,789 |
|
|
| - |
|
|
| 3,789 |
|
As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company completed a series of transactions from April 2013 to October 2017 with The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, and Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to us, to significantly expand our distribution and manufacturing operations (the “System Transformation”). The System Transformation included the acquisition and exchange of rights to serve distribution territories and related distribution assets, as well as the acquisition and exchange of regional manufacturing facilities and related manufacturing assets.
In 2017, The Coca‑Cola Company agreed to provide the Company a fee to compensate the Company for the net economic impact of changes made by The Coca‑Cola Company to the authorized pricing on sales of covered beverages produced at certain manufacturing facilities owned by Company (the “Legacy Facilities Credit”). The Company immediately recognized the portion of the Legacy Facilities Credit applicable to a regional manufacturing facility divested in 2017 and the remaining balance of the Legacy Facilities Credit will be amortized as a reduction to cost of sales over a period of 40 years. The portion of the deferred liability that is expected to be amortized in the next twelve months is classified as current.
Coca‑Cola Refreshments USA, Inc.
The Company, adoptedThe Coca-Cola Company and CCR entered into a comprehensive beverage agreement on March 31, 2017 (as amended, the revenue recognition standard, including all relevant amendments“CBA”). Pursuant to the CBA, the Company is required to make quarterly sub-bottling payments to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and practical expedients,sell the authorized brands of The Coca‑Cola Company and related products in distribution territories the Company acquired from CCR as part of the System Transformation, excluding territories the Company acquired in an exchange transaction. These sub-bottling payments are 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.
Sub-bottling payments to CCR were $12.8 million during the first half of 2019 and $11.3 million during the first half of 2018. The following table summarizes the liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future sub‑bottling payments to CCR:
(in thousands) |
| June 30, 2019 |
|
| December 30, 2018 |
| ||
Current portion of acquisition related contingent consideration |
| $ | 32,131 |
|
| $ | 32,993 |
|
Noncurrent portion of acquisition related contingent consideration |
|
| 380,319 |
|
|
| 349,905 |
|
Total acquisition related contingent consideration |
| $ | 412,450 |
|
| $ | 382,898 |
|
Upon the conversion of the Company’s then-existing bottling agreements in 2017 pursuant to the CBA, the Company received a fee from CCR (the “Territory Conversion Fee”). The Territory Conversion Fee was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years. The portion of the deferred liability that is expected to be amortized in the next twelve months is classified as current.
Southeastern Container (“Southeastern”)
The Company is a shareholder of Southeastern, a plastic bottle manufacturing cooperative. The Company accounts for Southeastern as an equity method investment. The Company’s investment in Southeastern, which was classified as other assets in the condensed consolidated balance sheets, was $23.5 million as of June 30, 2019 and $23.6 million as of December 30, 2018.
South Atlantic Canners, Inc. (“SAC”)
The Company is a shareholder of SAC, a manufacturing cooperative in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights.The Company accounts for SAC as an equity method investment. The Company’s investment in SAC, which was classified as other assets in the condensed consolidated balance sheets, was $8.2 million as of both June 30, 2019 and December 30, 2018.
The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Proceeds from management fees received from SAC were $4.5 million in the first quarterhalf of 2019 and $4.6 million in the first half of 2018.
Coca‑Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”)
Along with other Coca‑Cola bottlers in the United States and Canada, the Company is a member of CCBSS, a company formed to provide certain procurement and other services with the intention of enhancing the efficiency and competitiveness of the Coca‑Cola bottling system. The Company accounts for CCBSS as an equity method investment and its investment in CCBSS is not material.
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 $7.3 million on June 30, 2019 and $10.4 million on December 30, 2018, which were classified as accounts receivable, other in the condensed consolidated balance sheets.
In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $1.0 million in the first half of 2019 and $1.5 million in the first half of 2018, usingwhich were classified as selling, delivery and administrative (“SD&A”) expenses in the modified retrospective approachcondensed consolidated statements of operations.
CONA Services LLC (“CONA”)
The Company is a member of CONA, an entity formed with The Coca‑Cola Company and certain other Coca‑Cola bottlers to provide business process and information technology services to its members. The Company accounts for all contracts not completed atCONA as an equity method investment. The Company’s investment in CONA, which was classified as other assets in the datecondensed consolidated balance sheets, was $8.5 million as of initial adoption, considering materialityJune 30, 2019 and applicability. Upon adoption$8.0 million as of this guidance, there was no material impactDecember 30, 2018.
Pursuant to an amended and restated master services agreement with CONA, the Company is 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. In exchange for the Company’s consolidated condensed financial statements.rights to use the CONA System and receive CONA-related services, it is charged service fees by CONA. The Company incurred CONA service fees of $11.5 million in the first half of 2019 and $10.2 million in the first half of 2018.
Related Party Leases
The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. The Company has definedleases its performance obligationsheadquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation, of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, is the majority stockholder and Morgan H. Everett, Senior Vice President and a director of the Company, is a minority stockholder. The annual base rent the Company is obligated to pay under this lease agreement is subject to adjustment for its contractsincreases in the Consumer Price Index and the lease expires on December 31, 2021. The principal balance outstanding under this lease was $8.4 million on June 30, 2019 and $9.9 million on December 30, 2018.
The Company leases the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina from Harrison Limited Partnership One, which is directly and indirectly owned by trusts of which J. Frank Harrison, III, and Sue Anne H. Wells, a director of the Company, are trustees and beneficiaries and of which Morgan H. Everett is a permissible, discretionary beneficiary. The annual base rent the Company is obligated to pay under this lease agreement is subject to an adjustment for an inflation factor and the lease expires on December 31, 2020. The principal balance outstanding under this lease was $6.3 million on June 30, 2019 and $8.1 million on December 30, 2018.
A summary of rental payments related to these leases is as either at a point in time or over time.follows:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Company headquarters |
| $ | 1,151 |
|
| $ | 1,110 |
|
| $ | 2,261 |
|
| $ | 2,236 |
|
Snyder Production Center |
|
| 1,081 |
|
|
| 1,049 |
|
|
| 2,161 |
|
|
| 2,098 |
|
3.Revenue Recognition
The Company offers a range of nonalcoholic beverage products and flavors designed to meet the demands of its consumers, including 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.
The Company’s products are sold and distributed in the United States through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During the first three quarters of 2018, approximately 66% of the Company’s bottle/can sales volume to retail customers was sold for future consumption, while the remaining bottle/can sales volume to retail customers was sold for immediate consumption. All the Company’s beverage sales were to customers in the United States. The Company typically collects payment from customers within 30 days from the date of sale.
The Company’s sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, “post-mix”“post‑mix” products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses. Net sales by category were as follows:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Bottle/can sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sparkling beverages (carbonated) |
| $ | 605,614 |
|
| $ | 582,710 |
|
| $ | 1,787,451 |
|
| $ | 1,670,093 |
|
Still beverages (noncarbonated, including energy products) |
|
| 413,282 |
|
|
| 384,495 |
|
|
| 1,142,764 |
|
|
| 1,009,508 |
|
Total bottle/can sales |
|
| 1,018,896 |
|
|
| 967,205 |
|
|
| 2,930,215 |
|
|
| 2,679,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to other Coca-Cola bottlers |
|
| 92,139 |
|
|
| 104,619 |
|
|
| 300,819 |
|
|
| 274,317 |
|
Post-mix and other |
|
| 100,626 |
|
|
| 90,702 |
|
|
| 279,963 |
|
|
| 243,601 |
|
Total other sales |
|
| 192,765 |
|
|
| 195,321 |
|
|
| 580,782 |
|
|
| 517,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
| $ | 1,211,661 |
|
| $ | 1,162,526 |
|
| $ | 3,510,997 |
|
| $ | 3,197,519 |
|
Bottle/can sales represented approximately 83% and 84% in the first three quarters of 2018 and the first three quarters of 2017, respectively. The sparkling beverage category represented approximately 61% and 62% of total bottle/can sales during the first three quarters of 2018 and the first three quarters of 2017, respectively.
The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time (“point in time”). Point in time sales accounted for approximately 96% of the Company’s net sales in the first half of 2019 and 97% of the Company’s net sales in both the first three quartershalf of 2018 and the first three quarters of 2017.2018. Substantially all of the Company’s revenue is recognized at a point in time and is included in the Nonalcoholic Beverages segment.
Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time (“over time”). Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not considered material to the Company’s condensed consolidated condensed financial statements.
The following table represents a disaggregation of revenue from contracts with customers:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Point in time net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic - point in time |
| $ | 1,227,977 |
|
| $ | 1,183,083 |
|
| $ | 2,288,248 |
|
| $ | 2,214,891 |
|
Total point in time net sales |
| $ | 1,227,977 |
|
| $ | 1,183,083 |
|
| $ | 2,288,248 |
|
| $ | 2,214,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over time net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic - over time |
| $ | 10,908 |
|
| $ | 9,199 |
|
| $ | 22,864 |
|
| $ | 17,813 |
|
Other - over time |
|
| 34,774 |
|
|
| 27,721 |
|
|
| 65,459 |
|
|
| 52,056 |
|
Total over time net sales |
| $ | 45,682 |
|
| $ | 36,920 |
|
| $ | 88,323 |
|
| $ | 69,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
| $ | 1,273,659 |
|
| $ | 1,220,003 |
|
| $ | 2,376,571 |
|
| $ | 2,284,760 |
|
The Company participates in various sales programs with The Coca‑Cola Company, other beverage companies and customers to increase the sale of its products. Programs negotiated with customers include arrangements under which allowances can be earned for attaining agreed-upon sales levels. The cost of these various sales incentives are not considered a separate performance obligation and are included as deductions to net sales.
Revenues doAllowance payments made to customers can be conditional on the achievement of volume targets and/or marketing commitments. Payments made in advance are recorded as prepayments and amortized in the condensed consolidated statements of operations over the relevant period for which the customer commitment is made. In the event there is no separate identifiable benefit or the fair value of such benefit cannot be established, the amortization of the prepayment is included as a reduction to net sales.
The Company historically presented consideration paid to customers under certain contractual arrangements for exclusive distribution rights and sponsorship privileges as a marketing expense within SD&A expenses. The Company has now determined such amounts should be presented as a reduction to net sales and has revised the presentation of previously issued financial statements to correct for this error. Management believes the effect on previously reported financial statements is not includematerial. In addition, management believes the revised presentation provides consistency with other companies that operate in the beverage industry. Net sales and SD&A expenses were revised by $7.3 million in the second quarter of 2018 and $14.6 million in the first half of 2018. The revision had no impact to net loss or other taxes collected from customers.net loss per share.
The majority of the Company’s contracts include multiple performance obligations related to the delivery of specifically identifiable products, which generally have a duration of less than one year. For sales contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using stated contractual price, which represents the standalone selling price of each distinct good sold under the contract. Generally, the Company’s service contracts have a single performance obligation.
The following table represents a disaggregation of revenue from contracts with customers:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Point in time net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic - point in time |
| $ | 1,168,276 |
|
| $ | 1,132,181 |
|
| $ | 3,394,253 |
|
| $ | 3,112,777 |
|
Total point in time net sales |
| $ | 1,168,276 |
|
| $ | 1,132,181 |
|
| $ | 3,394,253 |
|
| $ | 3,112,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over time net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic - over time |
| $ | 11,936 |
|
| $ | 10,057 |
|
| $ | 33,239 |
|
| $ | 27,197 |
|
Other - over time |
|
| 31,449 |
|
|
| 20,288 |
|
|
| 83,505 |
|
|
| 57,545 |
|
Total over time net sales |
| $ | 43,385 |
|
| $ | 30,345 |
|
| $ | 116,744 |
|
| $ | 84,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
| $ | 1,211,661 |
|
| $ | 1,162,526 |
|
| $ | 3,510,997 |
|
| $ | 3,197,519 |
|
The Company sells its products and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company evaluates the collectabilitycollectibility of its trade accounts receivable based on a number of factors, including the Company’s historic collections pattern and changes to a specific customer’s ability to meet its financial obligations. The Company has established an allowance for doubtful accounts to adjust the recorded receivable to the estimated amount the Company believes will ultimately be collected.
The nature of the Company’s contracts gives rise to several types of variable consideration, including prospective and retrospective rebates. The Company accounts for its prospective and retrospective rebates using the expected value method, which estimates the net price to the customer based on the customer’s expected annual sales volume projections.
The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers. The Company’s reserve for customer returns, which was classified as allowance for doubtful accounts in the condensed consolidated balance sheets, was $3.6 million as of June 30, 2019 and $2.3 million as of SeptemberDecember 30, 2018 and was included in the allowance for doubtful accounts in the consolidated condensed balance sheet.2018. Returned product is recognized as a reduction of net sales.
3.Acquisitions and Divestitures
4.Segments
As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company and Piedmont Coca‑Cola Bottling Partnership, a partnership formed by the Company and The Coca‑Cola Company (“Piedmont”), completed a series of transactions from April 2013 to October 2017 with The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company and Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to the Company, to significantly expand the Company’s distribution and manufacturing operations (the “System Transformation”). The System Transformation included the acquisition and exchange of rights to serve distribution territories and related distribution assets, as well as the acquisition and exchange of regional manufacturing facilities and related manufacturing assets.
A summary of the System Transformation transactions (the “System Transformation Transactions”) completed by the Company is included in the Company’s Annual Report on Form 10‑K for 2017. Following is a summary of the System Transformation Transactions for which final post-closing adjustments were completed during the third quarter of 2018evaluates segment reporting in accordance with the terms
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 conditionsChief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM. The Company believes four operating segments exist. Nonalcoholic Beverages represents the vast majority of the applicable asset purchase agreementCompany’s consolidated revenues and income from operations. The additional three operating segments do not meet the quantitative thresholds for separate reporting, either individually or asset exchange agreement for such transactions. As of September 30, 2018,in the cash purchase prices or settlement amounts for all System Transformation Transactionsaggregate, and therefore have been resolved according to the terms of the transaction agreements. The post-closing adjustments made during the third quarter of 2018 resulted in a $10.2 million net adjustment to the gain on exchange transactions in the consolidated condensed statements of operations.
Acquisition of Arkansas Distribution Territories and Memphis, Tennessee and West Memphis, Arkansas Regional Manufacturing Facilities in exchange for the Company’s Deep South and Somerset Distribution Territories and Mobile, Alabama Manufacturing Facility (the “CCR Exchange Transaction”)
On October 2, 2017, the Company (i) acquired from CCR distribution rights and related assets in territories previously served by CCR through CCR’s facilities and equipment located in central and southern Arkansas and two regional manufacturing facilities located in Memphis, Tennessee and West Memphis, Arkansas and related manufacturing assets (collectively, the “CCR Exchange Business”) in exchange for which the Company (ii) transferred to CCR distribution rights and related assets in territories previously served by the Company through its facilities and equipment located in portions of southern Alabama, southeastern Mississippi, southwestern Georgia and northwestern Florida and in and around Somerset, Kentucky and a regional manufacturing facility located in Mobile, Alabama and related manufacturing assets (collectively, the “Deep South and Somerset Exchange Business”), pursuant to an asset exchange agreement enteredcombined into by the Company, certain of its wholly-owned subsidiaries and CCR on September 29, 2017.
At closing, the Company paid CCR $15.9 million toward the settlement amount for the CCR Exchange Transaction, representing an estimate of the difference between the value of the CCR Exchange Business acquired by the Company and the value of the Deep South and Somerset Exchange Business acquired by CCR. During the fourth quarter of 2017, the Company recorded certain adjustments to this settlement amount as a result of changes in estimated net working capital and other fair value adjustments. The settlement amount was included in accounts payable to The Coca‑Cola Company in the consolidated condensed balance sheet as of December 31, 2017.
During the third quarter of 2018, all post-closing adjustments were finalized for the CCR Exchange Transaction, resulting in a final settlement amount for the CCR Exchange Transaction of $26.2 million. A net balance of $10.3 million related to the settlement amount for the CCR Exchange Transaction remained payable to CCR by the Company as of September 30, 2018. This balance was paid to CCR during the fourth quarter of 2018.
Acquisition of Memphis, Tennessee Distribution Territories (the “Memphis Transaction”)
On October 2, 2017, the Company acquired distribution rights and related assets in territories previously served by CCR through CCR’s facilities and equipment located in and around Memphis, Tennessee, including portions of northwestern Mississippi and eastern Arkansas (the “Memphis Territory”), pursuant to an asset purchase agreement entered by the Company and CCR on September 29, 2017 (the “September 2017 APA”). At closing, the Company paid CCR $39.6 million toward the purchase price for the Memphis Transaction. During the second and third quarters of 2018, all post-closing adjustments were finalized for the Memphis Transaction, resulting in a net increase of $2.6 million in the cash purchase price, which was paid to CCR during the third quarter of 2018.
Acquisition of Spartanburg and Bluffton, South Carolina Distribution Territories in exchange for the Company’s Florence and Laurel Territories and Piedmont’s Northeastern Georgia Territories (the “United Exchange Transaction”)
On October 2, 2017, the Company and Piedmont completed exchange transactions in which (i) the Company acquired from United distribution rights and related assets in territories previously served by United through United’s facilities and equipment located in and around Spartanburg, South Carolina and a portion of United’s territory located in and around Bluffton, South Carolina (collectively, the “United Distribution Business”) and Piedmont acquired from United similar rights, assets and liabilities, and working capital in the remainder of United’s Bluffton, South Carolina territory, in exchange for which (ii) the Company transferred to United distribution rights and related assets in territories previously served by the Company through its facilities and equipment located in parts of northwestern Alabama, south-central Tennessee and southeastern Mississippi previously served by the Company’s distribution centers located in Florence, Alabama and Laurel, Mississippi (collectively, the “Florence and Laurel Distribution Business”) and Piedmont transferred to United similar rights, assets and liabilities, and working capital of Piedmont’s in territory located in parts of northeastern Georgia (the “Northeastern Georgia Distribution Business”), pursuant to an asset exchange agreement between the Company, certain of its wholly-owned subsidiaries and United dated September 29, 2017 and an asset exchange agreement between Piedmont and United dated September 29, 2017.
At closing, the Company and Piedmont paid United $3.4 million toward the settlement amount for the United Exchange Transaction, representing an estimate of (i) the difference between the value of the United Distribution Business acquired by the Company and the value of the Florence and Laurel Distribution Business acquired by United, plus (ii) the difference between the value of the portion of
the Bluffton, South Carolina territory acquired by Piedmont and the value of the Northeastern Georgia Distribution Business acquired by United. During the third quarter of 2018, all post-closing adjustments were finalized for the United Exchange Transaction, resulting in an increase of $2.8 million in the settlement amount, which was included in accounts payable, trade in the consolidated condensed balance sheet as of September 30, 2018. The Company anticipates this balance will be paid to United during the fourth quarter of 2018.
Collectively, the CCR Exchange Transaction, the Memphis Transaction and the United Exchange Transaction are the “October 2017 Transactions,“All Other.” the CCR Exchange Business, the Memphis Territory and the United Distribution Business are the “October 2017 Acquisitions” and the Deep South and Somerset Exchange Business and the Florence and Laurel Distribution Business are the “October 2017 Divestitures.”
In addition to the October 2017 Transactions summarized above, the Company completed three additional System Transformation Transactions with CCR in 2017 for which all post-closing adjustments have been completed: (i) the acquisition from CCR of distribution rights and related assets for territories in Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana on January 27, 2017 (the “January 2017 Transaction”), (ii) the acquisition from CCR of distribution rights and related assets for territories in Indianapolis and Bloomington, Indiana and Columbus and Mansfield, Ohio and regional manufacturing facilities and related assets located in Indianapolis and Portland, Indiana on March 31, 2017 (the “March 2017 Transactions”), and (iii) the acquisition from CCR of distribution rights and related assets for territories in Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio and a regional manufacturing facility and related assets located in Twinsburg, Ohio on April 28, 2017 (the “April 2017 Transactions”).
Post-closing adjustments for the January 2017 Transaction and the March 2017 Transactions were completed during 2017 and post-closing adjustments for the April 2017 Transactions were completed during the second quarter of 2018. During the fourth quarter of 2017, the cash purchase price for the April 2017 Transactions decreased by $4.7 million as a result of net working capital and other fair value adjustments, which was paid to the Company by The Coca‑Cola Company during the second quarter of 2018.
The fair value of acquired assets and assumed liabilities of the System Transformation Transactions that closed during 2017 (the “2017 System Transformation Transactions”), as of the acquisition dates, is summarizedCompany’s segment results are as follows:
(in thousands) |
| January 2017 Transaction |
|
| March 2017 Transactions |
|
| April 2017 Transactions |
|
| October 2017 Acquisitions |
|
| Total 2017 System Transformation Transactions Acquisitions |
| |||||
Cash |
| $ | 107 |
|
| $ | 211 |
|
| $ | 103 |
|
| $ | 191 |
|
| $ | 612 |
|
Inventories |
|
| 5,953 |
|
|
| 20,952 |
|
|
| 14,554 |
|
|
| 14,850 |
|
|
| 56,309 |
|
Prepaid expenses and other current assets |
|
| 1,155 |
|
|
| 5,117 |
|
|
| 4,068 |
|
|
| 4,573 |
|
|
| 14,913 |
|
Accounts receivable from The Coca-Cola Company |
|
| 1,042 |
|
|
| 1,807 |
|
|
| 2,552 |
|
|
| 1,447 |
|
|
| 6,848 |
|
Property, plant and equipment |
|
| 25,708 |
|
|
| 81,638 |
|
|
| 52,263 |
|
|
| 71,589 |
|
|
| 231,198 |
|
Other assets (including deferred taxes) |
|
| 1,158 |
|
|
| 3,227 |
|
|
| 3,960 |
|
|
| 1,300 |
|
|
| 9,645 |
|
Goodwill |
|
| 1,544 |
|
|
| 2,527 |
|
|
| 16,941 |
|
|
| 11,442 |
|
|
| 32,454 |
|
Distribution agreements |
|
| 22,000 |
|
|
| 46,750 |
|
|
| 19,500 |
|
|
| 129,450 |
|
|
| 217,700 |
|
Customer lists |
|
| 1,500 |
|
|
| 1,750 |
|
|
| 1,000 |
|
|
| 4,950 |
|
|
| 9,200 |
|
Total acquired assets |
| $ | 60,167 |
|
| $ | 163,979 |
|
| $ | 114,941 |
|
| $ | 239,792 |
|
| $ | 578,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (acquisition related contingent consideration) |
| $ | 1,350 |
|
| $ | 2,958 |
|
| $ | 1,475 |
|
| $ | 1,501 |
|
| $ | 7,284 |
|
Other current liabilities |
|
| 324 |
|
|
| 3,760 |
|
|
| 2,860 |
|
|
| 8,311 |
|
|
| 15,255 |
|
Other liabilities (acquisition related contingent consideration) |
|
| 26,377 |
|
|
| 49,739 |
|
|
| 25,616 |
|
|
| 20,676 |
|
|
| 122,408 |
|
Other liabilities |
|
| 43 |
|
|
| 2,953 |
|
|
| 1,792 |
|
|
| 102 |
|
|
| 4,890 |
|
Total assumed liabilities |
| $ | 28,094 |
|
| $ | 59,410 |
|
| $ | 31,743 |
|
| $ | 30,590 |
|
| $ | 149,837 |
|
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages(1) |
| $ | 1,238,885 |
|
| $ | 1,192,282 |
|
| $ | 2,311,112 |
|
| $ | 2,232,704 |
|
All Other |
|
| 94,942 |
|
|
| 93,398 |
|
|
| 182,857 |
|
|
| 179,997 |
|
Eliminations(2) |
|
| (60,168 | ) |
|
| (65,677 | ) |
|
| (117,398 | ) |
|
| (127,941 | ) |
Consolidated net sales |
| $ | 1,273,659 |
|
| $ | 1,220,003 |
|
| $ | 2,376,571 |
|
| $ | 2,284,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
| $ | 57,724 |
|
| $ | 16,089 |
|
| $ | 72,365 |
|
| $ | (6,656 | ) |
All Other |
|
| 9,490 |
|
|
| 3,590 |
|
|
| 15,003 |
|
|
| 7,338 |
|
Consolidated income from operations |
| $ | 67,214 |
|
| $ | 19,679 |
|
| $ | 87,368 |
|
| $ | 682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
| $ | 42,568 |
|
| $ | 44,220 |
|
| $ | 85,919 |
|
| $ | 89,045 |
|
All Other |
|
| 2,488 |
|
|
| 2,467 |
|
|
| 4,909 |
|
|
| 4,862 |
|
Consolidated depreciation and amortization |
| $ | 45,056 |
|
| $ | 46,687 |
|
| $ | 90,828 |
|
| $ | 93,907 |
|
(1) | The Company historically presented consideration paid to customers under certain contractual arrangements for exclusive distribution rights and sponsorship privileges as a marketing expense within SD&A expenses. The Company has now determined such amounts should be presented as a reduction to net sales and has revised the presentation of previously issued financial statements to correct for this error. Net sales and SD&A expenses were revised by $7.3 million in the second quarter of 2018 and $14.6 million in the first half of 2018. See Note 3 to the condensed consolidated financial statements for additional information. |
(2) | The entire net sales elimination for each period presented represents net sales from All Other to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction. |
5.Net Income (Loss) Per Share
The following table sets forth the computation of basic net income (loss) per share and diluted net income (loss) per share under the two-class method:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands, except per share data) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Numerator for basic and diluted net income (loss) per Common Stock and Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Coca-Cola Consolidated, Inc. |
| $ | 15,370 |
|
| $ | (3,933 | ) |
| $ | 8,539 |
|
| $ | (18,118 | ) |
Less dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
| 1,785 |
|
|
| 1,785 |
|
|
| 3,570 |
|
|
| 3,570 |
|
Class B Common Stock |
|
| 558 |
|
|
| 553 |
|
|
| 1,112 |
|
|
| 1,101 |
|
Total undistributed earnings (losses) |
| $ | 13,027 |
|
| $ | (6,271 | ) |
| $ | 3,857 |
|
| $ | (22,789 | ) |
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands, except per share data) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Common Stock undistributed earnings (losses) – basic |
| $ | 9,925 |
|
| $ | (4,787 | ) |
| $ | 2,941 |
|
| $ | (17,411 | ) |
Class B Common Stock undistributed earnings (losses) – basic |
|
| 3,102 |
|
|
| (1,484 | ) |
|
| 916 |
|
|
| (5,378 | ) |
Total undistributed earnings (losses) – basic |
| $ | 13,027 |
|
| $ | (6,271 | ) |
| $ | 3,857 |
|
| $ | (22,789 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock undistributed earnings (losses) – diluted |
| $ | 9,874 |
|
| $ | (4,787 | ) |
| $ | 2,925 |
|
| $ | (17,411 | ) |
Class B Common Stock undistributed earnings (losses) – diluted |
|
| 3,153 |
|
|
| (1,484 | ) |
|
| 932 |
|
|
| (5,378 | ) |
Total undistributed earnings (losses) – diluted |
| $ | 13,027 |
|
| $ | (6,271 | ) |
| $ | 3,857 |
|
| $ | (22,789 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income (loss) per Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock |
| $ | 1,785 |
|
| $ | 1,785 |
|
| $ | 3,570 |
|
| $ | 3,570 |
|
Common Stock undistributed earnings (losses) – basic |
|
| 9,925 |
|
|
| (4,787 | ) |
|
| 2,941 |
|
|
| (17,411 | ) |
Numerator for basic net income (loss) per Common Stock share |
| $ | 11,710 |
|
| $ | (3,002 | ) |
| $ | 6,511 |
|
| $ | (13,841 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income (loss) per Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Class B Common Stock |
| $ | 558 |
|
| $ | 553 |
|
| $ | 1,112 |
|
| $ | 1,101 |
|
Class B Common Stock undistributed earnings (losses) – basic |
|
| 3,102 |
|
|
| (1,484 | ) |
|
| 916 |
|
|
| (5,378 | ) |
Numerator for basic net income (loss) per Class B Common Stock share |
| $ | 3,660 |
|
| $ | (931 | ) |
| $ | 2,028 |
|
| $ | (4,277 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income (loss) per Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock |
| $ | 1,785 |
|
| $ | 1,785 |
|
| $ | 3,570 |
|
| $ | 3,570 |
|
Dividends on Class B Common Stock assumed converted to Common Stock |
|
| 558 |
|
|
| 553 |
|
|
| 1,112 |
|
|
| 1,101 |
|
Common Stock undistributed earnings (losses) – diluted |
|
| 13,027 |
|
|
| (6,271 | ) |
|
| 3,857 |
|
|
| (22,789 | ) |
Numerator for diluted net income (loss) per Common Stock share |
| $ | 15,370 |
|
| $ | (3,933 | ) |
| $ | 8,539 |
|
| $ | (18,118 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income (loss) per Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Class B Common Stock |
| $ | 558 |
|
| $ | 553 |
|
| $ | 1,112 |
|
| $ | 1,101 |
|
Class B Common Stock undistributed earnings (losses) – diluted |
|
| 3,153 |
|
|
| (1,484 | ) |
|
| 932 |
|
|
| (5,378 | ) |
Numerator for diluted net income (loss) per Class B Common Stock share |
| $ | 3,711 |
|
| $ | (931 | ) |
| $ | 2,044 |
|
| $ | (4,277 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income (loss) per Common Stock and Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock weighted average shares outstanding – basic |
|
| 7,141 |
|
|
| 7,141 |
|
|
| 7,141 |
|
|
| 7,141 |
|
Class B Common Stock weighted average shares outstanding – basic |
|
| 2,232 |
|
|
| 2,213 |
|
|
| 2,225 |
|
|
| 2,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (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) |
|
| 9,421 |
|
|
| 9,354 |
|
|
| 9,415 |
|
|
| 9,347 |
|
Class B Common Stock weighted average shares outstanding – diluted |
|
| 2,280 |
|
|
| 2,213 |
|
|
| 2,274 |
|
|
| 2,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
| $ | 1.64 |
|
| $ | (0.42 | ) |
| $ | 0.91 |
|
| $ | (1.94 | ) |
Class B Common Stock |
| $ | 1.64 |
|
| $ | (0.42 | ) |
| $ | 0.91 |
|
| $ | (1.94 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
| $ | 1.64 |
|
| $ | (0.42 | ) |
| $ | 0.91 |
|
| $ | (1.94 | ) |
Class B Common Stock |
| $ | 1.63 |
|
| $ | (0.42 | ) |
| $ | 0.90 |
|
| $ | (1.94 | ) |
The fair value of acquired assets and assumed liabilities in the October 2017 Acquisitions as of the acquisition date is summarized as follows:NOTES TO TABLE
(in thousands) |
| CCR Exchange Business |
|
| Memphis Territory |
|
| United Exchange Business |
|
| Total October 2017 Acquisitions |
| ||||
Cash |
| $ | 91 |
|
| $ | 100 |
|
| $ | - |
|
| $ | 191 |
|
Inventories |
|
| 10,667 |
|
|
| 3,354 |
|
|
| 829 |
|
|
| 14,850 |
|
Prepaid expenses and other current assets |
|
| 3,172 |
|
|
| 1,087 |
|
|
| 314 |
|
|
| 4,573 |
|
Accounts receivable from The Coca-Cola Company |
|
| 674 |
|
|
| 563 |
|
|
| 210 |
|
|
| 1,447 |
|
Property, plant and equipment |
|
| 47,484 |
|
|
| 21,321 |
|
|
| 2,784 |
|
|
| 71,589 |
|
Other assets (including deferred taxes) |
|
| 753 |
|
|
| 547 |
|
|
| - |
|
|
| 1,300 |
|
Goodwill |
|
| 3,546 |
|
|
| 5,199 |
|
|
| 2,697 |
|
|
| 11,442 |
|
Distribution agreements |
|
| 80,100 |
|
|
| 35,400 |
|
|
| 13,950 |
|
|
| 129,450 |
|
Customer lists |
|
| 3,200 |
|
|
| 1,200 |
|
|
| 550 |
|
|
| 4,950 |
|
Total acquired assets |
| $ | 149,687 |
|
| $ | 68,771 |
|
| $ | 21,334 |
|
| $ | 239,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities (acquisition related contingent consideration) |
| $ | - |
|
| $ | 1,501 |
|
| $ | - |
|
| $ | 1,501 |
|
Other current liabilities |
|
| 3,497 |
|
|
| 4,323 |
|
|
| 491 |
|
|
| 8,311 |
|
Other liabilities (acquisition related contingent consideration) |
|
| - |
|
|
| 20,676 |
|
|
| - |
|
|
| 20,676 |
|
Other liabilities |
|
| 15 |
|
|
| 87 |
|
|
| - |
|
|
| 102 |
|
Total assumed liabilities |
| $ | 3,512 |
|
| $ | 26,587 |
|
| $ | 491 |
|
| $ | 30,590 |
|
(1) | For purposes of the diluted net income (loss) per share computation for Common Stock, all shares of Class B Common Stock are assumed to be converted; therefore, 100% of undistributed losses is allocated to Common Stock. |
(2) | For purposes of the diluted net income (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) | For periods presented during which the Company has net income, the denominator for diluted net income per share for Common Stock and Class B Common Stock included the dilutive effect of shares relative to the Long-Term Performance Equity Plan and the Performance Unit Award Agreement. For periods presented during which the Company has net loss, the unvested performance units granted pursuant to the Long-Term Performance Equity Plan and the Performance Unit Award Agreement are excluded from the calculation of diluted net loss per share, as the effect of these awards would be anti-dilutive. See Note 21 to the condensed consolidated financial statements for additional information on the Long-Term Performance Equity Plan and the Performance Unit Award Agreement. |
(4) | The Company does not have anti-dilutive shares. |
The goodwill for the 2017 System Transformation Transactions is included in the Nonalcoholic Beverages segment and is primarily attributed to operational synergies and the workforce acquired. Goodwill of $11.4 million, $3.5 million, $8.6 million and $2.7 million is expected to be deductible for tax purposes for the April 2017 Transactions, the CCR Exchange Business, the Memphis Territory and the United Exchange Business, respectively. No goodwill is expected to be deductible for tax purposes for the January 2017 Transaction or the March 2017 Transactions.
The carrying value of assets and liabilities divested in the October 2017 Divestitures is summarized as follows:
(in thousands) |
| October 2017 Divestitures |
| |
Cash |
| $ | 303 |
|
Inventories |
|
| 13,717 |
|
Prepaid expenses and other current assets |
|
| 1,199 |
|
Property, plant and equipment |
|
| 44,380 |
|
Other assets (including deferred taxes) |
|
| 604 |
|
Goodwill |
|
| 13,073 |
|
Distribution agreements |
|
| 65,043 |
|
Total divested assets |
| $ | 138,319 |
|
|
|
|
|
|
Other current liabilities |
| $ | 5,683 |
|
Pension and postretirement benefit obligation |
|
| 16,855 |
|
Total divested liabilities |
| $ | 22,538 |
|
The October 2017 Divestitures were recorded in the Company’s Nonalcoholic Beverages segment prior to divestiture.
System Transformation Transactions Financial Results
The financial results of the System Transformation Transactions have been included in the Company’s consolidated condensed financial statements from their respective acquisition or exchange dates. Net sales and income from operations for certain territories and regional manufacturing facilities acquired and divested by the Company during 2017 are impracticable to separately calculate, as the operations were absorbed into territories and facilities owned by the Company prior to the System Transformation, and therefore have been omitted from the results below. Omission of net sales and income from operations for such territories and facilities is not
considered material to the results presented below. The remaining 2017 System Transformation Transactions contributed the following amounts to the Company’s consolidated condensed statements of operations:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Impact to net sales - total 2017 System Transformation Transactions acquisitions |
| $ | 308,825 |
|
| $ | 221,034 |
|
| $ | 896,179 |
|
| $ | 454,174 |
|
Impact to net sales - October 2017 Divestitures |
|
| - |
|
|
| 79,032 |
|
|
| - |
|
|
| 231,301 |
|
Total impact to net sales |
| $ | 308,825 |
|
| $ | 300,066 |
|
| $ | 896,179 |
|
| $ | 685,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to income from operations - total 2017 System Transformation Transactions acquisitions |
| $ | 11,874 |
|
| $ | 3,176 |
|
| $ | 14,635 |
|
| $ | 13,595 |
|
Impact to income from operations - October 2017 Divestitures |
|
| - |
|
|
| 7,689 |
|
|
| - |
|
|
| 22,973 |
|
Total impact to income from operations |
| $ | 11,874 |
|
| $ | 10,865 |
|
| $ | 14,635 |
|
| $ | 36,568 |
|
The Company incurred transaction related expenses for the System Transformation Transactions of $5.6 million in the first three quarters of 2017, which were included within S,D&A expenses on the consolidated condensed statements of operations.
System Transformation Transactions Pro Forma Financial Information
The purpose of the pro forma disclosure is to present the net sales and the income from operations of the combined entity as though the 2017 System Transformation Transactions had occurred as of the beginning of 2017. 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 2017. 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 table represents the Company’s unaudited pro forma net sales and unaudited pro forma income from operations for the 2017 System Transformation Transactions.
|
| Third Quarter 2017 |
|
| First Three Quarters 2017 |
| ||||||||||
(in thousands) |
| Net Sales |
|
| Income from Operations |
|
| Net Sales |
|
| Income from Operations |
| ||||
Balance as reported |
| $ | 1,162,526 |
|
| $ | 37,472 |
|
| $ | 3,197,519 |
|
| $ | 101,077 |
|
Pro forma adjustments (unaudited) |
|
| 1,754 |
|
|
| 55 |
|
|
| 231,183 |
|
|
| 4,262 |
|
Balance including pro forma adjustments (unaudited) |
| $ | 1,164,280 |
|
| $ | 37,527 |
|
| $ | 3,428,702 |
|
| $ | 105,339 |
|
The net sales pro forma and the income from operations pro forma reflect adjustments for (i) the inclusion of historic results of operations for the distribution territories and the regional manufacturing facilities acquired in the System Transformation Transactions for the period prior to the Company’s acquisition of the applicable territories or facility, for each period presented and (ii) the elimination of historic results of operations for the October 2017 Divestitures.
4.6.Inventories
Inventories consisted of the following:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Finished products |
| $ | 156,669 |
|
| $ | 116,354 |
|
| $ | 154,669 |
|
| $ | 135,561 |
|
Manufacturing materials |
|
| 35,703 |
|
|
| 33,073 |
|
|
| 38,033 |
|
|
| 39,840 |
|
Plastic shells, plastic pallets and other inventories |
|
| 37,520 |
|
|
| 34,191 |
|
|
| 38,196 |
|
|
| 34,632 |
|
Total inventories |
| $ | 229,892 |
|
| $ | 183,618 |
|
| $ | 230,898 |
|
| $ | 210,033 |
|
5.7.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Repair parts |
| $ | 29,535 |
|
| $ | 30,530 |
|
| $ | 27,821 |
|
| $ | 26,846 |
|
Prepaid marketing |
|
| 7,755 |
|
|
| 6,097 |
| ||||||||
Prepaid software |
|
| 6,858 |
|
|
| 6,553 |
| ||||||||
Current portion of income taxes |
|
| 22,896 |
|
|
| 35,930 |
|
|
| 6,517 |
|
|
| 6,637 |
|
Prepaid software |
|
| 5,786 |
|
|
| 5,855 |
| ||||||||
Prepayments for sponsorship contracts |
|
| 5,644 |
|
|
| 6,358 |
|
|
| 5,516 |
|
|
| 7,557 |
|
Commodity hedges at fair market value |
|
| 1,047 |
|
|
| 4,420 |
| ||||||||
Other prepaid expenses and other current assets |
|
| 26,606 |
|
|
| 17,553 |
|
|
| 17,860 |
|
|
| 16,990 |
|
Total prepaid expenses and other current assets |
| $ | 91,514 |
|
| $ | 100,646 |
|
| $ | 72,327 |
|
| $ | 70,680 |
|
6.8.Property, Plant and Equipment, Net
The principal categories and estimated useful lives of property, plant and equipment, net were as follows:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| Estimated Useful Lives |
| June 30, 2019 |
|
| December 30, 2018 |
|
| Estimated Useful Lives | ||||
Land |
| $ | 78,478 |
|
| $ | 78,825 |
|
|
|
| $ | 77,949 |
|
| $ | 78,242 |
|
|
|
Buildings |
|
| 216,821 |
|
|
| 211,308 |
|
| 8-50 years |
|
| 220,608 |
|
|
| 218,846 |
|
| 8-50 years |
Machinery and equipment |
|
| 320,447 |
|
|
| 315,117 |
|
| 5-20 years |
|
| 333,795 |
|
|
| 328,034 |
|
| 5-20 years |
Transportation equipment |
|
| 373,426 |
|
|
| 351,479 |
|
| 4-20 years |
|
| 384,642 |
|
|
| 372,895 |
|
| 4-20 years |
Furniture and fixtures |
|
| 92,000 |
|
|
| 89,559 |
|
| 3-10 years |
|
| 90,812 |
|
|
| 89,439 |
|
| 3-10 years |
Cold drink dispensing equipment |
|
| 497,008 |
|
|
| 488,208 |
|
| 5-17 years |
|
| 495,458 |
|
|
| 491,161 |
|
| 5-17 years |
Leasehold and land improvements |
|
| 130,257 |
|
|
| 125,348 |
|
| 5-20 years |
|
| 134,435 |
|
|
| 132,837 |
|
| 5-20 years |
Software for internal use |
|
| 120,767 |
|
|
| 113,490 |
|
| 3-10 years |
|
| 122,882 |
|
|
| 122,604 |
|
| 3-10 years |
Construction in progress |
|
| 13,524 |
|
|
| 25,490 |
|
|
|
|
| 17,929 |
|
|
| 15,142 |
|
|
|
Total property, plant and equipment, at cost |
|
| 1,842,728 |
|
|
| 1,798,824 |
|
|
|
|
| 1,878,510 |
|
|
| 1,849,200 |
|
|
|
Less: Accumulated depreciation and amortization |
|
| 844,611 |
|
|
| 767,436 |
|
|
|
|
| 916,108 |
|
|
| 858,668 |
|
|
|
Property, plant and equipment, net |
| $ | 998,117 |
|
| $ | 1,031,388 |
|
|
|
| $ | 962,402 |
|
| $ | 990,532 |
|
|
|
Depreciation expense, which includes amortization expense
9.Leases
The Company leases office and warehouse space, machinery and other equipment under noncancelable operating lease agreements and also leases certain warehouse space under financing lease agreements. The Company adopted the lease standard using the optional transition method on December 31, 2018, the transition date, and elected to adopt the following practical expedients as accounting policy upon initial adoption of the lease standard:
• | Short-term lease exception: Allows the Company to not recognize leases with a contractual term of less than 12 months on the balance sheet. |
• | Election to not separate non-lease components: Allows the Company to not separate lease and non-lease components and to account for both components as a single component, recognized on the balance sheet. |
• | Package of practical expedients for transition: Allows the Company to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) any initial direct costs for any existing leases as of the transition date. |
• | Additional transition method/relief: Allows the Company to apply the transition requirements in the lease standard as of the transition date, with any impact of initially applying the lease standard recognized as a cumulative effect adjustment to retained earnings in the period of adoption. This also requires the Company to maintain previous disclosure requirements for comparative periods. |
Upon adoption of the lease standard on December 31, 2018, the Company recorded right of use assets for leased propertyoperating leases of $88.0 million and associated lease liabilities of $88.2 million. The adoption of the lease standard did not change previously reported condensed consolidated statements of operations, did not result in a cumulative effect adjustment to retained earnings in the period of adoption and did not impact cash flows.
The Company used the following policies and assumptions to evaluate its population of leases:
• | Determining a lease: The Company assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys the Company’s right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right of use assets and associated liabilities are recognized at the commencement date and initially measured based on the present value of lease payments over the defined lease term. |
• | Allocating lease and non-lease components: The Company has elected the practical expedient to not separate lease and non-lease components for certain classes of underlying assets. The Company has equipment and vehicle lease agreements, which generally have the lease and associated non-lease components accounted for as a single lease component. The Company has real estate lease agreements with lease and non-lease components, which are generally accounted for separately where applicable. |
• | Discount rate: The Company calculates the discount rate based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company calculates an incremental borrowing rate using a portfolio approach. The incremental borrowing rate is calculated using the contractual lease term and the Company’s borrowing rate. |
• | Lease term: The Company does not recognize leases with a contractual term of less than 12 months on the balance sheet. Lease expense for these short-term leases is expensed on a straight-line basis over the lease term. |
• | Rent increases or escalation clauses: Certain leases contain scheduled rent increases or escalation clauses, which can be based on the Consumer Price Index or other rates. The Company assesses each contract individually and applies the appropriate variable payments based on the terms of the agreement. |
• | Renewal options and/or purchase options: Certain leases include renewal options to extend the lease term and/or purchase options to purchase the leased asset. The Company assesses these options using a threshold of reasonably certain, which is a high threshold and, therefore, the majority of the Company’s leases do not include renewal periods or purchase options for the measurement of the right of use asset and the associated lease liability. For leases the Company is reasonably certain to renew or purchase, those options are included within the lease term and, therefore, included in the measurement of the right of use asset and the associated lease liability. |
• | Option to terminate: Certain leases include the option to terminate the lease prior to its scheduled expiration. This allows a contractually bound party to terminate its obligation under the lease contract, typically in return for an agreed upon financial consideration. The terms and conditions of the termination options vary by contract. |
• | Residual value guarantees, restrictions or covenants: The Company’s lease agreements do not contain residual value guarantees, restrictions or covenants. |
Following is a summary of the weighted average remaining lease term and weighted average discount rate for the Company’s population of leases as of June 30, 2019:
|
| Operating Leases |
| Financing Leases |
| ||
Weighted average remaining lease term |
| 8.8 years |
| 5.0 years |
| ||
Weighted average discount rate |
|
| 4.0 | % |
| 5.8 | % |
As of June 30, 2019, the Company had real estate and equipment operating lease commitments that had not yet commenced. The commitments are expected to commence in the remainder of 2019 and have lease terms of 5 to 10 years. The additional lease liability associated with these lease commitments is expected to be $16.0 million.
Following is a summary of balances related to the Company’s lease portfolio within the Company’s condensed consolidated statement of operations for the second quarter and first half of 2019:
(in thousands) |
| Second Quarter 2019 |
|
| First Half 2019 |
| ||
Cost of sales impact: |
|
|
|
|
|
|
|
|
Operating leases costs |
| $ | 1,342 |
|
| $ | 2,683 |
|
Short-term and variable leases |
|
| 2,317 |
|
|
| 4,579 |
|
Depreciation expense from financing leases(1) |
|
| 354 |
|
|
| 707 |
|
Total cost of sales impact |
| $ | 4,013 |
|
| $ | 7,969 |
|
|
|
|
|
|
|
|
|
|
Selling, delivery and administrative expenses impact: |
|
|
|
|
|
|
|
|
Operating leases costs |
| $ | 3,026 |
|
| $ | 5,922 |
|
Short-term and variable leases |
|
| 779 |
|
|
| 1,838 |
|
Depreciation expense from financing leases(1) |
|
| 1,137 |
|
|
| 2,276 |
|
Total selling, delivery and administrative expenses impact |
| $ | 4,942 |
|
| $ | 10,036 |
|
|
|
|
|
|
|
|
|
|
Interest expense, net impact: |
|
|
|
|
|
|
|
|
Interest payments on financing lease obligations(2) |
| $ | 715 |
|
| $ | 1,417 |
|
Total interest expense, net impact |
| $ | 715 |
|
| $ | 1,417 |
|
|
|
|
|
|
|
|
|
|
Total lease cost |
| $ | 9,670 |
|
| $ | 19,422 |
|
(1) | During the second quarter of 2018, the Company had depreciation expense from capital leases of $0.3 million and $1.2 million in cost of sales and SD&A expenses, respectively. During the first half of 2018, the Company had depreciation expense from capital leases of $0.7 million and $2.3 million in cost of sales and SD&A expenses, respectively. |
(2) | The Company had interest payments on capital lease obligations of $0.9 million during the second quarter of 2018 and $1.8 million during the first half of 2018. |
The future minimum lease payments related to the Company’s lease portfolio include renewal options the Company has determined to be reasonably assured and exclude payments to landlords for real estate taxes and common area maintenance. Following is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of June 30, 2019:
(in thousands) |
| Operating Leases |
|
| Financing Leases |
|
| Total |
| |||
Remainder of 2019 |
| $ | 8,751 |
|
| $ | 5,222 |
|
| $ | 13,973 |
|
2020 |
|
| 18,652 |
|
|
| 10,611 |
|
|
| 29,263 |
|
2021 |
|
| 16,658 |
|
|
| 6,215 |
|
|
| 22,873 |
|
2022 |
|
| 13,551 |
|
|
| 2,694 |
|
|
| 16,245 |
|
2023 |
|
| 11,698 |
|
|
| 2,750 |
|
|
| 14,448 |
|
Thereafter |
|
| 54,384 |
|
|
| 8,214 |
|
|
| 62,598 |
|
Total minimum lease payments including interest |
| $ | 123,694 |
|
| $ | 35,706 |
|
| $ | 159,400 |
|
Less: Amounts representing interest |
|
| 21,119 |
|
|
| 4,505 |
|
|
| 25,624 |
|
Present value of minimum lease principal payments |
|
| 102,575 |
|
|
| 31,201 |
|
|
| 133,776 |
|
Less: Current portion of lease liabilities - operating and financing leases |
|
| 14,771 |
|
|
| 9,019 |
|
|
| 23,790 |
|
Noncurrent portion of lease liabilities - operating and financing leases |
| $ | 87,804 |
|
| $ | 22,182 |
|
| $ | 109,986 |
|
Following is a summary of future minimum lease payments for all noncancelable operating leases and capital leases was $123.5 million inas of December 30, 2018:
(in thousands) |
| Operating Leases |
|
| Capital Leases |
|
| Total |
| |||
2019 |
| $ | 14,146 |
|
| $ | 10,434 |
|
| $ | 24,580 |
|
2020 |
|
| 13,526 |
|
|
| 10,613 |
|
|
| 24,139 |
|
2021 |
|
| 12,568 |
|
|
| 6,218 |
|
|
| 18,786 |
|
2022 |
|
| 11,161 |
|
|
| 2,697 |
|
|
| 13,858 |
|
2023 |
|
| 10,055 |
|
|
| 2,753 |
|
|
| 12,808 |
|
Thereafter |
|
| 33,805 |
|
|
| 8,106 |
|
|
| 41,911 |
|
Total minimum lease payments including interest |
| $ | 95,261 |
|
| $ | 40,821 |
|
| $ | 136,082 |
|
Less: Amounts representing interest |
|
|
|
|
|
| 5,573 |
|
|
|
|
|
Present value of minimum lease principal payments |
|
|
|
|
|
| 35,248 |
|
|
|
|
|
Less: Current portion of lease liabilities - capital leases |
|
|
|
|
|
| 8,617 |
|
|
|
|
|
Noncurrent portion of lease liabilities - capital leases |
|
|
|
|
| $ | 26,631 |
|
|
|
|
|
Following is a summary of balances related to the Company’s lease portfolio within the Company’s condensed consolidated statements of cash flows for the first three quartershalf of 2018 and $108.7 million in the first three quarters of 2017.2019:
(in thousands) |
| First Half 2019 |
| |
Cash flows from operating activities impact: |
|
|
|
|
Operating leases |
| $ | 8,515 |
|
Interest payments on financing lease obligations(1) |
|
| 1,417 |
|
Total cash flows from operating activities impact |
| $ | 9,932 |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
Principal payments on financing lease obligations(1) |
| $ | 4,261 |
|
Total cash flows from financing activities impact |
| $ | 4,261 |
|
7.
(1) | During the first half of 2018, the Company had principal payments on capital lease obligations of $4.0 million and interest payments on capital lease obligations of $1.8 million. |
10.Goodwill
A reconciliation of the activity for goodwill for the first three quartershalf of 20182019 and the first three quartershalf of 20172018 is as follows:
|
| First Three Quarters |
|
| First Half |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Beginning balance - goodwill |
| $ | 169,316 |
|
| $ | 144,586 |
|
| $ | 165,903 |
|
| $ | 169,316 |
|
System Transformation Transactions acquisitions |
|
| - |
|
|
| 19,035 |
| ||||||||
Measurement period adjustments(1) |
|
| (3,413 | ) |
|
| 1,807 |
|
|
| - |
|
|
| 1,583 |
|
Balance held for sale(2) |
|
| - |
|
|
| (12,727 | ) | ||||||||
Ending balance - goodwill |
| $ | 165,903 |
|
| $ | 152,701 |
|
| $ | 165,903 |
|
| $ | 170,899 |
|
|
|
|
|
|
|
|
|
|
(1) | Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for |
|
|
The Company’s goodwill resides entirely within the Nonalcoholic Beverages segment. The Company performs its annual impairment test of goodwill as of the first day of the fourth quarter of each fiscal year. During the first three quartershalf of 2018,2019, the Company did not experience any triggering events or changes in circumstances indicating the carrying amounts of the Company’s goodwill exceeded fair values.
8.11.Distribution Agreements, Net
Distribution agreements, net, which are amortized on a straight linestraight-line basis and have an estimated useful life of 2010 to 40 years, consisted of the following:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Distribution agreements at cost |
| $ | 945,895 |
|
| $ | 939,527 |
|
| $ | 950,549 |
|
| $ | 950,559 |
|
Less: Accumulated amortization |
|
| (44,064 | ) |
|
| (26,175 | ) |
|
| (62,311 | ) |
|
| (50,176 | ) |
Distribution agreements, net |
| $ | 901,831 |
|
| $ | 913,352 |
|
| $ | 888,238 |
|
| $ | 900,383 |
|
A reconciliation of the activity for distribution agreements, net for the first three quartershalf of 20182019 and the first three quartershalf of 20172018 is as follows:
|
| First Three Quarters |
|
| First Half |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Beginning balance - distribution agreements, net |
| $ | 913,352 |
|
| $ | 234,988 |
|
| $ | 900,383 |
|
| $ | 913,352 |
|
Conversion to distribution rights from franchise rights(1) |
|
| - |
|
|
| 533,040 |
| ||||||||
System Transformation Transactions acquisitions |
|
| - |
|
|
| 36,800 |
| ||||||||
Measurement period adjustment(2) |
|
| 4,700 |
|
|
| - |
| ||||||||
Other distribution agreements |
|
| 1,668 |
|
|
| 44 |
|
|
| (10 | ) |
|
| - |
|
Measurement period adjustment(1) |
|
| - |
|
|
| 5,100 |
| ||||||||
Additional accumulated amortization |
|
| (17,889 | ) |
|
| (11,774 | ) |
|
| (12,135 | ) |
|
| (11,856 | ) |
Balance held for sale(3) |
|
| - |
|
|
| (63,321 | ) | ||||||||
Ending balance - distribution agreements, net |
| $ | 901,831 |
|
| $ | 729,777 |
|
| $ | 888,238 |
|
| $ | 906,596 |
|
(1) |
|
| Measurement period adjustment relates to post-closing adjustments made in |
|
|
9.12.Customer Lists and Other Identifiable Intangible Assets, Net
Customer lists and other identifiable intangible assets, net, which are amortized on a straight linestraight-line basis and have an estimated useful life of 125 to 2012 years, consisted of the following:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Customer lists and other identifiable intangible assets at cost |
| $ | 25,288 |
|
| $ | 25,288 |
|
| $ | 25,288 |
|
| $ | 25,288 |
|
Less: Accumulated amortization |
|
| (8,347 | ) |
|
| (6,968 | ) |
|
| (9,726 | ) |
|
| (8,806 | ) |
Customer lists and other identifiable intangible assets, net |
| $ | 16,941 |
|
| $ | 18,320 |
|
| $ | 15,562 |
|
| $ | 16,482 |
|
A reconciliation of the activity for customer lists and other identifiable intangible assets, net for the first three quarters of 2018 and the first three quarters of 2017 is as follows:
|
| First Three Quarters |
| |||||
(in thousands) |
| 2018 |
|
| 2017 |
| ||
Beginning balance - customer lists and other identifiable intangible assets, net |
| $ | 18,320 |
|
| $ | 10,427 |
|
System Transformation Transactions acquisitions |
|
| - |
|
|
| 3,800 |
|
Additional accumulated amortization |
|
| (1,379 | ) |
|
| (965 | ) |
Ending balance - customer lists and other identifiable intangible assets, net |
| $ | 16,941 |
|
| $ | 13,262 |
|
10.13.Other Accrued Liabilities
Other accrued liabilities consisted of the following:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Accrued insurance costs |
| $ | 39,299 |
|
| $ | 35,433 |
|
Employee and retiree benefit plan accruals |
|
| 25,950 |
|
|
| 27,024 |
|
Accrued marketing costs |
|
| 25,875 |
|
|
| 33,376 |
|
Current portion of acquisition related contingent consideration |
|
| 25,306 |
|
|
| 23,339 |
|
Checks and transfers yet to be presented for payment from zero balance cash accounts |
|
| 11,900 |
|
|
| 37,262 |
|
Accrued taxes (other than income taxes) |
|
| 5,811 |
|
|
| 6,391 |
|
Current deferred proceeds from Territory Conversion Fee(1) |
|
| 2,286 |
|
|
| 2,286 |
|
All other accrued expenses |
|
| 17,182 |
|
|
| 20,419 |
|
Total other accrued liabilities |
| $ | 153,609 |
|
| $ | 185,530 |
|
|
|
(in thousands) |
| June 30, 2019 |
|
| December 30, 2018 |
| ||
Accrued insurance costs |
| $ | 42,806 |
|
| $ | 37,916 |
|
Current portion of acquisition related contingent consideration |
|
| 32,131 |
|
|
| 32,993 |
|
Employee and retiree benefit plan accruals |
|
| 29,821 |
|
|
| 29,300 |
|
Accrued marketing costs |
|
| 26,712 |
|
|
| 31,475 |
|
Checks and transfers yet to be presented for payment from zero balance cash accounts |
|
| 13,356 |
|
|
| 72,701 |
|
Accrued taxes (other than income taxes) |
|
| 9,457 |
|
|
| 4,577 |
|
Commodity hedges at fair market value |
|
| 7,522 |
|
|
| 10,305 |
|
Current deferred proceeds from Territory Conversion Fee |
|
| 2,286 |
|
|
| 2,286 |
|
All other accrued expenses |
|
| 33,010 |
|
|
| 28,693 |
|
Total other accrued liabilities |
| $ | 197,101 |
|
| $ | 250,246 |
|
11.Debt
Following is a summary of the Company’s debt:
(in thousands) |
| Maturity Date |
| Interest Rate |
|
| Interest Paid |
| Public / Non-public |
| September 30, 2018 |
|
| December 31, 2017 |
| |||
Senior Notes(1) |
| 4/15/2019 |
| 7.00% |
|
| Semi-annually |
| Public |
| $ | 110,000 |
|
| $ | 110,000 |
| |
Term Loan Facility(1) |
| 6/7/2021 |
| Variable |
|
| Varies |
| Non-public |
|
| 292,500 |
|
|
| 300,000 |
| |
Senior Notes |
| 2/27/2023 |
| 3.28% |
|
| Semi-annually |
| Non-public |
|
| 125,000 |
|
|
| 125,000 |
| |
Revolving Credit Facility |
| 6/8/2023 |
| Variable |
|
| Varies |
| Non-public |
|
| 170,000 |
|
|
| 207,000 |
| |
Senior Notes |
| 11/25/2025 |
| 3.80% |
|
| Semi-annually |
| Public |
|
| 350,000 |
|
|
| 350,000 |
| |
Senior Notes |
| 3/21/2030 |
| 3.96% |
|
| Quarterly |
| Non-public |
|
| 150,000 |
|
|
| - |
| |
Unamortized discount on Senior Notes |
| 4/15/2019 |
|
|
|
|
|
|
|
|
|
| (143 | ) |
|
| (332 | ) |
Unamortized discount on Senior Notes |
| 11/25/2025 |
|
|
|
|
|
|
|
|
|
| (63 | ) |
|
| (70 | ) |
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| (3,185 | ) |
|
| (3,580 | ) |
Total debt |
|
|
|
|
|
|
|
|
|
|
|
| 1,194,109 |
|
|
| 1,088,018 |
|
Less: Current portion of debt |
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| - |
|
Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | 1,194,109 |
|
| $ | 1,088,018 |
|
|
|
The Company had capital lease obligations of $37.3 million on September 30, 2018 and $43.5 million on December 31, 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 June 8, 2018, the Company entered into a second amended and restated credit agreement for a five-year unsecured revolving credit facility (as amended, the “Revolving Credit Facility”), which amended and restated its prior credit agreement dated October 16, 2014. The Revolving Credit Facility has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. Borrowings under the Revolving Credit Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit ratings 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 June 8, 2023.
On March 21, 2018, the Company sold $150 million aggregate principal amount of senior unsecured notes due 2030 to NYL Investors LLC (“NYL”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated March 6, 2018 between the Company, NYL and the other parties thereto (as amended, the “NYL Shelf Facility”). These notes bear interest at 3.96%, payable quarterly in arrears on March 21, June 21, September 21 and December 21 of each year, and will mature on March 21, 2030, unless earlier redeemed by the Company.
In February 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 (as amended, the “Prudential Shelf Facility”). These notes bear interest at 3.28%, payable semi-annually in arrears on February 27 and August 27 of each year, and will mature on February 27, 2023 unless earlier redeemed by the Company. The Company may request that Prudential consider the purchase of additional senior unsecured notes of the Company under the Prudential Shelf Facility in an aggregate principal amount of up to $175 million.
In June 2016, the Company entered into a five-year term loan agreement for a senior unsecured term loan facility (as amended, the “Term Loan Facility”) in the aggregate principal amount of $300 million, maturing June 7, 2021. The Company may request additional term loans under the agreement, provided the Company’s aggregate borrowings under the Term Loan Facility do not exceed $500 million. Borrowings under the Term Loan Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit ratings.
During the third quarter of 2018, the Company amended each of the Revolving Credit Facility, the NYL Shelf Facility, the Prudential Shelf Facility and the Term Loan Facility to (i) align the calculation of the two financial covenants and certain events of default under each agreement and (ii) with regard to the Term Loan Facility, to revise the calculation of the rates at which borrowings bear interest to conform with the calculation of such rates under the Revolving Credit Facility.
The Revolving Credit Facility, the NYL Shelf Facility, the Prudential Shelf Facility and the Term Loan 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 September 30, 2018. 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 indebtedness by the Company’s subsidiaries in excess of certain amounts.
All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s debt.
12.14.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 condensed consolidated condensed balance sheets. These derivative instruments are not designated
as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. Derivative instruments held are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. Settlements of derivative agreements are included in cash flows from operating activities on the Company’s condensed consolidated condensed statements of cash flows.
The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company would be exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these parties.
The following table summarizes pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification of such changes in the condensed consolidated condensed statements of operations.
|
|
|
| Third Quarter |
|
| First Three Quarters |
|
|
|
| Second Quarter |
|
| First Half |
| ||||||||||||||||||||
(in thousands) |
| Classification of Gain (Loss) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| Classification of Gain (Loss) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Commodity hedges |
| Cost of sales |
| $ | (260 | ) |
| $ | 2,042 |
|
| $ | (2,776 | ) |
| $ | 2,066 |
|
| Cost of sales |
| $ | (4,874 | ) |
| $ | 249 |
|
| $ | (969 | ) |
| $ | (2,516 | ) |
Commodity hedges |
| Selling, delivery and administrative expenses |
|
| (209 | ) |
|
| 1,359 |
|
|
| (363 | ) |
|
| 475 |
|
| Selling, delivery and administrative expenses |
|
| (66 | ) |
|
| 48 |
|
|
| 2,649 |
|
|
| (154 | ) |
Total gain (loss) |
|
|
| $ | (469 | ) |
| $ | 3,401 |
|
| $ | (3,139 | ) |
| $ | 2,541 |
|
|
|
| $ | (4,940 | ) |
| $ | 297 |
|
| $ | 1,680 |
|
| $ | (2,670 | ) |
The following table summarizes the fair values and classification in the condensed consolidated condensed balance sheets of derivative instruments held by the Company:
(in thousands) |
| Balance Sheet Classification |
| September 30, 2018 |
|
| December 31, 2017 |
|
| Balance Sheet Classification |
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
| ||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||||||
Commodity hedges at fair market value |
| Prepaid expenses and other current assets |
| $ | 1,047 |
|
| $ | 4,420 |
|
| Other accrued liabilities |
| $ | 7,522 |
|
| $ | 10,305 |
|
Commodity hedges at fair market value |
| Other assets |
|
| 234 |
|
|
| - |
|
| Other liabilities |
|
| 1,103 |
|
|
| - |
|
Total assets |
|
|
| $ | 1,281 |
|
| $ | 4,420 |
| ||||||||||
Total liabilities |
|
|
| $ | 8,625 |
|
| $ | 10,305 |
|
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 condensed consolidated condensed balance sheets and the net amounts of derivative liabilities are recognized in other accrued liabilities or other liabilities in the condensed consolidated condensed balance sheets.
The following table summarizes the Company’s gross derivative assets and gross derivative liabilities in the condensed consolidated condensed balance sheets:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Gross derivative assets |
| $ | 15,633 |
|
| $ | 4,481 |
|
| $ | 17,328 |
|
| $ | 28,305 |
|
Gross derivative liabilities |
|
| 14,352 |
|
|
| 61 |
|
|
| 25,953 |
|
|
| 38,610 |
|
The following table summarizes the Company’s outstanding commodity derivative agreements:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Notional amount of outstanding commodity derivative agreements |
| $ | 143,282 |
|
| $ | 59,564 |
|
| $ | 167,630 |
|
| $ | 168,388 |
|
Latest maturity date of outstanding commodity derivative agreements |
| December 2019 |
|
| December 2018 |
|
| December 2020 |
|
| December 2019 |
|
13.15.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 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 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.
• | 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 value of the Company’s non-qualified deferred compensation plan for certain executives and other highly compensated employees is based on the fair values of 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 of 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. The Company’s 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. |
|
| Level 2 |
| The carrying amounts of the Company’s |
|
| Level 2 |
| The fair values of the Company’s |
Public debt securities |
| Level 2 |
| 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. |
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:
|
| September 30, 2018 |
|
| June 30, 2019 |
| ||||||||||||||||||||||||||||||||||
|
| Carrying |
|
| Total |
|
| Fair Value |
|
| Fair Value |
|
| Fair Value |
|
| Carrying |
|
| Total |
|
| Fair Value |
|
| Fair Value |
|
| Fair Value |
| ||||||||||
(in thousands) |
| Amount |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Amount |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
| $ | 36,291 |
|
| $ | 36,291 |
|
| $ | 36,291 |
|
| $ | - |
|
| $ | - |
|
| $ | 39,012 |
|
| $ | 39,012 |
|
| $ | 39,012 |
|
| $ | - |
|
| $ | - |
|
Commodity hedging agreements |
|
| 1,281 |
|
|
| 1,281 |
|
|
| - |
|
|
| 1,281 |
|
|
| - |
| ||||||||||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities |
|
| 36,291 |
|
|
| 36,291 |
|
|
| 36,291 |
|
|
| - |
|
|
| - |
|
|
| 39,012 |
|
|
| 39,012 |
|
|
| 39,012 |
|
|
| - |
|
|
| - |
|
Non-public variable rate debt |
|
| 462,031 |
|
|
| 462,500 |
|
|
| - |
|
|
| 462,500 |
|
|
| - |
| ||||||||||||||||||||
Non-public fixed rate debt |
|
| 274,697 |
|
|
| 256,200 |
|
|
| - |
|
|
| 256,200 |
|
|
| - |
| ||||||||||||||||||||
Commodity hedging agreements |
|
| 8,625 |
|
|
| 8,625 |
|
|
| - |
|
|
| 8,625 |
|
|
| - |
| ||||||||||||||||||||
Nonpublic variable rate debt |
|
| 369,662 |
|
|
| 370,000 |
|
|
| - |
|
|
| 370,000 |
|
|
| - |
| ||||||||||||||||||||
Nonpublic fixed rate debt |
|
| 374,696 |
|
|
| 380,900 |
|
|
| - |
|
|
| 380,900 |
|
|
| - |
| ||||||||||||||||||||
Public debt securities |
|
| 457,381 |
|
|
| 457,800 |
|
|
| - |
|
|
| 457,800 |
|
|
| - |
|
|
| 347,794 |
|
|
| 363,800 |
|
|
| - |
|
|
| 363,800 |
|
|
| - |
|
Acquisition related contingent consideration |
|
| 363,836 |
|
|
| 363,836 |
|
|
| - |
|
|
| - |
|
|
| 363,836 |
|
|
| 412,450 |
|
|
| 412,450 |
|
|
| - |
|
|
| - |
|
|
| 412,450 |
|
|
| December 31, 2017 |
|
| December 30, 2018 |
| ||||||||||||||||||||||||||||||||||
|
| Carrying |
|
| Total |
|
| Fair Value |
|
| Fair Value |
|
| Fair Value |
|
| Carrying |
|
| Total |
|
| Fair Value |
|
| Fair Value |
|
| Fair Value |
| ||||||||||
(in thousands) |
| Amount |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Amount |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
| $ | 33,166 |
|
| $ | 33,166 |
|
| $ | 33,166 |
|
| $ | - |
|
| $ | - |
|
| $ | 33,160 |
|
| $ | 33,160 |
|
| $ | 33,160 |
|
| $ | - |
|
| $ | - |
|
Commodity hedging agreements |
|
| 4,420 |
|
|
| 4,420 |
|
|
| - |
|
|
| 4,420 |
|
|
| - |
| ||||||||||||||||||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities |
|
| 33,166 |
|
|
| 33,166 |
|
|
| 33,166 |
|
|
| - |
|
|
| - |
|
|
| 33,160 |
|
|
| 33,160 |
|
|
| 33,160 |
|
|
| - |
|
|
| - |
|
Non-public variable rate debt |
|
| 506,398 |
|
|
| 507,000 |
|
|
| - |
|
|
| 507,000 |
|
|
| - |
| ||||||||||||||||||||
Non-public fixed rate debt |
|
| 124,829 |
|
|
| 126,400 |
|
|
| - |
|
|
| 126,400 |
|
|
| - |
| ||||||||||||||||||||
Commodity hedging agreements |
|
| 10,305 |
|
|
| 10,305 |
|
|
| - |
|
|
| 10,305 |
|
|
| - |
| ||||||||||||||||||||
Nonpublic variable rate debt |
|
| 372,074 |
|
|
| 372,500 |
|
|
| - |
|
|
| 372,500 |
|
|
| - |
| ||||||||||||||||||||
Nonpublic fixed rate debt |
|
| 274,717 |
|
|
| 261,200 |
|
|
| - |
|
|
| 261,200 |
|
|
| - |
| ||||||||||||||||||||
Public debt securities |
|
| 456,791 |
|
|
| 475,100 |
|
|
| - |
|
|
| 475,100 |
|
|
| - |
|
|
| 457,612 |
|
|
| 455,400 |
|
|
| - |
|
|
| 455,400 |
|
|
| - |
|
Acquisition related contingent consideration |
|
| 381,291 |
|
|
| 381,291 |
|
|
| - |
|
|
| - |
|
|
| 381,291 |
|
|
| 382,898 |
|
|
| 382,898 |
|
|
| - |
|
|
| - |
|
|
| 382,898 |
|
Under the CBA, the Company is required to make quarterly sub-bottling payments 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 distribution territories acquired in the System Transformation, excluding territories the Company acquired in an exchange transaction. This
The 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 distribution territories to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC.
TheseThe future expected sub-bottling payments extend through the life of the relatedapplicable distribution assets acquired in each distribution territory,System Transformation transaction, which is generally 40 years. 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 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 income or 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:
|
| Third Quarter |
|
| First Three Quarters |
|
| Second Quarter |
|
| First Half |
| ||||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Beginning balance - Level 3 liability |
| $ | 374,537 |
|
| $ | 319,102 |
|
| $ | 381,291 |
|
| $ | 253,437 |
|
| $ | 393,007 |
|
| $ | 368,804 |
|
| $ | 382,898 |
|
| $ | 381,291 |
|
Increase due to System Transformation Transactions acquisitions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 46,086 |
| ||||||||||||||||
Measurement period adjustments(1) |
|
| (1,279 | ) |
|
| - |
|
|
| 813 |
|
|
| - |
|
|
| - |
|
|
| 3,151 |
|
|
| - |
|
|
| 2,092 |
|
Payment of acquisition related contingent consideration |
|
| (7,049 | ) |
|
| (5,094 | ) |
|
| (18,312 | ) |
|
| (11,650 | ) | ||||||||||||||||
Payments of acquisition related contingent consideration |
|
| (6,599 | ) |
|
| (5,381 | ) |
|
| (12,836 | ) |
|
| (11,263 | ) | ||||||||||||||||
Reclassification to current payables |
|
| - |
|
|
| 150 |
|
|
| (1,540 | ) |
|
| (2,080 | ) |
|
| (3,180 | ) |
|
| (1,180 | ) |
|
| (880 | ) |
|
| (1,540 | ) |
(Favorable)/unfavorable fair value adjustment |
|
| (2,373 | ) |
|
| (5,225 | ) |
|
| 1,584 |
|
|
| 23,140 |
| ||||||||||||||||
Increase in fair value |
|
| 29,222 |
|
|
| 9,143 |
|
|
| 43,268 |
|
|
| 3,957 |
| ||||||||||||||||
Ending balance - Level 3 liability |
| $ | 363,836 |
|
| $ | 308,933 |
|
| $ | 363,836 |
|
| $ | 308,933 |
|
| $ | 412,450 |
|
| $ | 374,537 |
|
| $ | 412,450 |
|
| $ | 374,537 |
|
(1) | Measurement period adjustments relate to post-closing adjustments made |
The increase in the fair value adjustments toof the acquisition related contingent consideration liability during the first three quartershalf of 2018 were2019 was primarily driven by a decrease in the discount rate and changes to the risk-free interest rate and the projectedin future operating resultscash flow projections of the distribution territories acquired as part of the System Transformation subject to sub-bottling fees partially offset by cash payments.. The increase in the fair value adjustments toof the acquisition related contingent consideration liability during the first three quartershalf of 2017 were2018 was primarily driven by a changecash payments, post-closing adjustments related to System Transformation transactions and changes in future cash flow projections of the distribution territories subject to sub-bottling fees, partially offset by an increase in the risk-free interestdiscount rate. These fair value adjustments were recorded in other income (expense),expense, net in the condensed consolidated condensed statements of operations.
The anticipated amount the Company could pay annually under the acquisition related contingent consideration arrangements for the System Transformation Transactions is expected to be in the range of $25 million to $47$49 million.
14.16.Income Taxes
The Company’s effective income tax rate, calculated by dividing income tax expense (benefit) by income (loss) before income taxes, was 27.0% for the first half of 2019 and 44.6% for the first half of 2018. The decrease in the effective tax rate was primarily driven by improved financial results.
The Company’s effective income tax rate, calculated by dividing income tax expense (benefit) by income (loss) before income taxes minus net income attributable to noncontrolling interest, was 32.8% for the first half of 2019 and 42.0% for the first half of 2018.
The Company had uncertain tax positions, including accrued interest, of $3.2 million on June 30, 2019 and $3.1 million on December 30, 2018, all of which would affect the Company’s effective tax rate if recognized. While it is expected the amount of uncertain tax positions may change in the next 12 months, the Company does not expect such change would have a significant impact on the condensed 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.
17.Pension and Postretirement Benefit Obligations
Pension Plans
There are two Company-sponsored pension plans. The primary Company-sponsored pension 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 Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes.
The components of net periodic pension cost were as follows:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Service cost |
| $ | 1,206 |
|
| $ | 1,413 |
|
| $ | 2,413 |
|
| $ | 2,825 |
|
Interest cost |
|
| 3,062 |
|
|
| 2,856 |
|
|
| 6,125 |
|
|
| 5,712 |
|
Expected return on plan assets |
|
| (2,574 | ) |
|
| (3,852 | ) |
|
| (5,148 | ) |
|
| (7,704 | ) |
Recognized net actuarial loss |
|
| 900 |
|
|
| 933 |
|
|
| 1,801 |
|
|
| 1,866 |
|
Amortization of prior service cost |
|
| 7 |
|
|
| 6 |
|
|
| 12 |
|
|
| 12 |
|
Net periodic pension cost |
| $ | 2,601 |
|
| $ | 1,356 |
|
| $ | 5,203 |
|
| $ | 2,711 |
|
The Company did not make any contributions to the two Company sponsored pension plans during the first half of 2019. Contributions to the two Company-sponsored pension plans are expected to be in the range of $1 million to $2 million for the remainder of 2019.
Postretirement Benefits
The Company provides postretirement benefits for a portion of its current employees. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during covered employees’ periods of active service. The Company does not pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.
The components of net periodic postretirement benefit cost were as follows:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Service cost |
| $ | 389 |
|
| $ | 503 |
|
| $ | 778 |
|
| $ | 1,005 |
|
Interest cost |
|
| 693 |
|
|
| 696 |
|
|
| 1,386 |
|
|
| 1,392 |
|
Recognized net actuarial loss |
|
| 195 |
|
|
| 499 |
|
|
| 391 |
|
|
| 998 |
|
Amortization of prior service cost |
|
| (322 | ) |
|
| (462 | ) |
|
| (646 | ) |
|
| (924 | ) |
Net periodic postretirement benefit cost |
| $ | 955 |
|
| $ | 1,236 |
|
| $ | 1,909 |
|
| $ | 2,471 |
|
18.Other Liabilities
Other liabilities consisted of the following:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
|
| June 30, 2019 |
|
| December 30, 2018 |
| ||||
Non-current portion of acquisition related contingent consideration |
| $ | 338,530 |
|
| $ | 357,952 |
| ||||||||
Noncurrent portion of acquisition related contingent consideration |
| $ | 380,319 |
|
| $ | 349,905 |
| ||||||||
Accruals for executive benefit plans |
|
| 128,079 |
|
|
| 125,791 |
|
|
| 134,753 |
|
|
| 126,103 |
|
Non-current deferred proceeds from Territory Conversion Fee |
|
| 85,734 |
|
|
| 87,449 |
| ||||||||
Non-current deferred proceeds from Legacy Facilities Credit(1) |
|
| 30,568 |
|
|
| 29,881 |
| ||||||||
Noncurrent deferred proceeds from Territory Conversion Fee |
|
| 84,020 |
|
|
| 85,163 |
| ||||||||
Noncurrent deferred proceeds from Legacy Facilities Credit |
|
| 29,969 |
|
|
| 30,369 |
| ||||||||
Other |
|
| 17,399 |
|
|
| 19,506 |
|
|
| 12,495 |
|
|
| 17,595 |
|
Total other liabilities |
| $ | 600,310 |
|
| $ | 620,579 |
|
| $ | 641,556 |
|
| $ | 609,135 |
|
19.Debt
Following is a summary of the Company’s debt:
(in thousands) |
| Maturity Date |
| Interest Rate |
|
| Interest Paid |
| Public or Nonpublic |
| June 30, 2019 |
|
| December 30, 2018 |
| |||
Senior notes(1) |
| 4/15/2019 |
| 7.00% |
|
| Semi-annually |
| Public |
| $ | - |
|
| $ | 110,000 |
| |
Term loan facility(1) |
| 6/7/2021 |
| Variable |
|
| Varies |
| Nonpublic |
|
| 270,000 |
|
|
| 292,500 |
| |
Senior notes |
| 2/27/2023 |
| 3.28% |
|
| Semi-annually |
| Nonpublic |
|
| 125,000 |
|
|
| 125,000 |
| |
Revolving credit facility(2) |
| 6/8/2023 |
| Variable |
|
| Varies |
| Nonpublic |
|
| 100,000 |
|
|
| 80,000 |
| |
Senior notes |
| 11/25/2025 |
| 3.80% |
|
| Semi-annually |
| Public |
|
| 350,000 |
|
|
| 350,000 |
| |
Senior notes |
| 10/10/2026 |
| 3.93% |
|
| Quarterly |
| Nonpublic |
|
| 100,000 |
|
|
| - |
| |
Senior notes |
| 3/21/2030 |
| 3.96% |
|
| Quarterly |
| Nonpublic |
|
| 150,000 |
|
|
| 150,000 |
| |
Unamortized discount on senior notes(3) |
| 4/15/2019 |
|
|
|
|
|
|
|
|
|
| - |
|
|
| (78 | ) |
Unamortized discount on senior notes(3) |
| 11/25/2025 |
|
|
|
|
|
|
|
|
|
| (56 | ) |
|
| (61 | ) |
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| (2,792 | ) |
|
| (2,958 | ) |
Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | 1,092,152 |
|
| $ | 1,104,403 |
|
(2) | The Company’s revolving credit facility has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. The Company currently believes all banks participating in the revolving credit facility have the ability to and will meet any funding requests from the Company. |
(3) |
|
15.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 April 10, 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its affiliates pursuant to a Note Purchase and Private Shelf Agreement dated January 23, 2019 between the Company, MetLife and the other parties thereto. These notes bear interest at 3.93%, payable quarterly in arrears on each January 10, April 10, July 10 and October 10, commencing on July 10, 2019, and will mature on October 10, 2026, unless earlier redeemed by the Company. The Company used the proceeds to refinance the senior notes due on April 15, 2019. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to $200 million.
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 agreements under which the Company’s nonpublic debt were issued 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 June 30, 2019. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.
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.
20.Commitments and Contingencies
Manufacturing CooperativesPension Plans
There are two Company-sponsored pension plans. The primary Company-sponsored pension 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 Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes.
The components of net periodic pension cost were as follows:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Service cost |
| $ | 1,206 |
|
| $ | 1,413 |
|
| $ | 2,413 |
|
| $ | 2,825 |
|
Interest cost |
|
| 3,062 |
|
|
| 2,856 |
|
|
| 6,125 |
|
|
| 5,712 |
|
Expected return on plan assets |
|
| (2,574 | ) |
|
| (3,852 | ) |
|
| (5,148 | ) |
|
| (7,704 | ) |
Recognized net actuarial loss |
|
| 900 |
|
|
| 933 |
|
|
| 1,801 |
|
|
| 1,866 |
|
Amortization of prior service cost |
|
| 7 |
|
|
| 6 |
|
|
| 12 |
|
|
| 12 |
|
Net periodic pension cost |
| $ | 2,601 |
|
| $ | 1,356 |
|
| $ | 5,203 |
|
| $ | 2,711 |
|
The Company did not make any contributions to the two Company sponsored pension plans during the first half of 2019. Contributions to the two Company-sponsored pension plans are expected to be in the range of $1 million to $2 million for the remainder of 2019.
Postretirement Benefits
The Company is a shareholder of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights. The Company accountsprovides postretirement benefits for SAC as an equity method investment. The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Proceeds from management fees received from SAC were $6.8 million in the first three quarters of 2018 and $6.9 million in the first three quarters of 2017.
The Company is obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. The Company purchased 22.2 million cases and 22.6 million cases of finished product from SAC in the first three quarters of 2018 and the first three quarters of 2017, respectively.
The Company is also a shareholder of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative from which the Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. The Company accounts for Southeastern as an equity method investment.
The following table summarizes the Company’s purchases from these manufacturing cooperatives:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Purchases from SAC |
| $ | 38,569 |
|
| $ | 37,267 |
|
| $ | 117,729 |
|
| $ | 111,408 |
|
Purchases from Southeastern |
|
| 32,379 |
|
|
| 29,344 |
|
|
| 92,613 |
|
|
| 80,301 |
|
Total purchases from manufacturing cooperatives |
| $ | 70,948 |
|
| $ | 66,611 |
|
| $ | 210,342 |
|
| $ | 191,709 |
|
The Company guarantees a portion of SAC’s debt,its current employees. The Company recognizes the cost of postretirement benefits, which expires at various dates through 2021. The amounts guaranteed were $23.9 million asconsist principally of both September 30, 2018 and December 31, 2017.medical benefits, during covered employees’ periods of active service. The Company does not anticipate SAC will failpre-fund these benefits and has the right to fulfill its commitment related tomodify or terminate certain of these benefits in the debt. future.
The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, andcomponents of net periodic postretirement benefit cost were as follows:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Service cost |
| $ | 389 |
|
| $ | 503 |
|
| $ | 778 |
|
| $ | 1,005 |
|
Interest cost |
|
| 693 |
|
|
| 696 |
|
|
| 1,386 |
|
|
| 1,392 |
|
Recognized net actuarial loss |
|
| 195 |
|
|
| 499 |
|
|
| 391 |
|
|
| 998 |
|
Amortization of prior service cost |
|
| (322 | ) |
|
| (462 | ) |
|
| (646 | ) |
|
| (924 | ) |
Net periodic postretirement benefit cost |
| $ | 955 |
|
| $ | 1,236 |
|
| $ | 1,909 |
|
| $ | 2,471 |
|
18.Other Liabilities
Other liabilities consisted of the ability to adjust selling pricesfollowing:
(in thousands) |
| June 30, 2019 |
|
| December 30, 2018 |
| ||
Noncurrent portion of acquisition related contingent consideration |
| $ | 380,319 |
|
| $ | 349,905 |
|
Accruals for executive benefit plans |
|
| 134,753 |
|
|
| 126,103 |
|
Noncurrent deferred proceeds from Territory Conversion Fee |
|
| 84,020 |
|
|
| 85,163 |
|
Noncurrent deferred proceeds from Legacy Facilities Credit |
|
| 29,969 |
|
|
| 30,369 |
|
Other |
|
| 12,495 |
|
|
| 17,595 |
|
Total other liabilities |
| $ | 641,556 |
|
| $ | 609,135 |
|
19.Debt
Following is a summary of its products to adequately mitigate the risk of material loss from the Company’s guarantee.
In the event SAC 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 guarantee. The following table summarizes the Company’s maximum exposure under this guarantee if SAC had borrowed up to its aggregate borrowing capacity:debt:
(in thousands) |
| September 30, 2018 |
| |
Maximum guaranteed debt |
| $ | 23,938 |
|
Equity investments(1) |
|
| 8,175 |
|
Maximum total exposure, including equity investments |
| $ | 32,113 |
|
(in thousands) |
| Maturity Date |
| Interest Rate |
|
| Interest Paid |
| Public or Nonpublic |
| June 30, 2019 |
|
| December 30, 2018 |
| |||
Senior notes(1) |
| 4/15/2019 |
| 7.00% |
|
| Semi-annually |
| Public |
| $ | - |
|
| $ | 110,000 |
| |
Term loan facility(1) |
| 6/7/2021 |
| Variable |
|
| Varies |
| Nonpublic |
|
| 270,000 |
|
|
| 292,500 |
| |
Senior notes |
| 2/27/2023 |
| 3.28% |
|
| Semi-annually |
| Nonpublic |
|
| 125,000 |
|
|
| 125,000 |
| |
Revolving credit facility(2) |
| 6/8/2023 |
| Variable |
|
| Varies |
| Nonpublic |
|
| 100,000 |
|
|
| 80,000 |
| |
Senior notes |
| 11/25/2025 |
| 3.80% |
|
| Semi-annually |
| Public |
|
| 350,000 |
|
|
| 350,000 |
| |
Senior notes |
| 10/10/2026 |
| 3.93% |
|
| Quarterly |
| Nonpublic |
|
| 100,000 |
|
|
| - |
| |
Senior notes |
| 3/21/2030 |
| 3.96% |
|
| Quarterly |
| Nonpublic |
|
| 150,000 |
|
|
| 150,000 |
| |
Unamortized discount on senior notes(3) |
| 4/15/2019 |
|
|
|
|
|
|
|
|
|
| - |
|
|
| (78 | ) |
Unamortized discount on senior notes(3) |
| 11/25/2025 |
|
|
|
|
|
|
|
|
|
| (56 | ) |
|
| (61 | ) |
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| (2,792 | ) |
|
| (2,958 | ) |
Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | 1,092,152 |
|
| $ | 1,104,403 |
|
(1) |
|
(2) | The Company’s revolving credit facility has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s |
(3) | The senior notes due in 2019 were issued at 98.238% of par and the senior notes due in 2025 were issued at 99.975% of par. |
The Company holds no assets as collateral against the SAC guarantee, the fair value of which is immaterial to the Company’s consolidated condensedmitigates its financing risk by using multiple financial statements.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 April 10, 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its investments in SACaffiliates pursuant to a Note Purchase and would be required to write down its investment if an impairment was identifiedPrivate Shelf Agreement dated January 23, 2019 between the Company, MetLife and the other parties thereto. These notes bear interest at 3.93%, payable quarterly in arrears on each January 10, April 10, July 10 and October 10, commencing on July 10, 2019, and will mature on October 10, 2026, unless earlier redeemed by the Company. The Company determined itused the proceeds to be other than temporary. No impairmentrefinance the senior notes due on April 15, 2019. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company’s investmentsCompany under the agreement in SAC was identified asan aggregate principal amount of September 30, 2018, and there was no impairment identified in 2017.
Other Commitments and Contingenciesup to $200 million.
The Company has standby lettersindentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of credit, primarily related to its propertycertain liens and casualty insurance programs. These letters of credit totaled $35.6 millionencumbrances as of both September 30, 2018 and December 31, 2017.
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of September 30, 2018,well as indebtedness by the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $160.0 million.
The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes that the ultimate disposition of these matters will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company. No material amount of lossCompany’s subsidiaries in excess of recorded amounts is believed to be reasonably possiblecertain amounts. The agreements under which the Company’s nonpublic debt were issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as a result of these claims and legal proceedings.
defined in the respective agreements. The Company is subject to audits by tax authoritieswas in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolvedcompliance with the authorities or potentially through the courts. Management believes the Company has adequately provided for any assessments likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the consolidated condensed financial statements.
16.Income Taxes
The Company’s effective income tax rate, as calculated by dividing income tax expense by income before income taxes, was 24.1% for the first three quarters of 2018 and 34.8% for the first three quarters of 2017. The decrease in the effective tax rate was primarily driven by the corporate rate reduction due to the Tax Act and its impact on prior estimates and lower income before income taxes, which was offset by an increase in certain non-deductible expenses.
The Company’s effective income tax rate, as calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 32.5% for the first three quarters of 2018 and 38.8% for the first three quarters of 2017.
Shortly after the Tax Act was enacted, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the application of GAAP and direct taxpayers to consider the impact of the Tax Act as “provisional” when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law. In accordance with SAB 118, the Company recognized a provisional tax benefit related to the re-measurement of its net deferred tax liability of $69.0 millioncovenants as of December 31, 2017. During the third quarter of 2018, the Company recorded an additional provisional tax benefit of $1.9 million attributable to the re-measurement of its net deferred tax liability in connection with the filing of its 2017 federal income tax return.
The ultimate impact may differ from the provisional amounts, possibly materially, due to, among other things, the significant complexity of the Tax Act, anticipated additional regulatory guidance or related interpretations that may be issued by the Internal Revenue Service (the “IRS”), changes in accounting standards, legislative actions, future actions by states within the U.S.June 30, 2019. These covenants do not currently, and changes in estimates, analysis, interpretations and assumptions made by the Company.
The Company had uncertain tax positions, including accrued interest, of $3.0 million on September 30, 2018 and $2.4 million on December 31, 2017, all of which would affect the Company’s effective tax rate if recognized. While it is expected the amount of uncertain tax positions may change in the next 12 months, the Company does not expect such change would have a significant impact on the consolidated condensed financial statements.anticipate they will, restrict its liquidity or capital resources.
Prior tax years beginning in year 2002 remain open to examinationAll outstanding long-term debt has been issued by the IRS,Company and various tax years beginning in year 1998 remain open to examinationnone has been issued by certain state tax jurisdictions.
17.Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (“AOCI(L)”) is comprisedany of adjustments relative to the Company’s pension and postretirement medical benefit plans and foreign currency translation adjustments required for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.
A summary of AOCI(L) for the third quarter of 2018 and the third quarter of 2017 is as follows:
(in thousands) |
| July 1, 2018 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| September 30, 2018 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (77,212 | ) |
| $ | 934 |
|
| $ | (231 | ) |
| $ | (76,509 | ) |
Prior service costs |
|
| (34 | ) |
|
| 6 |
|
|
| (2 | ) |
|
| (30 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (22,767 | ) |
|
| 499 |
|
|
| (123 | ) |
|
| (22,391 | ) |
Prior service costs |
|
| 1,048 |
|
|
| (462 | ) |
|
| 114 |
|
|
| 700 |
|
Recognized loss due to October 2017 Divestitures(1) |
|
| 6,220 |
|
|
| - |
|
|
| - |
|
|
| 6,220 |
|
Foreign currency translation adjustment |
|
| 8 |
|
|
| (2 | ) |
|
| 1 |
|
|
| 7 |
|
Total |
| $ | (92,737 | ) |
| $ | 975 |
|
| $ | (241 | ) |
| $ | (92,003 | ) |
|
|
(in thousands) |
| July 2, 2017 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| October 1, 2017 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (71,402 | ) |
| $ | 807 |
|
| $ | (311 | ) |
| $ | (70,906 | ) |
Prior service costs |
|
| (52 | ) |
|
| 7 |
|
|
| (3 | ) |
|
| (48 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (23,315 | ) |
|
| 648 |
|
|
| (250 | ) |
|
| (22,917 | ) |
Prior service costs |
|
| 2,763 |
|
|
| (745 | ) |
|
| 287 |
|
|
| 2,305 |
|
Foreign currency translation adjustment |
|
| 5 |
|
|
| 11 |
|
|
| (4 | ) |
|
| 12 |
|
Total |
| $ | (92,001 | ) |
| $ | 728 |
|
| $ | (281 | ) |
| $ | (91,554 | ) |
A summary of AOCI(L) for the first three quarters of 2018 and the first three quarters of 2017 is as follows:
(in thousands) |
| December 31, 2017 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| September 30, 2018 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (78,618 | ) |
| $ | 2,800 |
|
| $ | (691 | ) |
| $ | (76,509 | ) |
Prior service costs |
|
| (43 | ) |
|
| 18 |
|
|
| (5 | ) |
|
| (30 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (23,519 | ) |
|
| 1,497 |
|
|
| (369 | ) |
|
| (22,391 | ) |
Prior service costs |
|
| 1,744 |
|
|
| (1,386 | ) |
|
| 342 |
|
|
| 700 |
|
Recognized loss due to October 2017 Divestitures(1) |
|
| 6,220 |
|
|
| - |
|
|
| - |
|
|
| 6,220 |
|
Foreign currency translation adjustment |
|
| 14 |
|
|
| (10 | ) |
|
| 3 |
|
|
| 7 |
|
Total |
| $ | (94,202 | ) |
| $ | 2,919 |
|
| $ | (720 | ) |
| $ | (92,003 | ) |
|
|
(in thousands) |
| January 1, 2017 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| October 1, 2017 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (72,393 | ) |
| $ | 2,421 |
|
| $ | (934 | ) |
| $ | (70,906 | ) |
Prior service costs |
|
| (61 | ) |
|
| 21 |
|
|
| (8 | ) |
|
| (48 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (24,111 | ) |
|
| 1,944 |
|
|
| (750 | ) |
|
| (22,917 | ) |
Prior service costs |
|
| 3,679 |
|
|
| (2,237 | ) |
|
| 863 |
|
|
| 2,305 |
|
Foreign currency translation adjustment |
|
| (11 | ) |
|
| 37 |
|
|
| (14 | ) |
|
| 12 |
|
Total |
| $ | (92,897 | ) |
| $ | 2,186 |
|
| $ | (843 | ) |
| $ | (91,554 | ) |
A summary of the impact of AOCI(L) on certain statements of operations line items is as follows:
|
| Third Quarter 2018 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 217 |
|
| $ | 6 |
|
| $ | - |
|
| $ | 223 |
|
Selling, delivery and administrative expenses |
|
| 723 |
|
|
| 31 |
|
|
| (2 | ) |
|
| 752 |
|
Subtotal pre-tax |
|
| 940 |
|
|
| 37 |
|
|
| (2 | ) |
|
| 975 |
|
Income tax expense |
|
| 233 |
|
|
| 9 |
|
|
| (1 | ) |
|
| 241 |
|
Total after tax effect |
| $ | 707 |
|
| $ | 28 |
|
| $ | (1 | ) |
| $ | 734 |
|
|
| Third Quarter 2017 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 171 |
|
| $ | (21 | ) |
| $ | - |
|
| $ | 150 |
|
Selling, delivery and administrative expenses |
|
| 643 |
|
|
| (76 | ) |
|
| 11 |
|
|
| 578 |
|
Subtotal pre-tax |
|
| 814 |
|
|
| (97 | ) |
|
| 11 |
|
|
| 728 |
|
Income tax expense |
|
| 314 |
|
|
| (37 | ) |
|
| 4 |
|
|
| 281 |
|
Total after tax effect |
| $ | 500 |
|
| $ | (60 | ) |
| $ | 7 |
|
| $ | 447 |
|
|
| First Three Quarters 2018 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 648 |
|
| $ | 19 |
|
| $ | - |
|
| $ | 667 |
|
Selling, delivery and administrative expenses |
|
| 2,170 |
|
|
| 92 |
|
|
| (10 | ) |
|
| 2,252 |
|
Subtotal pre-tax |
|
| 2,818 |
|
|
| 111 |
|
|
| (10 | ) |
|
| 2,919 |
|
Income tax expense |
|
| 696 |
|
|
| 27 |
|
|
| (3 | ) |
|
| 720 |
|
Total after tax effect |
| $ | 2,122 |
|
| $ | 84 |
|
| $ | (7 | ) |
| $ | 2,199 |
|
|
| First Three Quarters 2017 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 497 |
|
| $ | (64 | ) |
| $ | - |
|
| $ | 433 |
|
Selling, delivery and administrative expenses |
|
| 1,945 |
|
|
| (230 | ) |
|
| 37 |
|
|
| 1,752 |
|
Subtotal pre-tax |
|
| 2,442 |
|
|
| (294 | ) |
|
| 37 |
|
|
| 2,185 |
|
Income tax expense |
|
| 942 |
|
|
| (114 | ) |
|
| 14 |
|
|
| 842 |
|
Total after tax effect |
| $ | 1,500 |
|
| $ | (180 | ) |
| $ | 23 |
|
| $ | 1,343 |
|
18.Capital Transactions
During the first quarter of each year, the Compensation Committeeits subsidiaries. There are no guarantees of the Company’s Board of Directors (the “Committee”) 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”). The Performance Unit Award Agreement expires at the end of 2018, with the final potential award to be issued in the first quarter of 2019 in connection with Mr. Harrison’s services during 2018.debt.
As permitted under the terms of the Performance Unit Award Agreement, a number of shares were settled in cash in 201820.Commitments and 2017 to satisfy tax withholding obligations in connection with the vesting of the performance units. The remaining number of shares increased the total shares of Class B Common Stock outstanding. A summary of the awards issued in 2018 and 2017 is as follows:Contingencies
|
| Fiscal Year |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Date of approval for award |
| March 6, 2018 |
|
| March 7, 2017 |
| ||
Fiscal year of service covered by award |
| 2017 |
|
| 2016 |
| ||
Shares settled in cash to satisfy tax withholding obligations |
|
| 16,504 |
|
|
| 18,980 |
|
Increase in Class B Common Stock shares outstanding |
|
| 20,296 |
|
|
| 21,020 |
|
Total Class B Common Stock awarded |
|
| 36,800 |
|
|
| 40,000 |
|
Compensation expense for the awards issued pursuant to the Performance Unit Award Agreement, recognized on the closing share price of the last trading day prior to the end of the fiscal period, was as follows:
|
| First Three Quarters |
| |||||
(in thousands, except share price) |
| 2018 |
|
| 2017 |
| ||
Total compensation expense |
| $ | 4,494 |
|
| $ | 6,473 |
|
Share price for compensation expense |
| $ | 182.28 |
|
| $ | 215.75 |
|
Share price date for compensation expense |
| September 28, 2018 |
|
| September 29, 2017 |
|
During the second quarter of 2018, the Committee and the Company’s stockholders approved a long-term performance equity plan (the “Long-Term Performance Equity Plan”), which will compensate J. Frank Harrison, III based on the Company’s performance and will succeed the Performance Unit Award Agreement upon its expiration. Awards granted under the Long-Term Performance Equity Plan will be earned based on the Company’s attainment during a performance period of certain performance measures, each as specified by the Committee. These awards may be settled in cash and/or shares of Class B Common Stock, based on the average of the closing prices of shares of Common Stock during the last twenty trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which is included in S,D&A expenses on the consolidated condensed statements of operations, was $1.5 million for the first three quarters of 2018.
19.Pension and Postretirement Benefit Obligations
Pension Plans
There are two Company-sponsored pension plans. The primary Company-sponsored pension 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 Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes.
The components of net periodic pension cost were as follows:
|
| Third Quarter |
|
| First Three Quarters |
|
| Second Quarter |
|
| First Half |
| ||||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Service cost |
| $ | 1,412 |
|
| $ | 150 |
|
| $ | 4,237 |
|
| $ | 450 |
|
| $ | 1,206 |
|
| $ | 1,413 |
|
| $ | 2,413 |
|
| $ | 2,825 |
|
Interest cost |
|
| 2,856 |
|
|
| 2,978 |
|
|
| 8,568 |
|
|
| 8,936 |
|
|
| 3,062 |
|
|
| 2,856 |
|
|
| 6,125 |
|
|
| 5,712 |
|
Expected return on plan assets |
|
| (3,853 | ) |
|
| (3,399 | ) |
|
| (11,557 | ) |
|
| (10,197 | ) |
|
| (2,574 | ) |
|
| (3,852 | ) |
|
| (5,148 | ) |
|
| (7,704 | ) |
Recognized net actuarial loss |
|
| 934 |
|
|
| 807 |
|
|
| 2,800 |
|
|
| 2,421 |
|
|
| 900 |
|
|
| 933 |
|
|
| 1,801 |
|
|
| 1,866 |
|
Amortization of prior service cost |
|
| 6 |
|
|
| 7 |
|
|
| 18 |
|
|
| 21 |
|
|
| 7 |
|
|
| 6 |
|
|
| 12 |
|
|
| 12 |
|
Net periodic pension cost |
| $ | 1,355 |
|
| $ | 543 |
|
| $ | 4,066 |
|
| $ | 1,631 |
|
| $ | 2,601 |
|
| $ | 1,356 |
|
| $ | 5,203 |
|
| $ | 2,711 |
|
The Company contributed $20.0 milliondid not make any contributions to the two Company sponsored pension plans during the third quarterfirst half of 2018 and does not anticipate making additional contributions during2019. Contributions to the fourth quartertwo Company-sponsored pension plans are expected to be in the range of 2018.$1 million to $2 million for the remainder of 2019.
The Company provides postretirement benefits for a portion of its current employees. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during covered employees’ periods of active service. The Company does not pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.
The components of net periodic postretirement benefit cost were as follows:
|
| Third Quarter |
|
| First Three Quarters |
|
| Second Quarter |
|
| First Half |
| ||||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Service cost |
| $ | 502 |
|
| $ | 572 |
|
| $ | 1,507 |
|
| $ | 1,716 |
|
| $ | 389 |
|
| $ | 503 |
|
| $ | 778 |
|
| $ | 1,005 |
|
Interest cost |
|
| 696 |
|
|
| 910 |
|
|
| 2,088 |
|
|
| 2,732 |
|
|
| 693 |
|
|
| 696 |
|
|
| 1,386 |
|
|
| 1,392 |
|
Recognized net actuarial loss |
|
| 499 |
|
|
| 648 |
|
|
| 1,497 |
|
|
| 1,944 |
|
|
| 195 |
|
|
| 499 |
|
|
| 391 |
|
|
| 998 |
|
Amortization of prior service cost |
|
| (462 | ) |
|
| (745 | ) |
|
| (1,386 | ) |
|
| (2,237 | ) |
|
| (322 | ) |
|
| (462 | ) |
|
| (646 | ) |
|
| (924 | ) |
Net periodic postretirement benefit cost |
| $ | 1,235 |
|
| $ | 1,385 |
|
| $ | 3,706 |
|
| $ | 4,155 |
|
| $ | 955 |
|
| $ | 1,236 |
|
| $ | 1,909 |
|
| $ | 2,471 |
|
Multi-Employer Benefits18.Other Liabilities
Certain employeesOther liabilities consisted of the following:
(in thousands) |
| June 30, 2019 |
|
| December 30, 2018 |
| ||
Noncurrent portion of acquisition related contingent consideration |
| $ | 380,319 |
|
| $ | 349,905 |
|
Accruals for executive benefit plans |
|
| 134,753 |
|
|
| 126,103 |
|
Noncurrent deferred proceeds from Territory Conversion Fee |
|
| 84,020 |
|
|
| 85,163 |
|
Noncurrent deferred proceeds from Legacy Facilities Credit |
|
| 29,969 |
|
|
| 30,369 |
|
Other |
|
| 12,495 |
|
|
| 17,595 |
|
Total other liabilities |
| $ | 641,556 |
|
| $ | 609,135 |
|
19.Debt
Following is a summary of the Company’s debt:
(in thousands) |
| Maturity Date |
| Interest Rate |
|
| Interest Paid |
| Public or Nonpublic |
| June 30, 2019 |
|
| December 30, 2018 |
| |||
Senior notes(1) |
| 4/15/2019 |
| 7.00% |
|
| Semi-annually |
| Public |
| $ | - |
|
| $ | 110,000 |
| |
Term loan facility(1) |
| 6/7/2021 |
| Variable |
|
| Varies |
| Nonpublic |
|
| 270,000 |
|
|
| 292,500 |
| |
Senior notes |
| 2/27/2023 |
| 3.28% |
|
| Semi-annually |
| Nonpublic |
|
| 125,000 |
|
|
| 125,000 |
| |
Revolving credit facility(2) |
| 6/8/2023 |
| Variable |
|
| Varies |
| Nonpublic |
|
| 100,000 |
|
|
| 80,000 |
| |
Senior notes |
| 11/25/2025 |
| 3.80% |
|
| Semi-annually |
| Public |
|
| 350,000 |
|
|
| 350,000 |
| |
Senior notes |
| 10/10/2026 |
| 3.93% |
|
| Quarterly |
| Nonpublic |
|
| 100,000 |
|
|
| - |
| |
Senior notes |
| 3/21/2030 |
| 3.96% |
|
| Quarterly |
| Nonpublic |
|
| 150,000 |
|
|
| 150,000 |
| |
Unamortized discount on senior notes(3) |
| 4/15/2019 |
|
|
|
|
|
|
|
|
|
| - |
|
|
| (78 | ) |
Unamortized discount on senior notes(3) |
| 11/25/2025 |
|
|
|
|
|
|
|
|
|
| (56 | ) |
|
| (61 | ) |
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
| (2,792 | ) |
|
| (2,958 | ) |
Long-term debt |
|
|
|
|
|
|
|
|
|
|
| $ | 1,092,152 |
|
| $ | 1,104,403 |
|
(1) | The senior notes due in 2019 were refinanced on April 10, 2019 using proceeds from the issuance of the senior notes due in 2026 (as discussed below). The Company intends to refinance principal payments due in the next twelve months under the term loan facility, and has the capacity to do so under its revolving credit facility, which is classified as long-term debt. As such, any amounts due in the next twelve months were classified as noncurrent. |
(2) | The Company’s revolving credit facility has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. The Company currently believes all banks participating in the revolving credit facility have the ability to and will meet any funding requests from the Company. |
(3) | The senior notes due in 2019 were issued at 98.238% of par and the senior notes due in 2025 were issued at 99.975% of par. |
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 April 10, 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its affiliates pursuant to a Note Purchase and Private Shelf Agreement dated January 23, 2019 between the Company, MetLife and the other parties thereto. These notes bear interest at 3.93%, payable quarterly in arrears on each January 10, April 10, July 10 and October 10, commencing on July 10, 2019, and will mature on October 10, 2026, unless earlier redeemed by the Company. The Company used the proceeds to refinance the senior notes due on April 15, 2019. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company whose employment is covered under collective bargaining agreements participatethe agreement in a multi-employer pension plan, the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund (the “Teamsters Plan”). The Company makes monthly contributionsan aggregate principal amount of up to the Teamsters Plan on behalf of such employees. The collective bargaining agreements covering the Teamsters Plan expire at various times by April 2020. The Company expects these agreements will be re-negotiated.$200 million.
The risksindentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of participatingcertain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The agreements under which the Company’s nonpublic debt were issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the Teamsters Planrespective agreements. The Company was in compliance with these covenants as of June 30, 2019. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.
All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are differentno guarantees of the Company’s debt.
20.Commitments and Contingencies
Manufacturing Cooperatives
The Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories from single-employer plans as contributed assets are pooledSoutheastern. The Company is also obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. The Company purchased 14.3 million cases and may15.0 million cases of finished product from SAC in the first half of 2019 and the first half of 2018, respectively.
The following table summarizes the Company’s purchases from these manufacturing cooperatives:
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Purchases from Southeastern |
| $ | 36,614 |
|
| $ | 34,797 |
|
| $ | 70,940 |
|
| $ | 63,966 |
|
Purchases from SAC |
|
| 39,993 |
|
|
| 41,084 |
|
|
| 77,439 |
|
|
| 79,160 |
|
Total purchases from manufacturing cooperatives |
| $ | 76,607 |
|
| $ | 75,881 |
|
| $ | 148,379 |
|
| $ | 143,126 |
|
The Company guarantees a portion of SAC’s debt, which expires at various dates through 2021. The amounts guaranteed were $23.9 million on both June 30, 2019 and December 30, 2018. In the event SAC fails to fulfill its commitments under the related debt, the Company would be used to provide benefits to employees of other participating employers. If a participating employer stops contributingresponsible for payments to the Teamsters Plan,lenders up to the unfunded obligationslevel 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.guarantee. The Company does not anticipate withdrawingSAC will fail to fulfill its commitment related to the debt. The Company further believes SAC 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 Teamsters Plan.Company’s guarantee.
In 2015,The Company holds no assets as collateral against the SAC guarantee, the fair value of which is immaterial to the Company’s condensed consolidated financial statements. The Company monitors its investments in SAC and would be required to write down its investment if an impairment was identified and the Company increaseddetermined it to be other than temporary. No impairment of the Company’s investments in SAC was identified as of June 30, 2019, and there was no impairment identified in 2018.
Other Commitments and Contingencies
The Company has standby letters of credit, primarily related to its contribution ratesproperty and casualty insurance programs. These letters of credit totaled $35.6 million on both June 30, 2019 and December 30, 2018.
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of June 30, 2019, the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $198.0 million.
The Company is involved in various claims and legal proceedings which have arisen in the Teamsters Plan, with additional increases occurring annually,ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes that the ultimate disposition of these matters will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as part of a rehabilitation plan, which was incorporated into the renewal of collective bargaining agreements with the unions effective April 28, 2014 and adopted by the Company as a rehabilitation plan effective January 1, 2015. This was a result of the Teamsters Plan being certified by its actuary as being in “critical” status for the plan year beginning January 1, 2013.
20.Related Party Transactionsthese claims and legal proceedings.
The Coca‑Cola 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 condensed consolidated financial statements.
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 formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.21.Capital Transactions
AsDuring the first quarter of September 30, 2018, The Coca‑Cola Company owned approximately 27% of the Company’s total outstanding Common Stock and Class B Common Stock on a consolidated basis, 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, andeach year presented, J. Frank Harrison, III the Chairman of the Board and 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 thereceived shares of the Company’s Class B Common Stock which they control, representing approximately 86% of the total voting power of the Company’s combined Common Stock and Class B Common Stock, in favor of such designee. The Coca‑Cola Company does not own any shares of the Company’s Class B Common Stock.
The following table and the subsequent descriptions summarize the significant transactions between the Company and The Coca‑Cola Company:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Payments made by the Company to The Coca-Cola Company for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrate, syrup, sweetener and other purchases |
| $ | 341,949 |
|
| $ | 317,040 |
|
| $ | 904,244 |
|
| $ | 806,256 |
|
Customer marketing programs |
|
| 34,005 |
|
|
| 27,855 |
|
|
| 110,062 |
|
|
| 102,095 |
|
Cold drink equipment parts |
|
| 7,958 |
|
|
| 6,881 |
|
|
| 22,188 |
|
|
| 18,968 |
|
Glacéau distribution agreement consideration |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 15,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments made by The Coca-Cola Company to the Company for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Territory Conversion Fee |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 87,066 |
|
Marketing funding support payments |
|
| 22,632 |
|
|
| 22,074 |
|
|
| 65,325 |
|
|
| 62,235 |
|
Fountain delivery and equipment repair fees |
|
| 10,199 |
|
|
| 9,286 |
|
|
| 29,899 |
|
|
| 26,138 |
|
Facilitating the distribution of certain brands and packages to other Coca-Cola bottlers |
|
| 1,937 |
|
|
| 1,773 |
|
|
| 7,663 |
|
|
| 6,881 |
|
Presence marketing funding support on the Company’s behalf |
|
| 1,108 |
|
|
| 2,707 |
|
|
| 6,203 |
|
|
| 3,844 |
|
Cold drink equipment |
|
| - |
|
|
| - |
|
|
| 3,789 |
|
|
| 8,400 |
|
Coca‑Cola Refreshments USA, Inc.
The Company previously had a production arrangement with CCR to buy and sell finished products at cost and transported products for CCR to the Company’s and other Coca‑Cola bottlers’ locations. Following the completion of the October 2017 Transactions discussed in Note 3, the Company no longer transacts with CCR other than making quarterly sub-bottling payments, as discussed below. The following table summarizes purchases and sales under these arrangements between the Company and CCR prior to the closing of the October 2017 Transactions:
|
| 2017 |
| |||||
(in thousands) |
| Third Quarter |
|
| First Three Quarters |
| ||
Purchases from CCR |
| $ | 20,157 |
|
| $ | 110,451 |
|
Gross sales to CCR |
|
| 11,873 |
|
|
| 72,930 |
|
Pursuant to the CBA, the Company is required to make quarterly sub-bottling payments 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 territories acquired in the System Transformation, excluding territories the Company acquired in an exchange transaction. These sub-bottling payments are 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. Sub-bottling payments to CCR were $18.3 million during the first three quarters of 2018 and $11.7 million during the first three quarters of 2017. The following table summarizes the liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future sub‑bottling payments to CCR:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Current portion of acquisition related contingent consideration |
| $ | 25,306 |
|
| $ | 23,339 |
|
Non-current portion of acquisition related contingent consideration |
|
| 338,530 |
|
|
| 357,952 |
|
Total acquisition related contingent consideration |
| $ | 363,836 |
|
| $ | 381,291 |
|
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 to The Coca‑Cola Company during the first quarter of 2017, 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, 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 $13.9 million on September 30, 2018 and $11.2 million on December 31, 2017, which were classified as accounts receivable, other in the consolidated condensed balance sheets.
In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $2.2 million in the first three quarters of 2018 and $2.0 million in the first three quarters of 2017, which were classified as S,D&A expenses in the consolidated condensed statements of operations.
National Product Supply Group (“NPSG”)
The Company is a member of the NPSG, an organization comprised of The Coca‑Cola Company and other Coca‑Cola bottlers who are regional producing bottlers (“RPBs”) in The Coca‑Cola Company’s national product supply system, pursuant to a national product supply governance agreement executed in October 2015 with The Coca‑Cola Company and other RPBs (the “NPSG Governance Agreement”). 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.
Under the NPSG Governance Agreement, the NPSG members established certain 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 of September 30, 2018, the NPSG Board consisted of The Coca‑Cola Company, the Company and seven other RPBs. 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.
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, each RPB is required to make investments in its respective manufacturing assets and implement Coca‑Cola system strategic investment opportunities consistent with the NPSG Governance Agreement. The Company is also obligated to pay a certain portion of the costs of operating the NPSG. The Company incurred NPSG operating costs of $0.9 million in the first three quarters of 2018 and $0.8 million in the first three quarters of 2017, which were classified as S,D&A expense in the consolidated condensed statements of operations.
CONA Services LLC (“CONA”)
The Company is a member of CONA, an entity formed with The Coca‑Cola Company and certain other Coca‑Cola bottlers pursuant to a limited liability company agreement executed in January 2016 (as amended, the “CONA LLC Agreement”) to provide business process and information technology services to its members.
Under the CONA LLC Agreement, the business and affairs of CONA are managed by a board of directors comprised of representatives of its members (the “CONA Board”). All directors are entitled to one vote, regardless of the percentage interest in CONA held by each member. The Company currently has the right to designate one of the members of the CONA Board and has a percentage interest in CONA of approximately 20%. Most matters to be decided by the CONA Board require approval by a majority of a quorum of the directors, provided that the approval of 80% of the directors is required to, among other things, require members to make additional capital contributions, approve CONA’s annual operating and capital budgets, and approve capital expenditures in excess of certain agreed upon amounts. Each CONA member is required to make capital contributions to CONA if and when approved by the CONA Board.
The Company made capital contributions to CONA of $2.1 million in the first three quarters of 2018 and $2.0 million in the first three quarters of 2017, which were classified as other assets in the consolidated condensed balance sheets. No CONA member may transfer its membership interest (or any portion thereof) except to a purchaser of the member’s bottling business (or any portion thereof) and as permitted under the member’s comprehensive beverage agreement with The Coca‑Cola Company.
The CONA LLC Agreement further provides that, if CCR grants any major North American Coca‑Cola bottler other than a CONA member rights to (i) manufacture, produce and package or (ii) market, promote, distribute and sell Coca‑Cola products, CCR will
require the bottler to become a CONA member, to implement the CONA System in the bottler’s operations and to enter into a master services agreement with CONA.
The Company is also party to an amended and restated master services agreement with CONA (the “CONA MSA”), 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, CONA provides the Company with certain business process and information technology services, including the planning, development, management and operation of the CONA System in connection with the Company’s direct store delivery and manufacture of products (collectively, the “CONA Services”).
The Company is also authorized under the CONA MSA to use the CONA System in connection with its distribution, promotion, marketing, sale and manufacture of beverages it is authorized to distribute or manufacture under the CBA, the Company’s regional manufacturing agreement or any other agreement with The Coca‑Cola Company, subject to the provisions of the CONA LLC Agreement and any licenses or other agreements relating to products orhis services provided by third parties and used in connection with the CONA System.
In exchange for the Company’s rights to use the CONA System and receive the CONA Services under the CONA MSA, it is charged service fees by CONA. Currently, the service fees are based on the number of physical cases of beverages the Company distributed or manufactured during the applicable period in the portion of its territories where the CONA Services have then been implemented.
Upon the earlier of (i) all members of CONA beginning to use the CONA System in all territories in which they distribute and manufacture Coca‑Cola products (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 or manufactured in any portion of the Company’s 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 or manufactured by all of the members of CONA, subject to certain exceptions and provided that the aggregate costs related to CONA’s manufacturing functionality will be borne solely amongst the CONA members who have rights to manufacture beverages of The Coca‑Cola Company.
The Company is obligated to pay the service fees under the CONA MSA even if it is not using the CONA System for all or any portion of its distribution and manufacturing operations. The Company incurred CONA services fees of $15.5 million in the first three quarters of 2018 and $9.2 million in the first three quarters of 2017.
Related Party Leases
The Company leases its headquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation, of which J. Frank Harrison, III is the majority stockholder and Morgan H. Everett is a minority stockholder. The annual base rent the Company is obligated to pay under this lease agreement is subject to adjustment for increases in the Consumer Price Index and the lease expires on December 31, 2021.
The Company leases the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina from Harrison Limited Partnership One, which is directly and indirectly owned by trusts of which J. Frank Harrison, III,as Chairman of the Board of Directors and Chief Executive Officer of the Company during the prior year, pursuant to a ten-year performance unit award agreement approved in 2008 (the “Performance Unit Award Agreement”). The Performance Unit Award Agreement expired at the end of 2018, with the final award issued in the first quarter of 2019. 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 issued in 2019 and Sue Anne H. Wells,2018 is as follows:
|
| Fiscal Year |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Date of approval for award |
| March 5, 2019 |
|
| March 6, 2018 |
| ||
Fiscal year of service covered by award |
| 2018 |
|
| 2017 |
| ||
Shares settled in cash to satisfy tax withholding obligations |
|
| 15,476 |
|
|
| 16,504 |
|
Increase in Class B Common Stock shares outstanding |
|
| 19,224 |
|
|
| 20,296 |
|
Total Class B Common Stock awarded |
|
| 34,700 |
|
|
| 36,800 |
|
Compensation expense for the awards issued pursuant to the Performance Unit Award Agreement, recognized on the closing share price of the last trading day prior to the end of each fiscal period, was $2.0 million in the first half of 2019 and $1.7 million in the first half of 2018.
In 2018, the Compensation Committee of the Company’s Board of Directors (the “Committee”) and the Company’s stockholders approved a directorlong-term performance equity plan (the “Long-Term Performance Equity Plan”), which compensates J. Frank Harrison, III based on the Company’s performance. The Long-Term Performance Equity Plan succeeded the Performance Unit Award Agreement upon its expiration. Awards granted under the Long-Term Performance Equity Plan are earned based on the Company’s attainment during a performance period of certain performance measures, each as specified by the Committee. These awards may be settled in cash and/or shares of Class B Common Stock, based on the average of the closing prices of shares of Common Stock during the last twenty trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which is included in SD&A expenses on the condensed consolidated statements of operations, was $6.7 million in the first half of 2019 and $1.0 million in the first half of 2018.
22.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 are trusteesthat performs data analysis and beneficiaries andprovides consulting services outside the United States.
A summary of which Morgan H. Everett, Vice President and a directorAOCI(L) for the second quarter of the Company, is a permissible, discretionary beneficiary. The annual base rent the Company is obligated to pay under this lease agreement is subject to an adjustment for an inflation factor2019 and the lease expires on December 31, 2020.second quarter of 2018 is as follows:
(in thousands) |
| March 31, 2019 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| June 30, 2019 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (72,011 | ) |
| $ | 900 |
|
| $ | (221 | ) |
| $ | (71,332 | ) |
Prior service costs |
|
| (20 | ) |
|
| 7 |
|
|
| (2 | ) |
|
| (15 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (4,754 | ) |
|
| 195 |
|
|
| (48 | ) |
|
| (4,607 | ) |
Prior service costs |
|
| 107 |
|
|
| (322 | ) |
|
| 79 |
|
|
| (136 | ) |
Foreign currency translation adjustment |
|
| (9 | ) |
|
| 7 |
| �� |
| (2 | ) |
|
| (4 | ) |
Reclassification of stranded tax effects |
|
| (19,720 | ) |
|
| - |
|
|
| - |
|
|
| (19,720 | ) |
Total |
| $ | (96,407 | ) |
| $ | 787 |
|
| $ | (194 | ) |
| $ | (95,814 | ) |
(in thousands) |
| April 1, 2018 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| July 1, 2018 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (77,915 | ) |
| $ | 933 |
|
| $ | (230 | ) |
| $ | (77,212 | ) |
Prior service costs |
|
| (39 | ) |
|
| 6 |
|
|
| (1 | ) |
|
| (34 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (16,922 | ) |
|
| 499 |
|
|
| (124 | ) |
|
| (16,547 | ) |
Prior service costs |
|
| 1,396 |
|
|
| (462 | ) |
|
| 114 |
|
|
| 1,048 |
|
Foreign currency translation adjustment |
|
| 17 |
|
|
| (12 | ) |
|
| 3 |
|
|
| 8 |
|
Total |
| $ | (93,463 | ) |
| $ | 964 |
|
| $ | (238 | ) |
| $ | (92,737 | ) |
A summary of AOCI(L) for the first half of 2019 and the first half of 2018 is as follows:
(in thousands) |
| December 30, 2018 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| June 30, 2019 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (72,690 | ) |
| $ | 1,801 |
|
| $ | (443 | ) |
| $ | (71,332 | ) |
Prior service costs |
|
| (24 | ) |
|
| 12 |
|
|
| (3 | ) |
|
| (15 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (4,902 | ) |
|
| 391 |
|
|
| (96 | ) |
|
| (4,607 | ) |
Prior service costs |
|
| 351 |
|
|
| (646 | ) |
|
| 159 |
|
|
| (136 | ) |
Foreign currency translation adjustment |
|
| - |
|
|
| (3 | ) |
|
| (1 | ) |
|
| (4 | ) |
Reclassification of stranded tax effects |
|
| - |
|
|
| - |
|
|
| (19,720 | ) |
|
| (19,720 | ) |
Total |
| $ | (77,265 | ) |
| $ | 1,555 |
|
| $ | (20,104 | ) |
| $ | (95,814 | ) |
(in thousands) |
| December 31, 2017 |
|
| Pre-tax Activity |
|
| Tax Effect |
|
| July 1, 2018 |
| ||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
| $ | (78,618 | ) |
| $ | 1,866 |
|
| $ | (460 | ) |
| $ | (77,212 | ) |
Prior service costs |
|
| (43 | ) |
|
| 12 |
|
|
| (3 | ) |
|
| (34 | ) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
| (17,299 | ) |
|
| 998 |
|
|
| (246 | ) |
|
| (16,547 | ) |
Prior service costs |
|
| 1,744 |
|
|
| (924 | ) |
|
| 228 |
|
|
| 1,048 |
|
Foreign currency translation adjustment |
|
| 14 |
|
|
| (8 | ) |
|
| 2 |
|
|
| 8 |
|
Total |
| $ | (94,202 | ) |
| $ | 1,944 |
|
| $ | (479 | ) |
| $ | (92,737 | ) |
A summary of the principal balance outstanding under these related party capital leasesimpact of AOCI(L) on certain statements of operations line items is as follows:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Company headquarters |
| $ | 10,597 |
|
| $ | 12,771 |
|
Snyder Production Center |
|
| 9,033 |
|
|
| 11,612 |
|
|
| Second Quarter 2019 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 266 |
|
| $ | (66 | ) |
| $ | - |
|
| $ | 200 |
|
Selling, delivery and administrative expenses |
|
| 641 |
|
|
| (61 | ) |
|
| 7 |
|
|
| 587 |
|
Subtotal pre-tax |
|
| 907 |
|
|
| (127 | ) |
|
| 7 |
|
|
| 787 |
|
Income tax expense |
|
| 223 |
|
|
| (31 | ) |
|
| 2 |
|
|
| 194 |
|
Total after tax effect |
| $ | 684 |
|
| $ | (96 | ) |
| $ | 5 |
|
| $ | 593 |
|
|
| Second Quarter 2018 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 215 |
|
| $ | 7 |
|
| $ | - |
|
| $ | 222 |
|
Selling, delivery and administrative expenses |
|
| 724 |
|
|
| 30 |
|
|
| (12 | ) |
|
| 742 |
|
Subtotal pre-tax |
|
| 939 |
|
|
| 37 |
|
|
| (12 | ) |
|
| 964 |
|
Income tax expense |
|
| 231 |
|
|
| 10 |
|
|
| (3 | ) |
|
| 238 |
|
Total after tax effect |
| $ | 708 |
|
| $ | 27 |
|
| $ | (9 | ) |
| $ | 726 |
|
|
| First Half 2019 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 529 |
|
| $ | (133 | ) |
| $ | - |
|
| $ | 396 |
|
Selling, delivery and administrative expenses |
|
| 1,284 |
|
|
| (122 | ) |
|
| (3 | ) |
|
| 1,159 |
|
Subtotal pre-tax |
|
| 1,813 |
|
|
| (255 | ) |
|
| (3 | ) |
|
| 1,555 |
|
Income tax expense |
|
| 446 |
|
|
| (63 | ) |
|
| 1 |
|
|
| 384 |
|
Total after tax effect |
| $ | 1,367 |
|
| $ | (192 | ) |
| $ | (4 | ) |
| $ | 1,171 |
|
|
| First Half 2018 |
| |||||||||||||
(in thousands) |
| Net Pension Activity |
|
| Net Postretirement Benefits Activity |
|
| Foreign Currency Translation Adjustment |
|
| Total |
| ||||
Cost of sales |
| $ | 431 |
|
| $ | 13 |
|
| $ | - |
|
| $ | 444 |
|
Selling, delivery and administrative expenses |
|
| 1,447 |
|
|
| 61 |
|
|
| (8 | ) |
|
| 1,500 |
|
Subtotal pre-tax |
|
| 1,878 |
|
|
| 74 |
|
|
| (8 | ) |
|
| 1,944 |
|
Income tax expense |
|
| 463 |
|
|
| 18 |
|
|
| (2 | ) |
|
| 479 |
|
Total after tax effect |
| $ | 1,415 |
|
| $ | 56 |
|
| $ | (6 | ) |
| $ | 1,465 |
|
A summary of rental payments related to these capital leases is as follows:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Company headquarters |
| $ | 1,110 |
|
| $ | 1,091 |
|
| $ | 3,346 |
|
| $ | 3,294 |
|
Snyder Production Center |
|
| 1,049 |
|
|
| 1,018 |
|
|
| 3,147 |
|
|
| 3,055 |
|
21.Net Income Per Share
The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands, except per share data) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Numerator for basic and diluted net income per Common Stock and Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Coca-Cola Bottling Co. Consolidated |
| $ | 25,164 |
|
| $ | 17,316 |
|
| $ | 7,046 |
|
| $ | 18,613 |
|
Less dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
| 1,787 |
|
|
| 1,785 |
|
|
| 5,357 |
|
|
| 5,356 |
|
Class B Common Stock |
|
| 556 |
|
|
| 548 |
|
|
| 1,657 |
|
|
| 1,639 |
|
Total undistributed earnings |
| $ | 22,821 |
|
| $ | 14,983 |
|
| $ | 32 |
|
| $ | 11,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock undistributed earnings – basic |
| $ | 17,422 |
|
| $ | 11,463 |
|
|
| 24 |
|
| $ | 8,893 |
|
Class B Common Stock undistributed earnings – basic |
|
| 5,399 |
|
|
| 3,520 |
|
|
| 8 |
|
|
| 2,725 |
|
Total undistributed earnings – basic |
| $ | 22,821 |
|
| $ | 14,983 |
|
| $ | 32 |
|
| $ | 11,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock undistributed earnings – diluted |
| $ | 17,327 |
|
| $ | 11,414 |
|
|
| 24 |
|
| $ | 8,855 |
|
Class B Common Stock undistributed earnings – diluted |
|
| 5,494 |
|
|
| 3,569 |
|
|
| 8 |
|
|
| 2,763 |
|
Total undistributed earnings – diluted |
| $ | 22,821 |
|
| $ | 14,983 |
|
| $ | 32 |
|
| $ | 11,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock |
| $ | 1,787 |
|
| $ | 1,785 |
|
| $ | 5,357 |
|
| $ | 5,356 |
|
Common Stock undistributed earnings – basic |
|
| 17,422 |
|
|
| 11,463 |
|
|
| 24 |
|
|
| 8,893 |
|
Numerator for basic net income per Common Stock share |
| $ | 19,209 |
|
| $ | 13,248 |
|
| $ | 5,381 |
|
| $ | 14,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Class B Common Stock |
| $ | 556 |
|
| $ | 548 |
|
| $ | 1,657 |
|
| $ | 1,639 |
|
Class B Common Stock undistributed earnings – basic |
|
| 5,399 |
|
|
| 3,520 |
|
|
| 8 |
|
|
| 2,725 |
|
Numerator for basic net income per Class B Common Stock share |
| $ | 5,955 |
|
| $ | 4,068 |
|
| $ | 1,665 |
|
| $ | 4,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock |
| $ | 1,787 |
|
| $ | 1,785 |
|
| $ | 5,357 |
|
| $ | 5,356 |
|
Dividends on Class B Common Stock assumed converted to Common Stock |
|
| 556 |
|
|
| 548 |
|
|
| 1,657 |
|
|
| 1,639 |
|
Common Stock undistributed earnings – diluted |
|
| 22,821 |
|
|
| 14,983 |
|
|
| 32 |
|
|
| 11,618 |
|
Numerator for diluted net income per Common Stock share |
| $ | 25,164 |
|
| $ | 17,316 |
|
| $ | 7,046 |
|
| $ | 18,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Class B Common Stock |
| $ | 556 |
|
| $ | 548 |
|
| $ | 1,657 |
|
| $ | 1,639 |
|
Class B Common Stock undistributed earnings – diluted |
|
| 5,494 |
|
|
| 3,569 |
|
|
| 8 |
|
|
| 2,763 |
|
Numerator for diluted net income per Class B Common Stock share |
| $ | 6,050 |
|
| $ | 4,117 |
|
| $ | 1,665 |
|
| $ | 4,402 |
|
| Third Quarter |
|
| First Three Quarters |
| |||||||||||
(in thousands, except per share data) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Denominator for basic net income per Common Stock and Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock weighted average shares outstanding – basic |
|
| 7,141 |
|
|
| 7,141 |
|
|
| 7,141 |
|
|
| 7,141 |
|
Class B Common Stock weighted average shares outstanding – basic |
|
| 2,213 |
|
|
| 2,193 |
|
|
| 2,208 |
|
|
| 2,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income 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) |
|
| 9,405 |
|
|
| 9,374 |
|
|
| 9,400 |
|
|
| 9,369 |
|
Class B Common Stock weighted average shares outstanding – diluted |
|
| 2,264 |
|
|
| 2,233 |
|
|
| 2,259 |
|
|
| 2,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
| $ | 2.69 |
|
| $ | 1.86 |
|
| $ | 0.75 |
|
| $ | 2.00 |
|
Class B Common Stock |
| $ | 2.69 |
|
| $ | 1.86 |
|
| $ | 0.75 |
|
| $ | 2.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
| $ | 2.69 |
|
| $ | 1.85 |
|
| $ | 0.75 |
|
| $ | 1.99 |
|
Class B Common Stock |
| $ | 2.68 |
|
| $ | 1.84 |
|
| $ | 0.74 |
|
| $ | 1.97 |
|
NOTES TO TABLE
|
|
|
|
|
|
|
|
22.23.Supplemental Disclosures of Cash Flow InformationInformation
Changes in current assets and current liabilities affecting cash flows were as follows:
|
| First Three Quarters |
| |||||
(in thousands) |
| 2018 |
|
| 2017 |
| ||
Accounts receivable, trade, net |
| $ | (34,899 | ) |
| $ | (109,023 | ) |
Accounts receivable from The Coca-Cola Company |
|
| (2,083 | ) |
|
| 1,548 |
|
Accounts receivable, other |
|
| 10,328 |
|
|
| (8,308 | ) |
Inventories |
|
| (46,274 | ) |
|
| (19,254 | ) |
Prepaid expenses and other current assets |
|
| 8,951 |
|
|
| (281 | ) |
Accounts payable, trade |
|
| 3,749 |
|
|
| 67,058 |
|
Accounts payable to The Coca-Cola Company |
|
| (15,222 | ) |
|
| 45,722 |
|
Other accrued liabilities |
|
| (33,712 | ) |
|
| 7,924 |
|
Accrued compensation |
|
| (15,496 | ) |
|
| (10,062 | ) |
Accrued interest payable |
|
| 4,237 |
|
|
| 5,640 |
|
Change in current assets less current liabilities (exclusive of acquisitions) |
| $ | (120,421 | ) |
| $ | (19,036 | ) |
23.Segments
The Company evaluates segment reporting in accordance with the 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. In conjunction with the completion of the System Transformation Transactions in October 2017 and integration of acquired operations, management continues to assess whether changes are necessary to the Company’s reportable segments.
The Company believes four operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated revenues, income from operations and assets. The additional three operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and therefore have been combined into “All Other.”
The Company’s segment results are as follows:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages(1) |
| $ | 1,180,212 |
|
| $ | 1,142,238 |
|
| $ | 3,427,492 |
|
| $ | 3,139,974 |
|
All Other(1) |
|
| 93,493 |
|
|
| 81,439 |
|
|
| 273,490 |
|
|
| 220,734 |
|
Eliminations(2) |
|
| (62,044 | ) |
|
| (61,151 | ) |
|
| (189,985 | ) |
|
| (163,189 | ) |
Consolidated net sales |
| $ | 1,211,661 |
|
| $ | 1,162,526 |
|
| $ | 3,510,997 |
|
| $ | 3,197,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
| $ | 39,361 |
|
| $ | 33,867 |
|
| $ | 32,705 |
|
| $ | 90,254 |
|
All Other |
|
| 5,043 |
|
|
| 3,605 |
|
|
| 12,381 |
|
|
| 10,823 |
|
Consolidated income from operations |
| $ | 44,404 |
|
| $ | 37,472 |
|
| $ | 45,086 |
|
| $ | 101,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
| $ | 44,050 |
|
| $ | 41,151 |
|
| $ | 133,095 |
|
| $ | 114,166 |
|
All Other |
|
| 2,539 |
|
|
| 2,095 |
|
|
| 7,401 |
|
|
| 6,127 |
|
Consolidated depreciation and amortization |
| $ | 46,589 |
|
| $ | 43,246 |
|
| $ | 140,496 |
|
| $ | 120,293 |
|
|
|
|
|
|
| First Half |
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
| ||
Accounts receivable, trade, net |
| $ | (20,374 | ) |
| $ | (60,592 | ) |
Accounts receivable from The Coca-Cola Company |
|
| (23,273 | ) |
|
| (7,586 | ) |
Accounts receivable, other |
|
| (8,199 | ) |
|
| 9,923 |
|
Inventories |
|
| (20,865 | ) |
|
| (38,455 | ) |
Prepaid expenses and other current assets |
|
| (2,408 | ) |
|
| 11,565 |
|
Accounts payable, trade |
|
| 32,761 |
|
|
| 12,767 |
|
Accounts payable to The Coca-Cola Company |
|
| 28,237 |
|
|
| 60,857 |
|
Other accrued liabilities |
|
| (52,688 | ) |
|
| 13,609 |
|
Accrued compensation |
|
| (10,256 | ) |
|
| (18,160 | ) |
Accrued interest payable |
|
| (1,777 | ) |
|
| (55 | ) |
Change in current assets less current liabilities (exclusive of acquisitions) |
| $ | (78,842 | ) |
| $ | (16,127 | ) |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Bottling Co. Consolidated, Inc., a Delaware corporation (together with its majority-owned subsidiaries, the “Company,” “we” or “our”), should be read in conjunction with the condensed consolidated condensed financial statements of the Company and the accompanying notes to the condensed consolidated condensed financial statements.
The Company’s fiscal year generally ends on the Sunday closest to December 31 of each year. The condensed consolidated condensed financial statements presented are:
The financial position as of September 30, 2018 and December 31, 2017.
• | The financial position as of June 30, 2019 and December 30, 2018. |
The results of operations and comprehensive income for the 13 week periods ended September 30, 2018 (“third quarter” of fiscal 2018 (“2018”)) and October 1, 2017 (“third quarter” of fiscal 2017 (“2017”)), and the 39 week periods ended September 30, 2018 (“first three quarters” of 2018) and October 1, 2017 (“first three quarters” of 2017).
• | The results of operations and comprehensive income for the 13 week periods ended June 30, 2019 (the “second quarter” of fiscal 2019 (“2019”)) and July 1, 2018 (the “second quarter” of fiscal 2018 (“2018”)), and the 26 week periods ended June 30, 2019 (the “first half” of 2019) and July 1, 2018 (the “first half” of 2018). |
The changes in equity and cash flows for the first three quarters of 2018 and the first three quarters of 2017.
• | The changes in cash flows and equity for the first half of 2019 and the first half of 2018. |
The condensed consolidated condensed financial statements include the consolidated operations of the Company and its majority-owned subsidiaries including Piedmont Coca‑Cola Bottling Partnership (“Piedmont”), the Company’s only subsidiary with a significant noncontrolling interest. This noncontrolling interest consists of The Coca‑Cola Company’s interest in Piedmont, which was 22.7% for all periods presented.
Our Business and the Nonalcoholic Beverage Industry
Coca‑Cola Bottling Co. Consolidated, a Delaware corporation, distributes, marketsWe distribute, market and manufacturesmanufacture nonalcoholic beverages in territories spanning 14 states and the District of Columbia. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest independent Coca‑Cola bottler in the United States. Approximately 94%85% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage brandscompanies, including BA Sports Nutrition, LLC (“BodyArmor”), Keurig Dr Pepper SundropInc. (“Dr Pepper”) and Monster Energy.Energy Company (“Monster Energy”). Our purpose is to honor God, to serve others, to pursue excellence and to grow profitably. Our stock is traded on the NASDAQ Global Select Market under the symbol “COKE.”
We offer a range of nonalcoholic beverage products and flavors designed to meet the demands of our consumers, including 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.
Our sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Other sales include sales to other Coca‑Cola bottlers, “post-mix” products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.
NetBottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales by product category werevolume generated for each package and the channels in which those packages are sold. The Company’s products are sold and distributed through various channels, which include selling directly to retail stores and other outlets such as follows:food markets, institutional accounts and vending machine outlets.
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Bottle/can sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sparkling beverages (carbonated) |
| $ | 605,614 |
|
| $ | 582,710 |
|
| $ | 1,787,451 |
|
| $ | 1,670,093 |
|
Still beverages (noncarbonated, including energy products) |
|
| 413,282 |
|
|
| 384,495 |
|
|
| 1,142,764 |
|
|
| 1,009,508 |
|
Total bottle/can sales |
|
| 1,018,896 |
|
|
| 967,205 |
|
|
| 2,930,215 |
|
|
| 2,679,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales to other Coca-Cola bottlers |
|
| 92,139 |
|
|
| 104,619 |
|
|
| 300,819 |
|
|
| 274,317 |
|
Post-mix and other |
|
| 100,626 |
|
|
| 90,702 |
|
|
| 279,963 |
|
|
| 243,601 |
|
Total other sales |
|
| 192,765 |
|
|
| 195,321 |
|
|
| 580,782 |
|
|
| 517,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
| $ | 1,211,661 |
|
| $ | 1,162,526 |
|
| $ | 3,510,997 |
|
| $ | 3,197,519 |
|
The nonalcoholic beverage market is highly competitive for both sparkling and still beverages. 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-ColaPepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper Royal Crown and/or 7‑Up products.
The principal methods of competition in the nonalcoholic beverage industry are point-of-sale merchandising, new product introductions, new vending and dispensing equipment, packaging changes, pricing, price promotions, product quality, retail space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition.
Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters of the fiscal year. We believe that we and other manufacturers from whom we purchase finished goodsproducts have adequate production capacity to
meet sales demand for sparkling and still beverages during these peak periods. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.
Executive Summary
During the third quarter of 2018, our Company made meaningful progress towards the strategic priorities we set duringRevenue grew 4.4% in the second quarter of 2018, even in the midst of continued challenges in the commodities2019 and transportation markets. Our pricing actions delivered over 4% revenue growth versus the third quarter of 2017 on relatively flat volume of almost 87 million physical cases. Our performance during the third quarter of 2018 brings our year-to-date volume growth to 5.9% and our year-to-date revenue growth to 9.8%. Our organic case volume decline in the third quarter of 2018 was 0.4% versus the third quarter of 2017, and our year-to-date organic case volume growth was 0.3% versus the prior year period. Beginning in the fourth quarter of 2018, we will have cycled all of the transactions completed during our system transformation initiative, and results should be comparable on a year-over-year basis. As discussed last quarter, the mid-week July 4th holiday resulted in volume being split between the second and third quarters in 2018. Additionally, Hurricane Florence impacted our operations in much of our coastal territory in September, although identified incremental costs due to the storm were immaterial.
Integral to the strategic priorities we set during the second quarter of 2018, we implemented numerous pricing actions throughout our territory in the third quarter of 2018 to address our increased input costs. Gross margin in the third quarter of 2018 was 60 basis points lower than the third quarter of 2017 (34.7% in the third quarter of 2018 versus 35.3% in the third quarter of 2017), which reflects significant and sequential improvement over the gross margin declines we experienced4.0% in the first half of 2019, driven primarily by increased pricing and changes in our product mix. Revenue on our bottle/can Sparkling beverages increased 5.4% in the second quarter as our Sparkling brands continued to perform well at higher price points throughout our territories. Revenue on our Still beverages grew 7.2% in the second quarter, driven primarily by growth in our Sports Drinks and Energy categories. We began distribution of Reign, a fitness-focused energy beverage, in the second quarter, which drove growth in our Energy drinks compared to the second quarter of 2018. The primary driversIn addition, 2019 is our first full year of distributing BodyArmor products, which also helped generate overall higher net sales in our Still beverage category.
Gross margin increased 100 basis points in the year-over-yearsecond quarter of 2019 to 34.2%. On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, gross margin decline remain (in orderincreased 150 basis points over second quarter 2018. Gross margin for the first half of significance): (i) rising commodity2019 increased 130 basis points on both an actual and an adjusted basis. This improvement is primarily the result of pricing actions that started in the second half of 2018 to overcome significantly higher input costs. Reduced transportation costs (ii) the volume shiftalso contributed to lower-margin still products, and (iii) newly acquired territories generally experiencinghigher second quarter 2019 margins lower than our legacy territories. Weas we continue to refine our pricing strategies and focus on driving operating efficiencies inoptimize our supply chain to improve margin performance and address the rising input costs across the consumer products landscape.chain.
Selling, delivery and administrative (“S,DSD&A”) expenses in second quarter 2019 decreased $16.5 million, or 4.3%, versus second quarter 2018, largely driven by a decrease in costs from our system transformation initiative. System transformation expenses related to our information technology system conversion were $2.2 million in the thirdsecond quarter of 2018 increased approximately $3.02019, versus $9.8 million in the second quarter of 2018. On an adjusted basis, our second quarter 2019 SD&A expenses decreased $6.0 million, or 0.8%1.6%, as compared toversus the third quarter of 2017. Notably, our S,Dsame prior year period. Our adjusted SD&A expenses as a percent of revenue declined to 31.0%sales improved 180 basis points in the thirdsecond quarter of 2018 from 32.1% in the third quarter of 2017. We believe this leveraging of operating expenses was the result of our actions taken during2019 versus the second quarter of 2018 and our strong revenue performance(28.6% versus 30.4%, respectively). Our second quarter 2019 expenses also reflect the benefit of the operating structure changes we completed in the third quarter of 2018. These improvements were partially offset by the expenses associated with our continuing territory integration efforts. While we are pleased with our operating expense performance in the third quarter, we will continue to refine and optimize our operating model across our Company to drive improvements in efficiency and profitability.
Income from operations in the second quarter of 2019 and the first half of 2019 was $44.4$67.2 million and $87.4 million, respectively. Adjusted income from operations was $77.5 million in the second quarter of 2019, an increase of $43.5 million from the second quarter of 2018. Adjusted income from operations was $98.3 million in the thirdfirst half of 2019, an increase of $67.8 million from the first half of 2018.
Net income in the second quarter of 2019 was $15.4 million compared to a net loss of $3.9 million in the second quarter of 2018, increasing from $37.5an improvement of $19.3 million. For the first half of 2019, net income increased $26.7 million in the third quarter of 2017. We have completed our system transformation transactions and are nearing steady state from an IT system perspective. As such, we incurred $2.7 million less in system transformation expenses in the third quarter of 2018, as compared to the thirdfirst half of 2018. Net income for the second quarter and the first half of 2017. We are encouraged with our progress in operating income performance2019 was adversely impacted by other expense of $31.2 million and recognize we have additional improvement opportunities.
During the third quarter$47.0 million, respectively. Other expense for these periods was primarily comprised of 2018, we spent $10.4 million on system transformation expenses, which primarily relatedfair value adjustments to the implementation of our integrated CONA information systems platform. We anticipate spending between $6 million and $8 million on system transformation expensesacquisition related contingent consideration liability, driven by changes in the fourth quarter of 2018discount rate and expect to see these expenses continue to decrease over the next few quarters.future cash flow projections.
Capital spending for the third quarterfirst half of 2019 was approximately $27.8 million, bringing our year-to-date total capital investments to $113.1$57.6 million. We continue to anticipate capital spending in fiscal 2019 will be in the range of $25$150 million to $35$180 million as we remain focused on making prudent, long-term investments to support the growth of the Company. Cash flows provided by operations for the first half of 2019 were $88.6 million, compared to $57.2 million in the fourth quarterfirst half of 2018. Diligent capitalImproved cash generation is a key management processes have been put in placefocus area for 2019 as we strive to continueimprove our focus on debt reduction, while investing in the highest impact projects. In addition toprofitability, reduce our capital spending,financial leverage and further strengthen our balance sheet.
Areas of Emphasis
Key priorities for the Company contributed $20 million to fund our pension plans during the third quarter of 2018.
We expect to begininclude acquisition synergies and cost optimization, revenue management, free cash flow generation and debt repayment, distribution of the fast-growing premium sports drink, BodyArmor, in a portion of our territories in the fourth quarter of 2018. We are excited about the addition of BodyArmor to our powerful portfolio of brands,network optimization and while we do not expect the impact on our 2018 results to be material, we do anticipate our BodyArmor distribution rights will provide ongoing benefits and round out our sports drink portfolio.cost management.
System Transformation Transactions
As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories,Acquisition Synergies and Cost Optimization: In October 2017, the Company completed a series of transactions from April 2013 to October 2017distribution territory and regional manufacturing facility acquisitions and exchanges with The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, and Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to the Company, to significantly expand the Company’s distribution and manufacturing operations (the “System Transformation”). The System Transformation included the acquisition and exchange of rights to serve distribution territories and related distribution assets, as well as the acquisition and exchange of regional manufacturing facilities and related manufacturing assets. A summary of the System Transformation transactions (the “System Transformation Transactions”) completed byAs the Company is included in the Company’s Annual Report on Form 10-K for 2017. As of September 30, 2018, the cash purchase prices or settlement amounts for all System Transformation Transactions have been resolved accordingcontinues to the terms of the transaction agreements. The post-closing adjustments made during the third quarter of 2018 resulted in a $10.2 million net adjustment to the gain on exchange transactions in the consolidated condensed statements of operations.
The financial results of the System Transformation Transactions have been included in the Company’s consolidated condensed financial statements from their respective acquisition or exchange dates. Net sales and income from operations for certain territories and regional manufacturing facilitiesintegrate these acquired and divested by the Company during 2017 are impracticable to separately calculate, as the operations were absorbed into territories and facilities owned byinto its operations, the Company prior to the System Transformation,remains focused on synergy and therefore have been omitted from thecost optimization opportunities across its business, including opportunities across its manufacturing network, distribution network and back office functions. The Company anticipates identifying, investing against and executing these synergy and cost optimization opportunities will be a key driver of its results below. Omission of net sales and income from operations for such territories and facilities is not considered material to the results presented below. The remaining System Transformation Transactions that closed during 2017 (the “2017 System Transformation Transactions”) contributed the following amounts to the Company’s consolidated condensed statements of operations:operations.
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Impact to net sales - total 2017 System Transformation Transactions acquisitions |
| $ | 308,825 |
|
| $ | 221,034 |
|
| $ | 896,179 |
|
| $ | 454,174 |
|
Impact to net sales - October 2017 Divestitures |
|
| - |
|
|
| 79,032 |
|
|
| - |
|
|
| 231,301 |
|
Total impact to net sales |
| $ | 308,825 |
|
| $ | 300,066 |
|
| $ | 896,179 |
|
| $ | 685,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact to income from operations - total 2017 System Transformation Transactions acquisitions |
| $ | 11,874 |
|
| $ | 3,176 |
|
| $ | 14,635 |
|
| $ | 13,595 |
|
Impact to income from operations - October 2017 Divestitures |
|
| - |
|
|
| 7,689 |
|
|
| - |
|
|
| 22,973 |
|
Total impact to income from operations |
| $ | 11,874 |
|
| $ | 10,865 |
|
| $ | 14,635 |
|
| $ | 36,568 |
|
See Note 3 to the consolidated condensed financial statements for additional information on the October 2017 Divestitures.
Areas of Emphasis
Key priorities for the Company include integration of the territories and regional manufacturing facilities acquired during the System Transformation, 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. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs and other market conditions. Revenue management has been and continues to be a key driver which has a significant impact on the Company’s results of operations.
Product InnovationFree Cash Flow Generation and Beverage Portfolio ExpansionDebt Repayment: InnovationUpon completion of both new brandsthe System Transformation transactions in October 2017, the Company’s debt balance exceeded $1.1 billion. Generating free cash flow and packages has been and is expected toreducing its debt balance will continue to be importanta key focus for the Company. The Company has several initiatives in place to the Company’s overall revenue. Recent product introductions from the Companyoptimize free cash flow, improve profitability and The Coca‑Cola Company include new flavor varieties within certain brands such as Sprite Cherry, POWERade Citrus Passionfruit, Monster Ultra Violet, Monster Juice Mango Loco, Peace Tea Georgia Peach, Peace Tea Razzleberry, Minute Maid 5% Berry Punch,
Dunkin’ Donuts Mocha Iced Coffee, Dunkin’ Donuts French Vanilla Iced Coffeeprudently manage its capital expenditures in order to generate strong free cash flow and Coke Zero Sugar. Recent packaging introductions include the 13.7-ounce bottle for Dunkin’ Donuts Iced Coffees, 0.5-liter energy drink cans and eight-packs of 16-ounce energy drinks.reduce its financial leverage.
Distribution Network Optimization and Cost Management: Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs, including warehouse costs, were $458.7$304.7 million in the first three quartershalf of 20182019 and $407.1$301.2 million in the first three quartershalf of 2017. 2018. Management of these costs will continue to be a key area of emphasis for the Company. The Company believes that optimizing its expanded distribution footprint will be a key area of focus in the short-term in order to manage this significant cost to its business.
The Company has three primary delivery systems: (i) bulk delivery for large supermarkets, mass merchandisers and club stores, (ii) advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premises accounts and (iii) full service delivery for its full service vending customers.Results of Operations
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
ThirdSecond Quarter Results
Our results of operations for the thirdsecond quarter of 20182019 and the thirdsecond quarter of 20172018 are highlighted in the table below and discussed in the following paragraphs:
|
| Third Quarter |
|
|
|
|
|
|
|
|
|
| Second Quarter |
|
|
|
|
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| Change |
| |||||||
Net sales |
| $ | 1,211,661 |
|
| $ | 1,162,526 |
|
| $ | 49,135 |
|
| 4.2% |
|
| $ | 1,273,659 |
|
| $ | 1,220,003 |
|
| $ | 53,656 |
| |
Cost of sales |
|
| 791,317 |
|
|
| 752,202 |
|
|
| 39,115 |
|
|
| 5.2 |
|
|
| 837,880 |
|
|
| 815,295 |
|
|
| 22,585 |
|
Gross profit |
|
| 420,344 |
|
|
| 410,324 |
|
|
| 10,020 |
|
|
| 2.4 |
|
|
| 435,779 |
|
|
| 404,708 |
|
|
| 31,071 |
|
Selling, delivery and administrative expenses |
|
| 375,940 |
|
|
| 372,852 |
|
|
| 3,088 |
|
|
| 0.8 |
|
|
| 368,565 |
|
|
| 385,029 |
|
|
| (16,464 | ) |
Income from operations |
|
| 44,404 |
|
|
| 37,472 |
|
|
| 6,932 |
|
|
| 18.5 |
|
|
| 67,214 |
|
|
| 19,679 |
|
|
| 47,535 |
|
Interest expense, net |
|
| 12,827 |
|
|
| 10,697 |
|
|
| 2,130 |
|
|
| 19.9 |
|
|
| 11,995 |
|
|
| 12,744 |
|
|
| (749 | ) |
Other income, net |
|
| 1,696 |
|
|
| 3,884 |
|
|
| (2,188 | ) |
|
| (56.3 | ) | ||||||||||||
Gain on exchange transactions |
|
| 10,170 |
|
|
| - |
|
|
| 10,170 |
|
|
| - |
| ||||||||||||
Income before income taxes |
|
| 43,443 |
|
|
| 30,659 |
|
|
| 12,784 |
|
|
| 41.7 |
| ||||||||||||
Income tax expense |
|
| 16,493 |
|
|
| 11,748 |
|
|
| 4,745 |
|
|
| 40.4 |
| ||||||||||||
Net income |
|
| 26,950 |
|
|
| 18,911 |
|
|
| 8,039 |
|
|
| 42.5 |
| ||||||||||||
Other expense, net |
|
| 31,181 |
|
|
| 9,818 |
|
|
| 21,363 |
| ||||||||||||||||
Income (loss) before income taxes |
|
| 24,038 |
|
|
| (2,883 | ) |
|
| 26,921 |
| ||||||||||||||||
Income tax expense (benefit) |
|
| 7,182 |
|
|
| (135 | ) |
|
| 7,317 |
| ||||||||||||||||
Net income (loss) |
|
| 16,856 |
|
|
| (2,748 | ) |
|
| 19,604 |
| ||||||||||||||||
Less: Net income attributable to noncontrolling interest |
|
| 1,786 |
|
|
| 1,595 |
|
|
| 191 |
|
|
| 12.0 |
|
|
| 1,486 |
|
|
| 1,185 |
|
|
| 301 |
|
Net income attributable to Coca-Cola Bottling Co. Consolidated |
| $ | 25,164 |
|
| $ | 17,316 |
|
| $ | 7,848 |
|
| 45.3% |
| |||||||||||||
Net income (loss) attributable to Coca-Cola Consolidated, Inc. |
| $ | 15,370 |
|
| $ | (3,933 | ) |
| $ | 19,303 |
| ||||||||||||||||
Other comprehensive income, net of tax |
|
| 593 |
|
|
| 726 |
|
|
| (133 | ) | ||||||||||||||||
Comprehensive income (loss) attributable to Coca-Cola Consolidated, Inc. |
| $ | 15,963 |
|
| $ | (3,207 | ) |
| $ | 19,170 |
|
Items Impacting Operations and Financial Condition
The following items affect the comparability of the financial results:
ThirdSecond Quarter 20182019
$308.8 million in net sales and $11.8 million of income from operations related to the 2017 System Transformation Transactions;
$10.4 million of expenses related to the System Transformation; and
$10.2 million net adjustment to the gain on exchange transactions as a result of final post-closing adjustments related to the 2017 System Transformation Transactions.
Third Quarter 2017
$221.1 million in net sales and $3.2 million of income from operations related to the 2017 System Transformation Transactions;
$79.0 million in net sales and $7.7 million of income from operations related to the October 2017 Divestitures;
• | $29.3 million recorded in other expense, net as a result of an increase in the fair value of the Company’s contingent consideration liability; and |
| • | $ |
Second Quarter 2018
• | $9.8 million of expenses related to the |
• | $9.2 million recorded in other expense, net as a result of an increase in the fair value of the Company’s contingent consideration liability; and |
• | $4.8 million recorded in SD&A expenses related to severance and outplacement expenses incurred to optimize labor expense in the Nonalcoholic Beverages segment. |
$5.3 million recorded in other income, net as a result of a favorable fair value adjustment to the Company’s contingent consideration liability related to the distribution territories acquired as part of the System Transformation.
Net Sales
Net sales increased $49.1$53.7 million, or 4.2%4.4%, to $1.21$1.27 billion in the thirdsecond quarter of 2018,2019, as compared to $1.16$1.22 billion in the thirdsecond quarter of 2017.2018. The increase in net sales was primarily attributable to the following (in millions):
Third Quarter 2018 |
|
| Attributable to: | |||||
Second Quarter 2019 | Second Quarter 2019 |
|
| Attributable to: | ||||
$ | 50.7 |
|
| Increase in net sales primarily related to bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences | 56.6 |
|
| Increase in net sales primarily related to an increase in average bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences |
| (12.6 | ) |
| Decrease in sales volume to other Coca-Cola bottlers | (17.7 | ) |
| Decrease in sales volume to other Coca-Cola bottlers |
| 11.0 |
|
| Increase in volume of external freight revenue to external customers (other than non-alcoholic beverages) | 7.8 |
|
| Increase in net sales related to increased volume |
| 7.0 |
|
| Other | ||||
$ | 49.1 |
|
| Total increase in net sales | 53.7 |
|
| Total increase in net sales |
The Company’s bottle/canNet sales to retail customers accounted for approximately 84% of the Company’s total net sales in the third quarter of 2018,by product category were as compared to approximately 83% in the third quarter of 2017. Bottle/can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold.follows:
|
| Second Quarter |
|
|
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| % Change | ||
Bottle/can sales: |
|
|
|
|
|
|
|
|
|
|
Sparkling beverages (carbonated) |
| $ | 671,624 |
|
| $ | 637,215 |
|
| 5.4% |
Still beverages (noncarbonated, including energy products) |
|
| 421,450 |
|
|
| 393,015 |
|
| 7.2% |
Total bottle/can sales |
|
| 1,093,074 |
|
|
| 1,030,230 |
|
| 6.1% |
|
|
|
|
|
|
|
|
|
|
|
Other sales: |
|
|
|
|
|
|
|
|
|
|
Sales to other Coca-Cola bottlers |
|
| 89,278 |
|
|
| 106,946 |
|
| (16.5)% |
Post-mix and other |
|
| 91,307 |
|
|
| 82,827 |
|
| 10.2% |
Total other sales |
|
| 180,585 |
|
|
| 189,773 |
|
| (4.8)% |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
| $ | 1,273,659 |
|
| $ | 1,220,003 |
|
| 4.4% |
Product category sales volume of physical cases in the thirdsecond quarter of 20182019 and the thirdsecond quarter of 20172018 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 |
| Bottle/Can Sales Volume |
|
|
| ||||||||||
|
| Third Quarter |
|
| Sales Volume |
| Second Quarter |
|
| Bottle/Can Sales | ||||||||||
Product Category |
| 2018 |
|
| 2017 |
|
| Increase / (Decrease) |
| 2019 |
|
| 2018 |
|
| Volume % Change | ||||
Sparkling beverages |
|
| 66.0 | % |
|
| 65.1 | % |
| 1.3% |
|
| 69.6 | % |
|
| 70.3 | % |
| (0.6)% |
Still beverages (including energy products) |
|
| 34.0 | % |
|
| 34.9 | % |
| (2.7)% |
|
| 30.4 | % |
|
| 29.7 | % |
| 2.8% |
Total bottle/can sales volume |
|
| 100.0 | % |
|
| 100.0 | % |
| (0.1)% |
|
| 100.0 | % |
|
| 100.0 | % |
| 0.4% |
As the Company introduces new products, it reassesses the category assigned at the SKU level, therefore categorization could differ from previously presented results to conform with current period categorization. Any differences are not considered material.
Cost of Sales
CostInputs representing a substantial portion of the Company’s cost of sales includes the following:include: (i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles and sweetener, (iii) concentrate costs, and (iv) manufacturing costs, including labor, manufacturing overhead including depreciation expense, manufacturing warehousing costs,and warehouse costs. In addition, cost of sales includes shipping and handling costs related to the movement of finished goods from manufacturing locationsplants to sales distribution centers, amortization expense of distribution rights, distribution fees of certain products and the purchasemarketing credits from brand companies. Raw material costs represent approximately 20% of finished goods. Inputs representing a substantial portion of the Company’s total cost of sales include: (i) sweeteners, (ii) packaging materials, including plastic bottles and aluminum cans, and (iii) finished products purchased from other vendors.on an annual basis.
Cost of sales increased $39.1$22.6 million, or 5.2%2.8%, to $791.3$837.9 million in the thirdsecond quarter of 2018,2019, as compared to $752.2$815.3 million in the thirdsecond quarter of 2017.2018. The increase in cost of sales was primarily attributable to the following (in millions):
Third Quarter 2018 |
|
| Attributable to: | |||||
Second Quarter 2019 | Second Quarter 2019 |
|
| Attributable to: | ||||
$ | 42.9 |
|
| Increase in cost of sales primarily related to, in order of magnitude, commodities, the change in product mix to meet consumer preferences and higher costs in the territories acquired in the System Transformation | 29.6 |
|
| Increase in cost of sales primarily related to, in order of magnitude, the change in product mix to meet consumer preferences, an increase in concentrate costs and an increase in commodity costs, partially offset by reduced transportation costs |
| (12.7 | ) |
| Decrease in sales volume to other Coca-Cola bottlers | (19.6 | ) |
| Decrease in sales volume to other Coca-Cola bottlers |
| 9.8 |
|
| Increase in costs related to increased volume of freight revenue to external customers (other than non-alcoholic beverages) | 5.6 |
|
| Increase in cost of sales related to increased sales volume |
| (0.9 | ) |
| Other | 7.0 |
|
| Other |
$ | 39.1 |
|
| Total increase in cost of sales | 22.6 |
|
| Total increase in cost of sales |
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 Company’s territories. Certain of the marketing expenditures by The Coca‑Cola Company and other beverage companies are made pursuant to annual arrangements. The Company also benefits from national advertising programs conducted by The Coca‑Cola Company and other beverage companies. Total marketing funding support from The Coca‑Cola Company and other
beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $33.1$34.7 million in the thirdsecond quarter of 2018,2019, as compared to $32.5$33.4 million in the thirdsecond quarter of 2017.2018.
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,DSD&A expenses, as described below.
S,D&ASelling, Delivery and Administrative Expenses
S,DSD&A expenses include the following: sales management labor costs, distribution costs resulting from salestransporting finished products from distribution centers to customer locations, sales distribution center warehouseoverhead including depreciation expense, distribution center warehousing costs, depreciation expenses 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,DSD&A expenses increaseddecreased by $3.0$16.4 million, or 0.8%4.3%, to $375.9$368.6 million in the thirdsecond quarter of 2018,2019, as compared to $372.9$385.0 million in the thirdsecond quarter of 2017. S,D2018. SD&A expenses as a percentage of net sales increaseddecreased to 31.0%28.9% in the thirdsecond quarter of 20182019 from 32.1%31.6% in the thirdsecond quarter of 2017.2018. The increasedecrease in S,DSD&A expenses was primarily attributable to the following (in millions):
Third Quarter 2018 |
|
| Attributable to: | |||||
Second Quarter 2019 | Second Quarter 2019 |
|
| Attributable to: | ||||
$ | (3.7 | ) |
| Decrease in marketing expenses primarily related to sponsorship contracts | (9.3 | ) |
| Decrease in employee benefit costs including employee salaries primarily as a result of workforce optimization completed in the second and fourth quarters of 2018, partially offset by an increase in bonuses and incentives primarily related to improved financial results |
| 2.9 |
|
| Increase in employee salaries including bonuses and incentives due to additional personnel added in the System Transformation and normal salary increases | (7.7 | ) |
| Decrease in System Transformation transactions expenses |
| 2.6 |
|
| Increase in fuel costs related to the movement of finished goods from sales distribution centers to customer locations primarily as a result of territories acquired in the System Transformation | 0.6 |
|
| Other |
| 1.2 |
|
| Other individually immaterial expense increases primarily related to the System Transformation | ||||
$ | 3.0 |
|
| Total increase in S,D&A expenses | (16.4 | ) |
| Total decrease in SD&A expenses |
The Company has three primary delivery systems: (i) bulk delivery for large supermarkets, mass merchandisers and club stores, (ii) advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premise accounts and (iii) full-service delivery for its full-service vending customers. Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehousedistribution center warehousing costs, are included in S,DSD&A expenses and totaled $157.5$155.8 million in the thirdsecond quarter of 20182019 and $147.9$154.2 million in the thirdsecond quarter of 2017.
As a result of the Company adopting Accounting Standards Update 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017‑07”) issued by the Financial Accounting Standards Board in March 2017, the Company reclassified $1.3 million from the third quarter of 2017 of non-service cost components of net periodic benefit cost and other benefit plan charges from S,D&A expenses to other income, net. The non-service cost component of net periodic benefit cost is included in the Nonalcoholic Beverages segment.2018.
Interest Expense, Net
Interest expense, net, increased $2.1decreased $0.7 million to $12.8$12.0 million in the thirdsecond quarter of 2018,2019, as compared to $10.7$12.7 million in the thirdsecond quarter of 2017.2018. The increasedecrease was primarily a result of additional borrowings to finance the 2017 System Transformation Transactionslower average debt balances and additional borrowings during 2018 to support working capital and capital expenditure needs.lower average interest rates.
Other Income,Expense, Net
A summary of other income,expense, net is as follows:
|
| Third Quarter |
|
| Second Quarter |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Favorable fair value adjustment to acquisition related contingent consideration |
| $ | 2,373 |
|
| $ | 5,225 |
| ||||||||
Increase in the fair value of the acquisition related contingent consideration liability |
| $ | 29,222 |
|
| $ | 9,143 |
| ||||||||
Non-service cost component of net periodic benefit cost |
|
| (677 | ) |
|
| (1,341 | ) |
|
| 1,959 |
|
|
| 675 |
|
Total other income, net |
| $ | 1,696 |
|
| $ | 3,884 |
| ||||||||
Total other expense, net |
| $ | 31,181 |
|
| $ | 9,818 |
|
Each reporting period, the Company adjusts its contingent consideration liability related to the distribution territories acquired as part of the System Transformation, excluding territories acquired pursuantsubject to an exchange transaction,sub-bottling fees to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the CBA,Company’s comprehensive beverage agreement, which extend through the life of the applicable distribution assets, using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates; projectedrates and future operating results; and post-closing settlement of cash purchase prices for the territories acquired as part of the System Transformation. These future expected
sub-bottling payments extend through theflow projections. The life of the relatedthese distribution asset acquired in the System Transformation, which is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.
The increase in the fair value adjustments toof the acquisition related contingent consideration liability during the thirdsecond quarter of 2018 were2019 was primarily driven by changes toa decrease in the risk-free interestdiscount rate and the projectedchanges in future operating resultscash flow projections of the distribution territories acquired as part of the System Transformation subject to sub-bottling fees, partially offset by cash payments.fees. The increase in the fair value adjustments toof the acquisition related contingent consideration liability during the third quarter of 2017 were primarily a result of a change in the risk-free interest rate.
Gain on Exchange Transactions
As a result of final post-closing adjustments for the 2017 System Transformation Transactions made during the thirdsecond quarter of 2018 was primarily driven by cash payments, post-closing adjustments related to System Transformation transactions and changes in future cash flow projections of the Company recorded a $10.2 million net adjustmentdistribution territories subject to the gain on exchange transactions.sub-bottling fees.
Income Tax Expense (Benefit)
The Company’s effective income tax rate, calculated by dividing income tax expense (benefit) by income (loss) before income taxes, was 38.029.9% for the thirdsecond quarter of 20182019 and 38.3%4.7% for the thirdsecond quarter of 2017.2018. The decreaseincrease in the effective tax rate was primarily driven by higher income before income taxes for the third quarter of 2018 as compared to income before income taxes for the third quarter of 2017 and the corporate rate reduction due to the Tax Cuts and Jobs Act (the “Tax Act”) and its impact on prior estimates, which was offset by an increase in certain non-deductible expenses. improved financial results. The Company’s effective tax rate, calculated by dividing income tax expense (benefit) by income (loss) before income taxes minus net income attributable to noncontrolling interest, was 39.631.8% for the thirdsecond quarter of 20182019 and 40.4%3.3% for the thirdsecond quarter of 2017.2018.
Noncontrolling Interest
The Company recorded net income attributable to noncontrolling interest of $1.8$1.5 million in the thirdsecond quarter of 20182019 and $1.6$1.2 million in the thirdsecond quarter of 2017,2018, each related to the portion of Piedmont owned by The Coca‑Cola Company.
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was $0.6 million in the second quarter of 2019 and $0.7 million in the thirdsecond quarter of 2018 and $0.4 million in the third quarter of 2017. The increase was primarily a result of actuarial gains on the Company’s pension plans.2018.
First Three QuartersHalf Results
Our results of operations for the first three quartershalf of 20182019 and the first three quartershalf of 20172018 are highlighted in the table below and discussed in the following paragraphs:
|
| First Three Quarters |
|
|
|
|
|
|
|
|
|
| First Half |
|
|
|
|
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| Change |
|
| % Change |
|
| 2019 |
|
| 2018 |
|
| Change |
| |||||||
Net sales |
| $ | 3,510,997 |
|
| $ | 3,197,519 |
|
| $ | 313,478 |
|
| 9.8% |
|
| $ | 2,376,571 |
|
| $ | 2,284,760 |
|
| $ | 91,811 |
| |
Cost of sales |
|
| 2,313,728 |
|
|
| 2,039,996 |
|
|
| 273,732 |
|
|
| 13.4 |
|
|
| 1,551,484 |
|
|
| 1,522,411 |
|
|
| 29,073 |
|
Gross profit |
|
| 1,197,269 |
|
|
| 1,157,523 |
|
|
| 39,746 |
|
|
| 3.4 |
|
|
| 825,087 |
|
|
| 762,349 |
|
|
| 62,738 |
|
Selling, delivery and administrative expenses |
|
| 1,152,183 |
|
|
| 1,056,446 |
|
|
| 95,737 |
|
|
| 9.1 |
|
|
| 737,719 |
|
|
| 761,667 |
|
|
| (23,948 | ) |
Income from operations |
|
| 45,086 |
|
|
| 101,077 |
|
|
| (55,991 | ) |
|
| (55.4 | ) |
|
| 87,368 |
|
|
| 682 |
|
|
| 86,686 |
|
Interest expense, net |
|
| 37,617 |
|
|
| 30,607 |
|
|
| 7,010 |
|
|
| 22.9 |
|
|
| 24,881 |
|
|
| 24,790 |
|
|
| 91 |
|
Other expense, net |
|
| (3,612 | ) |
|
| (36,595 | ) |
|
| 32,983 |
|
|
| (90.1 | ) |
|
| 47,032 |
|
|
| 5,308 |
|
|
| 41,724 |
|
Gain on exchange transactions |
|
| 10,170 |
|
|
| - |
|
|
| 10,170 |
|
|
| - |
| ||||||||||||
Income before income taxes |
|
| 14,027 |
|
|
| 33,875 |
|
|
| (19,848 | ) |
|
| (58.6 | ) | ||||||||||||
Income tax expense |
|
| 3,387 |
|
|
| 11,800 |
|
|
| (8,413 | ) |
|
| (71.3 | ) | ||||||||||||
Net income |
|
| 10,640 |
|
|
| 22,075 |
|
|
| (11,435 | ) |
|
| (51.8 | ) | ||||||||||||
Income (loss) before income taxes |
|
| 15,455 |
|
|
| (29,416 | ) |
|
| 44,871 |
| ||||||||||||||||
Income tax expense (benefit) |
|
| 4,177 |
|
|
| (13,106 | ) |
|
| 17,283 |
| ||||||||||||||||
Net income (loss) |
|
| 11,278 |
|
|
| (16,310 | ) |
|
| 27,588 |
| ||||||||||||||||
Less: Net income attributable to noncontrolling interest |
|
| 3,594 |
|
|
| 3,462 |
|
|
| 132 |
|
|
| 3.8 |
|
|
| 2,739 |
|
|
| 1,808 |
|
|
| 931 |
|
Net income attributable to Coca-Cola Bottling Co. Consolidated |
| $ | 7,046 |
|
| $ | 18,613 |
|
| $ | (11,567 | ) |
| (62.1)% |
| |||||||||||||
Net income (loss) attributable to Coca-Cola Consolidated, Inc. |
| $ | 8,539 |
|
| $ | (18,118 | ) |
| $ | 26,657 |
| ||||||||||||||||
Other comprehensive income, net of tax |
|
| 1,171 |
|
|
| 1,465 |
|
|
| (294 | ) | ||||||||||||||||
Comprehensive income (loss) attributable to Coca-Cola Consolidated, Inc. |
| $ | 9,710 |
|
| $ | (16,653 | ) |
| $ | 26,363 |
|
Items Impacting Operations and Financial Condition
The following items affect the comparability of the financial results:
First Three Quarters 2018Half 2019
$896.2 million in net sales and $14.6 million of income from operations related to the 2017 System Transformation Transactions;
• | $43.3 million recorded in other expense, net as a result of an increase in the fair value of the Company’s contingent consideration liability; |
$32.7 million of expenses related to the System Transformation;
• | $6.9 million of expenses related to the System Transformation transactions, the majority of which were information technology related costs; and |
$10.2 million net adjustment to the gain on exchange transactions as a result of final post-closing adjustments related to the 2017 System Transformation Transactions;
$4.8 million recorded in S,D&A expenses related to severance and outplacement expenses incurred to optimize labor expense; and
$3.1 million pre-tax unfavorable mark-to-market adjustments related to the Company’s commodity hedging program.
• | $4.4 million adjustment to reflect the prospective change of increasing the capitalization thresholds on certain low-cost, short-lived assets. This change is not expected to be material to the condensed consolidated financial statements. |
First Three Quarters 2017Half 2018
$454.2 million in net sales and $13.6 million of income from operations related to the 2017 System Transformation Transactions;
• | $22.3 million of expenses related to the System Transformation transactions, the majority of which were information technology related costs; |
$231.3 million in net sales and $23.0 million of income from operations related to the October 2017 Divestitures;
• | $4.8 million recorded in SD&A expenses related to severance and outplacement expenses incurred to optimize labor expense in the Nonalcoholic Beverages segment; and |
$32.4 million of expenses related to the acquisition and transition of the distribution territories and the regional manufacturing facilities acquired as part of the System Transformation Transactions;
$23.1 million recorded in other expense, net as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to the distribution territories acquired as part of the System Transformation; and
$9.4 million recorded in other expense, net for net working capital and other fair value adjustments related to the System Transformation Transactions completed in January 2016 (the “January 2016 Transactions”) that were made beyond one year from the acquisition date.
• | $4.0 million recorded in other expense, net as a result of an increase in the fair value of the Company’s contingent consideration liability. |
Net Sales
Net sales increased $313.5$91.8 million, or 9.8%4.0%, to $3.51$2.38 billion in the first three quartershalf of 2018,2019, as compared to $3.20$2.28 billion in the first three quartershalf of 2017.2018. The increase in net sales was primarily attributable to the following (in millions):
First Three Quarters 2018 |
|
| Attributable to: | |||||
First Half 2019 | First Half 2019 |
|
| Attributable to: | ||||
$ | 168.4 |
|
| Net sales increase related to increased volume, primarily related to the 2017 System Transformation Transactions | 102.6 |
|
| Increase in net sales primarily related to an increase in average bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences |
| 86.4 |
|
| Increase in net sales primarily related to bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences | (37.7 | ) |
| Decrease in sales volume to other Coca-Cola bottlers |
| 26.5 |
|
| Increase in sales volume to other Coca-Cola bottlers | 13.6 |
|
| Increase in net sales related to increased volume |
| 25.2 |
|
| Increase in volume of external freight revenue to external customers (other than non-alcoholic beverages) | 13.3 |
|
| Other |
| 7.0 |
|
| Other | ||||
$ | 313.5 |
|
| Total increase in net sales | 91.8 |
|
| Total increase in net sales |
The Company’s bottle/can
Net sales to retail customers accounted for approximately 83% of the Company’s total net sales in the first three quarters of 2018,by product category were as compared to approximately 84% in the first three quarters of 2017.follows:
|
| First Half |
|
|
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| % Change | ||
Bottle/can sales: |
|
|
|
|
|
|
|
|
|
|
Sparkling beverages (carbonated) |
| $ | 1,272,181 |
|
| $ | 1,213,913 |
|
| 4.8% |
Still beverages (noncarbonated, including energy products) |
|
| 763,691 |
|
|
| 706,721 |
|
| 8.1% |
Total bottle/can sales |
|
| 2,035,872 |
|
|
| 1,920,634 |
|
| 6.0% |
|
|
|
|
|
|
|
|
|
|
|
Other sales: |
|
|
|
|
|
|
|
|
|
|
Sales to other Coca-Cola bottlers |
|
| 170,950 |
|
|
| 208,680 |
|
| (18.1)% |
Post-mix and other |
|
| 169,749 |
|
|
| 155,446 |
|
| 9.2% |
Total other sales |
|
| 340,699 |
|
|
| 364,126 |
|
| (6.4)% |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
| $ | 2,376,571 |
|
| $ | 2,284,760 |
|
| 4.0% |
Product category sales volume of physical cases in the first half of 2019 and the first half of 2018 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 |
|
| Bottle/Can Sales Volume |
|
|
| |||||||||||
|
| First Three Quarters |
|
| Sales Volume |
|
| First Half |
|
| Bottle/Can Sales | |||||||||||
Product Category |
| 2018 |
|
| 2017 |
|
| Increase |
|
| 2019 |
|
| 2018 |
|
| Volume % Change | |||||
Sparkling beverages |
|
| 68.7 | % |
|
| 67.9 | % |
|
| 7.2 | % |
|
| 70.8 | % |
|
| 71.8 | % |
| (1.1)% |
Still beverages (including energy products) |
|
| 31.3 | % |
|
| 32.1 | % |
|
| 3.3 | % |
|
| 29.2 | % |
|
| 28.2 | % |
| 3.9% |
Total bottle/can sales volume |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 5.9 | % |
|
| 100.0 | % |
|
| 100.0 | % |
| 0.3% |
The Company’sAs the Company introduces new products, it reassesses the category assigned at the SKU level, therefore categorization could differ from previously presented results to conform with current period categorization. Any differences are sold and distributed through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During the first three quarters of 2018, approximately 66% of the Company’s bottle/can sales volume to retail customers was sold for future consumption, while the remaining bottle/can sales volume to retail customers was sold for immediate consumption.not considered material.
The following table summarizes the percentage of the Company’s total bottle/can sales volume to its largest customers, as well as the percentage of the Company’s total net sales that such volume represents:
|
| First Three Quarters |
| |||||
|
| 2018 |
|
| 2017 |
| ||
Approximate percentage of the Company’s total bottle/can sales volume: |
|
|
|
|
|
|
|
|
Wal-Mart Stores, Inc. |
|
| 19 | % |
|
| 19 | % |
The Kroger Company |
|
| 11 | % |
|
| 9 | % |
Food Lion, LLC |
|
| 6 | % |
|
| 6 | % |
Total approximate percentage of the Company’s total bottle/can sales volume |
|
| 36 | % |
|
| 34 | % |
|
|
|
|
|
|
|
|
|
Approximate percentage of the Company’s total net sales: |
|
|
|
|
|
|
|
|
Wal-Mart Stores, Inc. |
|
| 14 | % |
|
| 14 | % |
The Kroger Company |
|
| 8 | % |
|
| 7 | % |
Food Lion, LLC |
|
| 4 | % |
|
| 4 | % |
Total approximate percentage of the Company’s total net sales |
|
| 26 | % |
|
| 25 | % |
|
| First Half |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Approximate percent of the Company’s total bottle/can sales volume: |
|
|
|
|
|
|
|
|
Wal-Mart Stores, Inc. |
|
| 19 | % |
|
| 19 | % |
The Kroger Company |
|
| 12 | % |
|
| 12 | % |
Total approximate percent of the Company’s total bottle/can sales volume |
|
| 31 | % |
|
| 31 | % |
|
|
|
|
|
|
|
|
|
Approximate percent of the Company’s total net sales: |
|
|
|
|
|
|
|
|
Wal-Mart Stores, Inc. |
|
| 14 | % |
|
| 13 | % |
The Kroger Company |
|
| 8 | % |
|
| 8 | % |
Total approximate percent of the Company’s total net sales |
|
| 22 | % |
|
| 21 | % |
Cost of Sales
Cost of sales increased $273.7$29.1 million, or 13.4%1.9%, to $2.31$1.55 billion in the first three quartershalf of 2018,2019, as compared to $2.04$1.52 billion in the first three quartershalf of 2017.2018. The increase in cost of sales was primarily attributable to the following (in millions):
First Three Quarters 2018 |
|
| Attributable to: | |||||
First Half 2019 | First Half 2019 |
|
| Attributable to: | ||||
$ | 118.4 |
|
| Increase in cost of sales primarily related to, in order of magnitude, commodities, the change in product mix to meet consumer preferences, higher costs in the territories acquired in the System Transformation and higher transportation costs | 57.5 |
|
| Increase in cost of sales primarily related to, in order of magnitude, the change in product mix to meet consumer preferences, an increase in commodity costs and an increase in concentrate costs, partially offset by reduced transportation costs |
| 103.0 |
|
| Cost of sales increase related to increased volume, primarily related to the 2017 System Transformation Transactions | (40.3 | ) |
| Decrease in sales volume to other Coca-Cola bottlers |
| 29.7 |
|
| Increase in sales volume to other Coca-Cola bottlers | 8.5 |
|
| Increase in cost of sales related to increased sales volume |
| 22.6 |
|
| Increase in costs related to increased volume of freight revenue to external customers (other than non-alcoholic beverages) | 3.4 |
|
| Other |
$ | 273.7 |
|
| Total increase in cost of sales | 29.1 |
|
| Total increase in cost of sales |
Total marketing funding support from The Coca‑Cola Company and other beverage companies which includes both direct payments to the Company and payments to customers for marketing programs, was $96.9$66.0 million in the first three quartershalf of 2018,2019, as compared to $89.4$63.8 million in the first three quartershalf of 2017.2018.
S,D&ASelling, Delivery and Administrative Expenses
S,DSD&A expenses increaseddecreased by $95.7$24.0 million, or 9.1%3.2%, to $1.15 billion$737.7 million in the first three quartershalf of 2018,2019, as compared to $1.06 billion$761.7 million in the first three quartershalf of 2017. S,D2018. SD&A expenses as a percentage of net sales decreased to 32.8%31.0% in the first three quartershalf of 20182019 from 33.0%33.3% in the first three quartershalf of 2017.2018. The increasedecrease in S,DSD&A expenses was primarily attributable to the following (in millions):
First Three Quarters 2018 |
|
| Attributable to: | |||||
First Half 2019 | First Half 2019 |
|
| Attributable to: | ||||
$ | 44.6 |
|
| Increase in employee salaries including bonuses and incentives due to additional personnel added in the System Transformation and normal salary increases | (15.2 | ) |
| Decrease in System Transformation transactions expenses |
| 11.3 |
|
| Increase in employee benefit costs primarily due to additional group insurance expense, 401(k) employer matching contributions and bargaining pension plan expense for employees added in the System Transformation | (7.5 | ) |
| Decrease in employee benefit costs including employee salaries primarily as a result of workforce optimization completed in the second and fourth quarters of 2018, partially offset by an increase in bonuses and incentives primarily related to improved financial results |
| 7.5 |
|
| Increase in depreciation and amortization of property, plant and equipment primarily due to depreciation for vending equipment, fleet, furniture and fixtures acquired in the System Transformation | (1.3 | ) |
| Other |
| 6.5 |
|
| Increase in software expenses primarily due to increased maintenance expense | ||||
| 4.8 |
|
| Increase in fuel costs related to the movement of finished goods from sales distribution centers to customer locations primarily as a result of territories acquired in the System Transformation | ||||
| 4.8 |
|
| Severance and outplacement expenses incurred to optimize labor expense in the Nonalcoholic Beverages segment | ||||
| 3.1 |
|
| Increase in employer payroll taxes primarily due to additional personnel added from the System Transformation | ||||
| 13.1 |
|
| Other individually immaterial expense increases primarily related to the System Transformation | ||||
$ | 95.7 |
|
| Total increase in S,D&A expenses | (24.0 | ) |
| Total decrease in SD&A expenses |
During the first three quarters of 2018, the Company incurred $32.7 million of expenses related to the System Transformation, the majority of which were information technologies related costs. The Company anticipates System Transformation expenses for the remainder of 2018 to be in the range of $6 million to $8 million.
Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehousedistribution center warehousing costs, are included in S,DSD&A expenses and totaled $458.7$304.7 million in the first three quartershalf of 20182019 and $407.1$301.2 million in the first three quartershalf of 2017.
As a result of the Company adopting ASU 2017‑07, the Company reclassified $4.0 million in the first three quarters of 2017 of non-service cost components of net periodic benefit cost and other benefit plan charges from S,D&A expenses to other expense, net.2018.
Interest Expense, Net
Interest expense, net increased $7.0 million to $37.6was $24.9 million in the first three quartershalf of 2018, as compared to $30.62019 and $24.8 million in the first three quartershalf of 2017. The increase was primarily a result of additional borrowings to finance the 2017 System Transformation Transactions and additional borrowings during the first three quarters of 2018 to support working capital and capital expenditure needs.2018.
Other Expense, Net
A summary of other expense, net is as follows:
|
| First Three Quarters |
|
| First Half |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
| ||||
Unfavorable fair value adjustment to acquisition related contingent consideration |
| $ | (1,584 | ) |
| $ | (23,140 | ) | ||||||||
Increase in the fair value of the acquisition related contingent consideration liability |
| $ | 43,268 |
|
| $ | 3,957 |
| ||||||||
Non-service cost component of net periodic benefit cost |
|
| (2,028 | ) |
|
| (4,025 | ) |
|
| 3,920 |
|
|
| 1,351 |
|
January 2016 Transactions settlement |
|
| - |
|
|
| (9,442 | ) | ||||||||
Other |
|
| - |
|
|
| 12 |
|
|
| (156 | ) |
|
| - |
|
Total other expense, net |
| $ | (3,612 | ) |
| $ | (36,595 | ) |
| $ | 47,032 |
|
| $ | 5,308 |
|
The increase in the fair value adjustments toof the acquisition related contingent consideration liability induring the first three quarters half of 2018 were2019 was primarily driven by changes toa decrease in the risk-free interestdiscount rate and the projectedchanges in future operating resultscash flow projections of the distribution territories acquired as partsubject to sub-bottling fees. The increase in the fair value of the acquisition related contingent consideration liability during the first half of 2018 was primarily driven by cash payments, post-closing adjustments related to System Transformation transactions and changes in future cash flow projections of the distribution territories subject to sub-bottling fees, partially offset by cash payments. The fair value adjustment to the acquisition related contingent consideration liabilityan increase in the first three quarters of 2017 was primarily a result of a change in the risk-free interestdiscount rate.
Gain on Exchange Transactions
As a result of final post-closing adjustments for the 2017 System Transformation Transactions made during the third quarter of 2018, the Company recorded a $10.2 million net adjustment to the gain on exchange transactions.
Income Tax Expense (Benefit)
The Company’s effective income tax rate, calculated by dividing income tax expense (benefit) by income (loss) before income taxes, was 24.1% in27.0% for the first three quarters half of 20182019 and 34.8% in44.6% for the first three quartershalf of 2017.2018. The decrease in the effective tax rate was primarily driven by the corporate rate reduction due to the Tax Act and its impact on prior estimates and lower income before income taxes, which was offset by an increase in certain non-deductible expenses. improved financial results. The Company’s effective tax rate, calculated by dividing income tax expense (benefit) by income (loss) before income taxes minus net income attributable to noncontrolling interest, was 32.5%32.8% for the first half of 2019 and 42.0% for the first half of 2018. The Company anticipates the annualized effective tax rate for 2019 will be in the first three quarters of 2018 and 38.8% in the first three quarters of 2017.low 30% range.
Noncontrolling Interest
The Company recorded net income attributable to noncontrolling interest of $3.6 million in the first three quarters of 2018 and $3.5$2.7 million in the first three quartershalf of 2017,2019 and $1.8 million in the first half of 2018, each related to the portion of Piedmont owned by The Coca‑Cola Company.
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was $2.2 million in the first three quarters of 2018 and $1.3$1.2 million in the first three quartershalf of 2017.2019 and $1.5 million in the first half of 2018. The increasedecrease was primarily a result of a decrease in actuarial gains on the Company’s pensionpostretirement benefit plans.
Segment Operating Results
The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board 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. In conjunction with the completion of the System Transformation Transactions in October 2017 and integration of acquired operations, management continues to assess whether changes are necessaryCODM. Asset information is not provided to the Company’s reportable segments.
CODM. The Company believes four operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated revenues and income from operations and assets.operations. The additional three operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and therefore have been combined into “All Other.”
The Company’s segment results are as follows:
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages(1) |
| $ | 1,180,212 |
|
| $ | 1,142,238 |
|
| $ | 3,427,492 |
|
| $ | 3,139,974 |
|
All Other(1) |
|
| 93,493 |
|
|
| 81,439 |
|
|
| 273,490 |
|
|
| 220,734 |
|
Eliminations(2) |
|
| (62,044 | ) |
|
| (61,151 | ) |
|
| (189,985 | ) |
|
| (163,189 | ) |
Consolidated net sales |
| $ | 1,211,661 |
|
| $ | 1,162,526 |
|
| $ | 3,510,997 |
|
| $ | 3,197,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
| $ | 39,361 |
|
| $ | 33,867 |
|
| $ | 32,705 |
|
| $ | 90,254 |
|
All Other |
|
| 5,043 |
|
|
| 3,605 |
|
|
| 12,381 |
|
|
| 10,823 |
|
Consolidated income from operations |
| $ | 44,404 |
|
| $ | 37,472 |
|
| $ | 45,086 |
|
| $ | 101,077 |
|
|
| Second Quarter |
|
| First Half |
| ||||||||||
(in thousands) |
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages(1) |
| $ | 1,238,885 |
|
| $ | 1,192,282 |
|
| $ | 2,311,112 |
|
| $ | 2,232,704 |
|
All Other |
|
| 94,942 |
|
|
| 93,398 |
|
|
| 182,857 |
|
|
| 179,997 |
|
Eliminations(2) |
|
| (60,168 | ) |
|
| (65,677 | ) |
|
| (117,398 | ) |
|
| (127,941 | ) |
Consolidated net sales |
| $ | 1,273,659 |
|
| $ | 1,220,003 |
|
| $ | 2,376,571 |
|
| $ | 2,284,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
| $ | 57,724 |
|
| $ | 16,089 |
|
| $ | 72,365 |
|
| $ | (6,656 | ) |
All Other |
|
| 9,490 |
|
|
| 3,590 |
|
|
| 15,003 |
|
|
| 7,338 |
|
Consolidated income from operations |
| $ | 67,214 |
|
| $ | 19,679 |
|
| $ | 87,368 |
|
| $ | 682 |
|
(1) |
|
(2) | The entire net sales elimination for each period presented represents net sales from All Other to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction. |
Organic / Adjusted Non-GAAP Results
The Company reports its financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance. Further, with the transformation of the Company’s business through System Transformation Transactions with The Coca‑Cola Company and the conversion of its information technology systems, the Company believes these non-GAAP financial measures allow users to better appreciate the impact of these transactionsthis conversion on the Company’s 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 organic / adjusted results (non-GAAP):
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Total bottle/can sales |
| $ | 1,018,896 |
|
| $ | 967,205 |
|
| $ | 2,930,215 |
|
| $ | 2,679,601 |
|
Total other sales |
|
| 192,765 |
|
|
| 195,321 |
|
|
| 580,782 |
|
|
| 517,918 |
|
Total net sales |
| $ | 1,211,661 |
|
| $ | 1,162,526 |
|
| $ | 3,510,997 |
|
| $ | 3,197,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bottle/can sales |
| $ | 1,018,896 |
|
| $ | 967,205 |
|
| $ | 2,930,215 |
|
| $ | 2,679,601 |
|
Less: Acquisition/divestiture related sales |
|
| 117,684 |
|
|
| 103,171 |
|
|
| 546,284 |
|
|
| 370,992 |
|
Organic net bottle/can sales (non-GAAP)(1) |
| $ | 901,212 |
|
| $ | 864,034 |
|
| $ | 2,383,931 |
|
| $ | 2,308,609 |
|
Increase in organic net bottle/can sales |
|
| 4.3 | % |
|
|
|
|
|
| 3.3 | % |
|
|
|
|
|
| Second Quarter 2019 |
| |||||||||||||||||||||
(in thousands, except per share data) |
| Gross profit |
|
| SD&A expenses |
|
| Income from operations |
|
| Income before income taxes |
|
| Net income |
|
| Basic net income per share |
| ||||||
Reported results (GAAP) |
| $ | 435,779 |
|
| $ | 368,565 |
|
| $ | 67,214 |
|
| $ | 24,038 |
|
| $ | 15,370 |
|
| $ | 1.64 |
|
System Transformation transactions expenses(1) |
|
| - |
|
|
| (2,185 | ) |
|
| 2,185 |
|
|
| 2,185 |
|
|
| 1,643 |
|
|
| 0.18 |
|
Fair value adjustment of acquisition related contingent consideration(2) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 29,222 |
|
|
| 21,975 |
|
|
| 2.34 |
|
Fair value adjustments for commodity hedges(3) |
|
| 4,874 |
|
|
| (66 | ) |
|
| 4,940 |
|
|
| 4,940 |
|
|
| 3,715 |
|
|
| 0.40 |
|
Capitalization threshold change for certain assets(4) |
|
| - |
|
|
| (1,903 | ) |
|
| 1,903 |
|
|
| 1,903 |
|
|
| 1,431 |
|
|
| 0.15 |
|
Memphis-area manufacturing plants consolidation(5) |
|
| 1,294 |
|
|
| - |
|
|
| 1,294 |
|
|
| 1,294 |
|
|
| 973 |
|
|
| 0.10 |
|
Other tax adjustments(6) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,815 | ) |
|
| (0.30 | ) |
Total reconciling items |
|
| 6,168 |
|
|
| (4,154 | ) |
|
| 10,322 |
|
|
| 39,544 |
|
|
| 26,922 |
|
|
| 2.87 |
|
Adjusted results (non-GAAP) |
| $ | 441,947 |
|
| $ | 364,411 |
|
| $ | 77,536 |
|
| $ | 63,582 |
|
| $ | 42,292 |
|
| $ | 4.51 |
|
|
| Third Quarter |
|
| First Three Quarters |
| ||||||||||
(in millions) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
Physical case volume |
|
| 86.7 |
|
|
| 86.8 |
|
|
| 254.8 |
|
|
| 240.5 |
|
Less: Acquisition/divestiture related physical case volume |
|
| 10.6 |
|
|
| 10.4 |
|
|
| 48.7 |
|
|
| 35.1 |
|
Organic physical case volume(1) |
|
| 76.1 |
|
|
| 76.4 |
|
|
| 206.1 |
|
|
| 205.4 |
|
Increase (decrease) in organic physical case volume |
| (0.4)% |
|
|
|
|
|
|
| 0.3 | % |
|
|
|
|
|
| Second Quarter 2018 |
| |||||||||||||||||||||
(in thousands, except per share data) |
| Gross profit |
|
| SD&A expenses |
|
| Income from operations |
|
| Income (loss) before income taxes |
|
| Net income (loss) |
|
| Basic net income (loss) per share |
| ||||||
Reported results (GAAP) |
| $ | 404,708 |
|
| $ | 385,029 |
|
| $ | 19,679 |
|
| $ | (2,883 | ) |
| $ | (3,933 | ) |
| $ | (0.42 | ) |
System Transformation transactions expenses(1) |
|
| 28 |
|
|
| (9,843 | ) |
|
| 9,871 |
|
|
| 9,871 |
|
|
| 7,423 |
|
|
| 0.79 |
|
Workforce optimization expenses(7) |
|
| - |
|
|
| (4,810 | ) |
|
| 4,810 |
|
|
| 4,810 |
|
|
| 3,617 |
|
|
| 0.39 |
|
Fair value adjustment of acquisition related contingent consideration(2) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 9,143 |
|
|
| 6,876 |
|
|
| 0.74 |
|
Fair value adjustments for commodity hedges(3) |
|
| (249 | ) |
|
| 48 |
|
|
| (297 | ) |
|
| (297 | ) |
|
| (223 | ) |
|
| (0.03 | ) |
Other tax adjustments(6) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,455 | ) |
|
| (0.36 | ) |
Total reconciling items |
|
| (221 | ) |
|
| (14,605 | ) |
|
| 14,384 |
|
|
| 23,527 |
|
|
| 14,238 |
|
|
| 1.53 |
|
Adjusted results (non-GAAP) |
| $ | 404,487 |
|
| $ | 370,424 |
|
| $ | 34,063 |
|
| $ | 20,644 |
|
| $ | 10,305 |
|
| $ | 1.11 |
|
|
| Third Quarter 2018 |
| |||||||||||||||||||||
(in thousands, except per share data) |
| Net sales |
|
| Gross profit |
|
| Income from operations |
|
| Income before income taxes |
|
| Net income |
|
| Basic net income per share |
| ||||||
Reported results (GAAP) |
| $ | 1,211,661 |
|
| $ | 420,344 |
|
| $ | 44,404 |
|
| $ | 43,443 |
|
| $ | 25,164 |
|
| $ | 2.69 |
|
System Transformation Transactions expenses(2) |
|
| - |
|
|
| 112 |
|
|
| 10,417 |
|
|
| 10,417 |
|
|
| 7,834 |
|
|
| 0.83 |
|
Gain on exchange transactions(3) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (10,170 | ) |
|
| (7,648 | ) |
|
| (0.82 | ) |
Fair value adjustment of acquisition related contingent consideration(4) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,373 | ) |
|
| (1,785 | ) |
|
| (0.19 | ) |
Fair value adjustments for commodity hedges(5) |
|
| - |
|
|
| 260 |
|
|
| 469 |
|
|
| 469 |
|
|
| 353 |
|
|
| 0.04 |
|
Other tax adjustment(6) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,534 |
|
|
| 0.38 |
|
Total reconciling items |
|
| - |
|
|
| 372 |
|
|
| 10,886 |
|
|
| (1,657 | ) |
|
| 2,288 |
|
|
| 0.24 |
|
Adjusted results (non-GAAP) |
| $ | 1,211,661 |
|
| $ | 420,716 |
|
| $ | 55,290 |
|
| $ | 41,786 |
|
| $ | 27,452 |
|
| $ | 2.93 |
|
|
| First Half 2019 |
| |||||||||||||||||||||
(in thousands, except per share data) |
| Gross profit |
|
| SD&A expenses |
|
| Income from operations |
|
| Income before income taxes |
|
| Net income |
|
| Basic net income per share |
| ||||||
Reported results (GAAP) |
| $ | 825,087 |
|
| $ | 737,719 |
|
| $ | 87,368 |
|
| $ | 15,455 |
|
| $ | 8,539 |
|
| $ | 0.91 |
|
System Transformation transactions expenses(1) |
|
| - |
|
|
| (6,915 | ) |
|
| 6,915 |
|
|
| 6,915 |
|
|
| 5,200 |
|
|
| 0.56 |
|
Fair value adjustment of acquisition related contingent consideration(2) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 43,268 |
|
|
| 32,538 |
|
|
| 3.47 |
|
Fair value adjustments for commodity hedges(3) |
|
| 969 |
|
|
| 2,649 |
|
|
| (1,680 | ) |
|
| (1,680 | ) |
|
| (1,263 | ) |
|
| (0.13 | ) |
Capitalization threshold change for certain assets(4) |
|
| - |
|
|
| (4,379 | ) |
|
| 4,379 |
|
|
| 4,379 |
|
|
| 3,293 |
|
|
| 0.35 |
|
Memphis-area manufacturing plants consolidation(5) |
|
| 1,294 |
|
|
| - |
|
|
| 1,294 |
|
|
| 1,294 |
|
|
| 973 |
|
|
| 0.10 |
|
Other tax adjustments(6) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,660 | ) |
|
| (0.39 | ) |
Total reconciling items |
|
| 2,263 |
|
|
| (8,645 | ) |
|
| 10,908 |
|
|
| 54,176 |
|
|
| 37,081 |
|
|
| 3.96 |
|
Adjusted results (non-GAAP) |
| $ | 827,350 |
|
| $ | 729,074 |
|
| $ | 98,276 |
|
| $ | 69,631 |
|
| $ | 45,620 |
|
| $ | 4.87 |
|
| Third Quarter 2017 |
| ||||||||||||||||||||||
(in thousands, except per share data) |
| Net sales |
|
| Gross profit |
|
| Income from operations |
|
| Income before income taxes |
|
| Net income |
|
| Basic net income per share |
| ||||||
Reported results (GAAP) |
| $ | 1,162,526 |
|
| $ | 410,324 |
|
| $ | 37,472 |
|
| $ | 30,659 |
|
| $ | 17,316 |
|
| $ | 1.86 |
|
System Transformation Transactions expenses(2) |
|
| - |
|
|
| 113 |
|
|
| 13,148 |
|
|
| 13,148 |
|
|
| 9,265 |
|
|
| 0.99 |
|
Fair value adjustment of acquisition related contingent consideration(4) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,225 | ) |
|
| (2,386 | ) |
|
| (0.25 | ) |
Fair value adjustments for commodity hedges(5) |
|
| - |
|
|
| (2,042 | ) |
|
| (3,401 | ) |
|
| (3,401 | ) |
|
| (2,187 | ) |
|
| (0.24 | ) |
Other tax adjustment(6) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,690 | ) |
|
| (0.18 | ) |
Total reconciling items |
|
| - |
|
|
| (1,929 | ) |
|
| 9,747 |
|
|
| 4,522 |
|
|
| 3,002 |
|
|
| 0.32 |
|
Adjusted results (non-GAAP) |
| $ | 1,162,526 |
|
| $ | 408,395 |
|
| $ | 47,219 |
|
| $ | 35,181 |
|
| $ | 20,318 |
|
| $ | 2.18 |
|
|
| First Three Quarters 2018 |
| |||||||||||||||||||||
(in thousands, except per share data) |
| Net sales |
|
| Gross profit |
|
| Income from operations |
|
| Income before income taxes |
|
| Net income |
|
| Basic net income per share |
| ||||||
Reported results (GAAP) |
| $ | 3,510,997 |
|
| $ | 1,197,269 |
|
| $ | 45,086 |
|
| $ | 14,027 |
|
| $ | 7,046 |
|
| $ | 0.75 |
|
System Transformation Transactions expenses(2) |
|
| - |
|
|
| 339 |
|
|
| 32,738 |
|
|
| 32,738 |
|
|
| 24,619 |
|
|
| 2.63 |
|
Gain on exchange transactions(3) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (10,170 | ) |
|
| (7,648 | ) |
|
| (0.82 | ) |
Workforce optimization expenses(7) |
|
| - |
|
|
| - |
|
|
| 4,810 |
|
|
| 4,810 |
|
|
| 3,617 |
|
|
| 0.39 |
|
Fair value adjustment of acquisition related contingent consideration(4) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,584 |
|
|
| 1,191 |
|
|
| 0.13 |
|
Amortization of converted distribution rights, net(8) |
|
| - |
|
|
| 2,231 |
|
|
| 2,231 |
|
|
| 2,231 |
|
|
| 1,678 |
|
|
| 0.18 |
|
Fair value adjustments for commodity hedges(5) |
|
| - |
|
|
| 2,776 |
|
|
| 3,139 |
|
|
| 3,139 |
|
|
| 2,361 |
|
|
| 0.25 |
|
Other tax adjustment(6) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,648 | ) |
|
| (0.28 | ) |
Total reconciling items |
|
| - |
|
|
| 5,346 |
|
|
| 42,918 |
|
|
| 34,332 |
|
|
| 23,170 |
|
|
| 2.48 |
|
Adjusted results (non-GAAP) |
| $ | 3,510,997 |
|
| $ | 1,202,615 |
|
| $ | 88,004 |
|
| $ | 48,359 |
|
| $ | 30,216 |
|
| $ | 3.23 |
|
|
| First Three Quarters 2017 |
|
| First Half 2018 |
| ||||||||||||||||||||||||||||||||||||||||||
(in thousands, except per share data) |
| Net sales |
|
| Gross profit |
|
| Income from operations |
|
| Income before income taxes |
|
| Net income |
|
| Basic net income per share |
|
| Gross profit |
|
| SD&A expenses |
|
| Income from operations |
|
| Income (loss) before income taxes |
|
| Net income (loss) |
|
| Basic net income (loss) per share |
| ||||||||||||
Reported results (GAAP) |
| $ | 3,197,519 |
|
| $ | 1,157,523 |
|
| $ | 101,077 |
|
| $ | 33,875 |
|
| $ | 18,613 |
|
| $ | 2.00 |
|
| $ | 762,349 |
|
| $ | 761,667 |
|
| $ | 682 |
|
| $ | (29,416 | ) |
| $ | (18,118 | ) |
| $ | (1.94 | ) |
System Transformation Transactions expenses(2) |
|
| - |
|
|
| 379 |
|
|
| 32,374 |
|
|
| 32,374 |
|
|
| 21,108 |
|
|
| 2.26 |
| ||||||||||||||||||||||||
January 2016 Transactions settlement(9) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 9,442 |
|
|
| 5,816 |
|
|
| 0.62 |
| ||||||||||||||||||||||||
System Transformation transactions expenses(1) |
|
| 227 |
|
|
| (22,094 | ) |
|
| 22,321 |
|
|
| 22,321 |
|
|
| 16,785 |
|
|
| 1.79 |
| ||||||||||||||||||||||||
Workforce optimization expenses(7) |
|
| - |
|
|
| (4,810 | ) |
|
| 4,810 |
|
|
| 4,810 |
|
|
| 3,617 |
|
|
| 0.39 |
| ||||||||||||||||||||||||
Fair value adjustment of acquisition related contingent consideration |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 23,140 |
|
|
| 15,087 |
|
|
| 1.62 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,957 |
|
|
| 2,976 |
|
|
| 0.32 |
|
Fair value adjustments for commodity hedges |
|
| - |
|
|
| (2,066 | ) |
|
| (2,541 | ) |
|
| (2,541 | ) |
|
| (1,657 | ) |
|
| (0.18 | ) |
|
| 2,516 |
|
|
| (154 | ) |
|
| 2,670 |
|
|
| 2,670 |
|
|
| 2,008 |
|
|
| 0.21 |
|
Other tax adjustment(6) |
|
| - |
|
|
|
|
|
|
| - |
|
|
| - |
|
|
| (2,156 | ) |
|
| (0.23 | ) | ||||||||||||||||||||||||
Other tax adjustments(6) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (5,798 | ) |
|
| (0.61 | ) | ||||||||||||||||||||||||
Total reconciling items |
|
| - |
|
|
| (1,687 | ) |
|
| 29,833 |
|
|
| 62,415 |
|
|
| 38,198 |
|
|
| 4.09 |
|
|
| 2,743 |
|
|
| (27,058 | ) |
|
| 29,801 |
|
|
| 33,758 |
|
|
| 19,588 |
|
|
| 2.10 |
|
Adjusted results (non-GAAP) |
| $ | 3,197,519 |
|
| $ | 1,155,836 |
|
| $ | 130,910 |
|
| $ | 96,290 |
|
| $ | 56,811 |
|
| $ | 6.09 |
|
| $ | 765,092 |
|
| $ | 734,609 |
|
| $ | 30,483 |
|
| $ | 4,342 |
|
| $ | 1,470 |
|
| $ | 0.16 |
|
Following is an explanation of non-GAAP adjustments:
(1) |
|
| Adjustment reflects expenses related to the System Transformation |
|
|
| This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates |
| The Company enters into derivative instruments from time to time to hedge some or all of its projected purchases of aluminum, PET resin, diesel fuel and unleaded gasoline in order to mitigate commodity risk. The Company accounts for commodity hedges on a mark-to-market basis. |
(4) | Adjustment reflects the prospective change of increasing the capitalization thresholds on certain low-cost, short-lived assets. This change is not expected to be material to the condensed consolidated financial statements. |
(5) | The Company plans to expand its West Memphis, Arkansas manufacturing plant by the end of fiscal 2020, and expects to close its Memphis, Tennessee manufacturing plant upon completion of the West Memphis plant expansion. Adjustment reflects expenses within the Nonalcoholic Beverages segment related to the impairment and accelerated depreciation of property, plant and equipment at the Memphis, Tennessee manufacturing plant. The remaining costs associated with the closure of the Memphis, Tennessee manufacturing plant are not expected to be material to the condensed consolidated financial statements. |
(6) | Includes |
(7) | Adjustment reflects severance and outplacement expenses relating to the Company’s optimization of its labor |
|
|
|
|
Financial Condition
Total assets were $3.07$3.13 billion on SeptemberJune 30, 2018,2019, which was a decreasean increase of $0.5$122.2 million from December 31, 2017.30, 2018. Net working capital, defined as current assets less current liabilities, was $286.6$262.0 million on SeptemberJune 30, 2018,2019, which was an increase of $131.5$66.3 million from December 31, 2017.30, 2018.
Significant changes in net working capital on SeptemberJune 30, 20182019 from December 31, 201730, 2018 were as follows:
An increase in accounts receivable, trade of $36.4 million primarily as a result of the timing of cash receipts.
• | An increase in accounts receivable, trade of $24.0 million and an increase in accounts receivable from The Coca‑Cola Company of $23.3 million primarily as a result of the timing of cash receipts. |
A decrease in accounts receivable, other of $10.3 million primarily as a result of the timing of payments received for marketing funding and rebates.
• | An increase in inventories of $20.9 million primarily as a result of seasonal builds of inventory and product launches. |
An increase in inventories of $46.3 million primarily as a result of rising commodity costs and expanded product selection offered by the Company.
• | The addition of the current portion of obligations under operating leases of $14.8 million as a result of the Company recording balances for operating leases on its condensed consolidated balance sheets. |
A decrease in prepaid and other current assets of $9.1 million primarily as a result of a decrease in the current portion of income taxes.
• | An increase in accounts payable, trade of $29.4 million and an increase in accounts payable to The Coca‑Cola Company of $23.6 million primarily as a result of seasonal builds of inventory. |
A decrease in accounts payable, trade of $10.3 million primarily as a result of the timing of payments.
• | A decrease in other accrued liabilities of $53.1 million primarily as a result of the timing of cash payments. |
• | A decrease in accrued compensation of $13.0 million primarily as a result of the timing of bonus and incentive payments in the first quarter of the fiscal year. |
A decrease in accounts payable to The Coca‑Cola Company of $28.2 million primarily as a result of the timing of purchases of raw materials and payments.
A decrease in other accrued liabilities of $31.9 million primarily as a result of the timing of payments.
A decrease in accrued compensation of $14.8 million primarily as a result of the timing of bonus and incentive payments in the first quarter of the fiscal year.
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, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of these condensed consolidated condensed financial statements. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future.
OnThe Company’s total debt as of June 8,30, 2019 and December 30, 2018 was as follows:
(in thousands) |
| Maturity Date |
| June 30, 2019 |
|
| December 30, 2018 |
| ||
Senior notes and unamortized discount on senior notes(1)(2) |
| 4/15/2019 |
| $ | - |
|
| $ | 109,922 |
|
Term loan facility(1) |
| 6/7/2021 |
|
| 270,000 |
|
|
| 292,500 |
|
Senior notes |
| 2/27/2023 |
|
| 125,000 |
|
|
| 125,000 |
|
Revolving credit facility |
| 6/8/2023 |
|
| 100,000 |
|
|
| 80,000 |
|
Senior notes and unamortized discount on senior notes(2) |
| 11/25/2025 |
|
| 349,944 |
|
|
| 349,939 |
|
Senior notes |
| 10/10/2026 |
|
| 100,000 |
|
|
| - |
|
Senior notes |
| 3/21/2030 |
|
| 150,000 |
|
|
| 150,000 |
|
Debt issuance costs |
|
|
|
| (2,792 | ) |
|
| (2,958 | ) |
Total debt |
|
|
| $ | 1,092,152 |
|
| $ | 1,104,403 |
|
(1) | The senior notes due in 2019 were refinanced on April 10, 2019 using proceeds from the issuance of the senior notes due in 2026 (as discussed below). The Company intends to refinance principal payments due in the next twelve months under the term loan facility, and has the capacity to do so under its revolving credit facility, which is classified as long-term debt. As such, any amounts due in the next twelve months were classified as noncurrent. |
(2) | The senior notes due in 2019 were issued at 98.238% of par and the senior notes due in 2025 were issued at 99.975% of par. |
The Company’s term loan facility matures on June 7, 2021. The original aggregate principal amount borrowed by the Company entered into a second amendedunder the facility was $300 million and restated creditrepayment of amounts outstanding began in 2018. The Company may request additional term loans under the term loan facility, provided the Company’s aggregate borrowings under the facility do not exceed $500 million.
The original aggregate principal amount borrowed by the Company on its senior notes due in 2023 was $125 million. Through June 10, 2019, the Company had the ability to request the lender consider the purchase of additional senior unsecured notes of the Company in an aggregate principal amount of up to $175 million.
As discussed below, on April 10, 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its affiliates. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement for a five-year unsecuredin an aggregate principal amount of up to $200 million.
The Company’s revolving credit facility (as amended, the “Revolving Credit Facility”), which amendedmatures on June 8, 2023 and restated its prior credit agreement dated October 16, 2014. The Revolving Credit Facility has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. Borrowings under the Revolving Credit Facility bear interest at a floating base rate or a floating Eurodollar rate, at the Company’s option, plus an applicable margin dependent on the Company’s credit ratings. 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 June 8, 2023. As of September 30, 2018, the Company had borrowed $170.0 million under the Revolving Credit Facility, and therefore had $330.0 million borrowing capacity remaining. The Company currently believes all banks participating in the Revolving Credit Facilityrevolving credit facility have the ability to and will meet any funding requests from the Company.
On March 21, 2018, As of June 30, 2019, the Company sold $150had borrowed $100 million aggregate principal amount of senior unsecured notes due 2030 to NYL Investors LLC (“NYL”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated March 6, 2018 between the Company, NYL and the other parties thereto (as amended, the “NYL Shelf Facility”). These notes bear interest at 3.96%, payable quarterly in arrears on March 21, June 21, September 21 and December 21 of each year, and will mature on March 21, 2030 unless earlier redeemed by the Company. The Company used the proceeds for general corporate purposes.
In February 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 (as amended, the “Prudential 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 Facilityrevolving 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 Prudential Shelf Facility in an aggregate principal amount of up to $175 million.
In June 2016, the Company entered into a five-year term loan agreement for a senior unsecured term loan facility (as amended, the “Term Loan Facility”) in the aggregate principal amount of $300therefore had $400 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, at the Company’s option, plus an applicable margin dependent on the Company’s credit ratings.
During the third quarter of 2018, the Company amended each of the Revolving Credit Facility, the NYL Shelf Facility, the Prudential Shelf Facility and the Term Loan Facility to (i) align the calculation of the two financial covenants and certain events of default under each agreement and (ii) with regard to the Term Loan Facility, to revise the calculation of the rates at which borrowings bear interest to conform with the calculation of such rates under the Revolving Credit Facility.
Pursuant to the Term Loan Facility and the indenture under which the senior notes due in 2019 were issued, principal payments will be due in the next twelve months. The Company intends to refinance these amounts and has theborrowing capacity to do so under the Revolving Credit Facility, which is classified as long-term debt. As such, any amounts due in the next twelve months were classified as non-current as of September 30, 2018. See Note 11 to the consolidated condensed financial statements for additional information on the senior notes due in 2019.
The Revolving Credit Facility, the NYL Shelf Facility, the Prudential Shelf Facility and the Term Loan 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 September 30, 2018. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.remaining.
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 nonpublic debt facilities 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 June 30, 2019. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.
All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s debt.
The Company’s credit ratings are reviewed periodically by the respective rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material impact on the Company’s financial position or results of operations. During the second quarter of 2018, Standard & Poor’s reaffirmed the Company’s BBB rating and revised the Company’s rating outlook tofor the Company is negative from stable.and Moody’s rating outlook for the Company is currently stable. As of SeptemberJune 30, 2018,2019, the Company’s credit ratings were as follows:
|
| Long-Term Debt |
Standard & Poor’s |
| BBB |
Moody’s |
| Baa2 |
Total net debt and capital lease obligations as of September 30, 2018 and December 31, 2017 were as follows:
(in thousands) |
| September 30, 2018 |
|
| December 31, 2017 |
| ||
Debt |
| $ | 1,194,109 |
|
| $ | 1,088,018 |
|
Capital lease obligations |
|
| 37,278 |
|
|
| 43,469 |
|
Total debt and capital lease obligations |
|
| 1,231,387 |
|
|
| 1,131,487 |
|
Less: Cash and cash equivalents |
|
| 9,337 |
|
|
| 16,902 |
|
Total net debt and capital lease obligations (1) |
| $ | 1,222,050 |
|
| $ | 1,114,585 |
|
|
|
The Company is subject to interest rate risk on its floatingvariable rate debt, including the Revolving Credit Facilityrevolving credit facility and the Term Loan Facility.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 SeptemberJune 30, 2018,2019, interest expense for the next twelve months would increase by approximately $4.6$3.7 million.
The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability incurred as a result of the System Transformation Transactions.liability. 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:
|
| Third Quarter |
|
| First Three Quarters |
|
| Second Quarter |
|
| First Half |
| ||||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Beginning balance - Level 3 liability |
| $ | 374,537 |
|
| $ | 319,102 |
|
| $ | 381,291 |
|
| $ | 253,437 |
|
| $ | 393,007 |
|
| $ | 368,804 |
|
| $ | 382,898 |
|
| $ | 381,291 |
|
Increase due to System Transformation Transactions acquisitions |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 46,086 |
| ||||||||||||||||
Measurement period adjustments(1) |
|
| (1,279 | ) |
|
| - |
|
|
| 813 |
|
|
| - |
|
|
| - |
|
|
| 3,151 |
|
|
| - |
|
|
| 2,092 |
|
Payment of acquisition related contingent consideration |
|
| (7,049 | ) |
|
| (5,094 | ) |
|
| (18,312 | ) |
|
| (11,650 | ) | ||||||||||||||||
Payments of acquisition related contingent consideration |
|
| (6,599 | ) |
|
| (5,381 | ) |
|
| (12,836 | ) |
|
| (11,263 | ) | ||||||||||||||||
Reclassification to current payables |
|
| - |
|
|
| 150 |
|
|
| (1,540 | ) |
|
| (2,080 | ) |
|
| (3,180 | ) |
|
| (1,180 | ) |
|
| (880 | ) |
|
| (1,540 | ) |
(Favorable)/unfavorable fair value adjustment |
|
| (2,373 | ) |
|
| (5,225 | ) |
|
| 1,584 |
|
|
| 23,140 |
| ||||||||||||||||
Increase in fair value |
|
| 29,222 |
|
|
| 9,143 |
|
|
| 43,268 |
|
|
| 3,957 |
| ||||||||||||||||
Ending balance - Level 3 liability |
| $ | 363,836 |
|
| $ | 308,933 |
|
| $ | 363,836 |
|
| $ | 308,933 |
|
| $ | 412,450 |
|
| $ | 374,537 |
|
| $ | 412,450 |
|
| $ | 374,537 |
|
(1) | Measurement period adjustments relate to post-closing adjustments made |
The primary sources of cash for the Company in the first three quarters of 2018 were debt financings. The primary uses of cash in the first three quarters of 2018 were repayments of debt and additions to property, plant and equipment. The primary sources of cash for the Company in the first three quarters of 2017 were debt financings, the Territory Conversion Fee (as defined below) received from The Coca‑Cola Company and operating activities. The primary uses of cash in the first three quarters of 2017 were repayments of debt, acquisitions of territories and regional manufacturing facilities as part of the System Transformation and additions to property, plant and equipment. A summary of cash-based activity is as follows:
|
| First Three Quarters |
| |||||
(in thousands) |
| 2018 |
|
| 2017 |
| ||
Cash Sources: |
|
|
|
|
|
|
|
|
Borrowings under Revolving Credit Facility |
| $ | 285,000 |
|
| $ | 333,000 |
|
Proceeds from issuance of Senior Notes |
|
| 150,000 |
|
|
| 125,000 |
|
Territory Conversion Fee(1) |
|
| - |
|
|
| 87,066 |
|
Adjusted cash provided by operating activities(2) |
|
| 26,030 |
|
|
| 141,672 |
|
Refund of income tax payments |
|
| 23,573 |
|
|
| - |
|
System Transformation acquisitions, net of cash acquired and purchase price settlements |
|
| 1,811 |
|
|
| - |
|
Proceeds from cold drink equipment |
|
| 3,789 |
|
|
| 8,400 |
|
Proceeds from the sale of property, plant and equipment |
|
| 3,555 |
|
|
| 493 |
|
Other |
|
| 17 |
|
|
| 66 |
|
Total cash sources |
| $ | 493,775 |
|
| $ | 695,697 |
|
|
|
|
|
|
|
|
|
|
Cash Uses: |
|
|
|
|
|
|
|
|
Payments on Revolving Credit Facility |
| $ | 322,000 |
|
| $ | 238,000 |
|
System Transformation acquisitions, net of cash acquired and purchase price settlements |
|
| - |
|
|
| 227,769 |
|
Additions to property, plant and equipment (exclusive of acquisitions) |
|
| 113,104 |
|
|
| 114,953 |
|
Prepayment of funds for October 2017 Expansion Transactions |
|
| - |
|
|
| 56,498 |
|
Pension plans contributions |
|
| 20,000 |
|
|
| 11,600 |
|
Glacéau distribution agreement consideration |
|
| - |
|
|
| 15,598 |
|
Payment of acquisition related contingent consideration |
|
| 18,312 |
|
|
| 11,650 |
|
Payment on Term Loan Facility |
|
| 7,500 |
|
|
| - |
|
Cash dividends paid |
|
| 7,014 |
|
|
| 6,995 |
|
Principal payments on capital lease obligations |
|
| 6,191 |
|
|
| 5,594 |
|
Income tax payments |
|
| 3,590 |
|
|
| 14,779 |
|
Investment in CONA Services LLC |
|
| 2,098 |
|
|
| 1,976 |
|
Debt issuance fees |
|
| 1,531 |
|
|
| 213 |
|
Total cash uses |
| $ | 501,340 |
|
| $ | 705,625 |
|
Net decrease in cash |
| $ | (7,565 | ) |
| $ | (9,928 | ) |
|
| First Half |
| |||||
(in thousands) |
| 2019 |
|
| 2018 |
| ||
Cash Sources: |
|
|
|
|
|
|
|
|
Borrowings under revolving credit facility |
| $ | 206,339 |
|
| $ | 190,000 |
|
Proceeds from issuance of senior notes |
|
| 100,000 |
|
|
| 150,000 |
|
Net cash provided by operating activities(1) |
|
| 88,586 |
|
|
| 57,242 |
|
Acquisitions, net of cash acquired and purchase price settlements |
|
| - |
|
|
| 4,706 |
|
Proceeds from cold drink equipment |
|
| - |
|
|
| 3,789 |
|
Proceeds from the sale of property, plant and equipment |
|
| 823 |
|
|
| 3,047 |
|
Total cash sources |
| $ | 395,748 |
|
| $ | 408,784 |
|
|
|
|
|
|
|
|
|
|
Cash Uses: |
|
|
|
|
|
|
|
|
Payments on revolving credit facility |
| $ | 186,339 |
|
| $ | 297,000 |
|
Payments on term loan facility and senior notes |
|
| 132,500 |
|
|
| - |
|
Additions to property, plant and equipment |
|
| 57,581 |
|
|
| 85,279 |
|
Payments of acquisition related contingent consideration |
|
| 12,836 |
|
|
| 11,263 |
|
Cash dividends paid |
|
| 4,682 |
|
|
| 4,671 |
|
Other distribution agreements |
|
| 4,654 |
|
|
| - |
|
Principal payments on financing or capital lease obligations |
|
| 4,261 |
|
|
| 4,194 |
|
Investment in CONA Services LLC |
|
| 486 |
|
|
| 2,020 |
|
Debt issuance fees |
|
| 265 |
|
|
| 1,535 |
|
Total cash uses |
| $ | 403,604 |
|
| $ | 405,962 |
|
Net increase (decrease) in cash |
| $ | (7,856 | ) |
| $ | 2,822 |
|
(1) |
|
|
|
Cash Flows From Operating Activities
During the first three quartershalf of 2018,2019, cash provided by operating activities was $26.0$88.6 million, which was a decreasean increase of $176.4$31.4 million as compared to the first three quartershalf of 2017.2018. The decreaseincrease was primarily a result of the non-reoccurrence of the Territory Conversion Fee, which was received during the first quarter of 2017,improved financial results and changes in netcontinued focus on working capital as discussed above.needs in order to optimize free cash flow.
Cash Flows From Investing Activities
During the first three quartershalf of 2018,2019, cash used in investing activities was $106.0$61.9 million, which was a decrease of $301.9$13.9 million as compared to the first three quartershalf of 2017.2018. The decrease was driven primarily by a reduction in additions to property, plant and equipment, as we remain focused on making prudent long-term investments to support the Company’s completiongrowth of its System Transformation Transactions in October 2017.the Company.
Additions to property, plant and equipment were $113.1$57.6 million during the first three quartershalf of 2018.2019. As of SeptemberJune 30, 2018, $4.12019, $10.3 million of additions to property, plant and equipment were accrued in accounts payable, trade. The Company anticipates additions to property, plant and equipment for the remainder of 20182019 will be in the range of $25$90 million to $35$125 million.
Additions to property, plant and equipment during the first three quartershalf of 20172018 were $115.0$85.3 million. As of OctoberJuly 1, 2017, $13.72018, $4.2 million of additions to property, plant and equipment were accrued in accounts payable, trade. These additions exclude $161.2 million in property, plant and equipment acquired in System Transformation Transactions and $8.4 million in proceeds from cold drink equipment.
Cash Flows From Financing Activities
During the first three quartershalf of 2019, cash used in financing activities was $34.5 million and during the first half of 2018, cash provided by financing activities was $72.5 million, which was a decrease of $123.0 million as compared to the first three quarters of 2017.$21.3 million. The decreasechange was primarily driven by a reduced need for capital as a resultnet repayments on borrowings in the first half of the Company’s completion of its System Transformation Transactions in October 2017.2019, stemming from improved financial results.
The Company had cash payments for acquisition related contingent consideration of $18.3$12.8 million during the first three quartershalf of 20182019 and $11.7$11.3 million during the first three quarters half of 20172018. The Company anticipates that the amount it could pay annually under the acquisition
related contingent consideration arrangements for the distribution territories acquired in the System Transformation, excluding territories the Company acquired in exchange transactions,subject to sub-bottling fees will be in the range of $25 million to $47$49 million.
On April 10, 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife and certain of its affiliates pursuant to a Note Purchase and Private Shelf Agreement dated January 23, 2019 between the Company, MetLife and the other parties thereto. These notes bear interest at 3.93%, payable quarterly in arrears, commencing on July 10, 2019, and will mature on October 10, 2026, unless earlier redeemed by the Company. The Company used the proceeds to refinance the senior notes due on April 15, 2019. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to $200 million.
In 2018, the Company sold $150 million aggregate principal amount of senior unsecured notes due 2030 to NYL Investors LLC (“NYL”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated March 6, 2018 between the Company, NYL and the other parties thereto. These notes bear interest at 3.96%, payable quarterly in arrears, and will mature on March 21, 2030, unless earlier redeemed by the Company. The Company used the proceeds for general corporate purposes.
Significant Accounting Policies
See Note 1, Note 3 and Note 29 to the condensed consolidated condensed financial statements for information on the Company’s significant accounting policies.
Off-Balance Sheet Arrangements
The Company is a member of, and has equity ownership in, South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative comprised of Coca‑Cola bottlers, and has guaranteed $23.9 million of SAC’s debt as of SeptemberJune 30, 2018.2019. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC 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 guarantee.
In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for paymentSee Note 20 to the lenders up to the level of the guarantee. As of September 30, 2018, the Company’s maximum exposure under the guarantee, if SAC borrowed up to its aggregate borrowing capacity, would have been $32.1 million, including the Company’s equity interests. See Note 15 to thecondensed consolidated condensed financial statements for additional information.
Hedging Activities
The Company uses derivative financial instruments to manage its exposure to movements in certain commodity prices. Fees paid by the Company for derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment to cost of sales or S,DSD&A expenses.
The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its derivative financial agreements that provide for net
settlement of derivative transactions. The net impact of the commodity hedges on the condensed consolidated condensed statements of operations was as follows:
|
| Third Quarter |
|
| First Three Quarters |
|
| Second Quarter |
|
| First Half |
| ||||||||||||||||||||
(in thousands) |
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||||||
Cost of sales - increase/(decrease) |
| $ | 640 |
|
| $ | (2,446 | ) |
| $ | 2,843 |
|
| $ | (3,015 | ) |
| $ | 7,784 |
|
| $ | (459 | ) |
| $ | 5,795 |
|
| $ | 2,203 |
|
S,D&A expenses - increase/(decrease) |
|
| 50 |
|
|
| (1,575 | ) |
|
| (305 | ) |
|
| (591 | ) | ||||||||||||||||
SD&A expenses - increase/(decrease) |
|
| 388 |
|
|
| (363 | ) |
|
| (1,985 | ) |
|
| (355 | ) | ||||||||||||||||
Net impact |
| $ | 690 |
|
| $ | (4,021 | ) |
| $ | 2,538 |
|
| $ | (3,606 | ) |
| $ | 8,172 |
|
| $ | (822 | ) |
| $ | 3,810 |
|
| $ | 1,848 |
|
Cautionary Information Regarding Forward-Looking Statements
Certain statements contained in this report,Quarterly Report, or in other public filings, press releases, or other written or oral communications made by Coca‑Cola Bottling Co. Consolidated, Inc. 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,DSD&A expenses, gross profit, income tax rates, earningsnet income per diluted share, dividends, pension plan
contributions, estimated acquisition related contingent consideration payments; or statements regarding the outcome or impact of certain new accounting pronouncements and pending or threatened litigation. These statements include:
the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements;
• | the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements; |
the Company’s expectations that the adoption of Accounting Standards Update 2016-02 “Leases,” (i) will have a material impact on its consolidated condensed balance sheets and (ii) will not have a material impact on its consolidated condensed statements of cash flows as the new guidance is non-cash in nature;
• | the Company’s belief that, at any given time, less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers; |
the Company’s expectation that certain amounts of goodwill will, or will not, be deductible for tax purposes;
• | the Company’s belief that SAC, whose debt the Company guarantees, has sufficient assets and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee and that the cooperative will perform its obligations under its debt commitments; |
the Company’s belief that, at any given time, less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers;
• | the Company’s belief that it has, and that other manufacturers from whom the Company purchases finished goods have, adequate production capacity to meet sales demand for sparkling and still beverages during peak periods; |
the Company’s belief that SAC, whose debt the Company guarantees, has sufficient assets and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee and that the cooperative will perform its obligations under its debt commitments;
• | the Company’s expectation that certain real estate and equipment operating lease commitments will commence in the remainder of 2019, have lease terms of 5 to 10 years and that the additional lease liability associated with these future lease commitments is expected to be $16.0 million; |
the Company’s belief that it has, and that other manufacturers from whom the Company purchases finished goods have, adequate production capacity to meet sales demand for sparkling and still beverages during peak periods;
• | 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 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 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; |
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 cash sources and uses, 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, 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 it has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months;
• | the Company’s belief that all the banks participating in the revolving credit facility have the ability to and will meet any funding requests from the Company; |
the Company’s belief that all the banks participating in the Revolving Credit Facility have the ability to and will meet any funding requests from the Company;
• | the Company’s intention to refinance amounts due in the next twelve months under the term loan facility using the capacity under the revolving credit facility; |
the Company’s intention to refinance amounts due in the next twelve months under the Term Loan Facility and the indenture under which the senior notes due in 2019 were issued using the capacity under the Revolving Credit Facility;
• | the Company’s estimate of the useful lives of certain acquired intangible assets and property, plant and equipment; |
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 included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $57.9 million, assuming no change in volume; |
the Company’s estimate that a 10% increase in the market price of certain commodities included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $56.5 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 that such changes will not have a significant impact on the condensed consolidated financial statements; |
the Company’s expectation that amounts due to United relating to the System Transformation exchange transaction between the Company and United will be paid by the Company during the fourth quarter of 2018;
• | the Company’s belief that optimizing its expanded distribution footprint will be a key area of focus in the short-term in order to manage this significant cost to its business; |
• | the Company’s estimates of certain inputs used in its calculations, including estimated rates of return, estimates of bad debts and amounts that will ultimately be collected, and estimates of inputs used in the calculation and adjustment of the fair value of its acquisition related contingent consideration liability related to the distribution territories subject to sub-bottling fees, such as the amounts that will be paid by the Company in the future under the Company’s comprehensive beverage agreement and the Company’s WACC; |
the Company’s expectation that the amount of uncertain tax positions may change over the next 12 months but that such changes will not have a significant impact on the consolidated condensed financial statements;
• | the Company’s belief that the range of undiscounted amounts it could pay annually under the acquisition related contingent consideration arrangements is expected to be between $25 million to $49 million; |
• | the Company’s belief that the covenants in its nonpublic debt 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 is expected to be in the range of $1 million to $2 million for the remainder of 2019; |
• | the Company’s belief that additions to property, plant and equipment for the remainder of 2019 are expected to be in the range of $90 million to $125 million and that total additions to property, plant and equipment in fiscal 2019 are expected to be in the range of $150 million to $180 million; |
• | the Company’s belief that it has adequately provided for any assessments likely to result from audits by tax authorities in the jurisdictions in which the Company conducts business; |
• | the Company’s belief that key priorities include acquisition synergies and cost optimization, revenue management, free cash flow generation and debt repayment, distribution network optimization and cost management; |
• | the Company’s belief that the annualized effective tax rate for 2019 will be in the low 30% range; |
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 estimates of certain inputs used in its calculations, including estimated rates of return, estimates of bad debts and amounts that will ultimately be collected, and estimates of inputs used in the calculation and adjustment of the fair value of its acquisition related contingent consideration liability related to the distribution territories acquired as part of the System Transformation, such as the amounts that will be paid by the Company in the future under the CBA and the Company’s WACC;
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 the range of undiscounted amounts it could pay annually under the acquisition related contingent consideration arrangements for the System Transformation Transactions is expected to be between $25 million to $47 million;
the Company’s belief that the covenants in the Revolving Credit Facility, the Term Loan Facility, the Prudential Shelf Facility and the NYL 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 expectation that it will not make additional contributions to the two Company-sponsored pension plans during the fourth quarter of 2018;
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 “Teamsters Plan”);
the Company’s expectation that the collective bargaining agreements covering the Teamsters Plan that expire at various times through April 2020 will be re-negotiated;
the Company’s belief that System Transformation expenses will be in the range of $6 million to $8 million in the fourth quarter of 2018 and will decrease over the next few quarters;
the Company’s belief that additions to property, plant and equipment for the remainder of 2018 are expected to be in the range of $25 million to $35 million;
the Company’s belief that, while the addition of BodyArmor products to the Company’s portfolio of brands will not have a material impact on the Company’s 2018 results, BodyArmor will provide ongoing benefits and round out the Company’s sports drink portfolio;
the Company’s belief that it has adequately provided for any assessments likely to result from audits by tax authorities in the jurisdictions in which the Company conducts business;
the Company’s belief that key priorities include territory and manufacturing integration, 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 September 30, 2018, interest expense for the next twelve months would increase by approximately $4.6 million, assuming no changes in the Company’s financial structure.
• | the Company’s hypothetical calculation that, if market interest rates average 1% more over the next twelve months than the interest rates as of June 30, 2019, interest expense for the next twelve months would increase by approximately $3.7 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. Risk Factors” of our Annual Report on Form 10-K for 2017,2018, as well as other factors discussed throughout this report,Quarterly Report, including, without limitation, the factors described under “Significant Accounting Policies” in our condensed consolidated condensed financial statements, or in other filings or statements made by the Company. All of the forward-looking statements in this reportQuarterly Report and other documents or statements are qualified by these and other factors, risks and uncertainties.
Caution should be taken not to place undue reliance on the forward-looking statements included in this report.Quarterly 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.
ItemItem 3.Quantitative and Qualitative Disclosures About Market Risk.
The Company is exposed to certain market risks that arise in the ordinary course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for trading or speculative purposes. A discussion of the Company’s primary market risk exposure and interest rate risk is presented below.
Debt and Derivative Financial Instruments
The Company is subject to interest rate risk on its floatingvariable rate debt, including the Revolving Credit Facilityits revolving credit facility and the Term Loan Facility.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 SeptemberJune 30, 2018,2019, interest expense for the next twelve months would increase by approximately $4.6$3.7 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 floatingvariable rate 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 CBA.Company’s comprehensive beverage agreement. 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 commodities included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $56.5$57.9 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,DSD&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 (the “CPI”), was 2.4% in 2018 and 2.1% in 2017 and 2016.2017. Inflation in the prices of those commodities important to the Company’s business is reflected in changes in the CPI, but commodity prices are volatile and in recent years have moved at a faster rate of change than the CPI.
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,DSD&A expenses. Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover 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,Quarterly 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 SeptemberJune 30, 2018.2019.
There has been no change in the Company’s internal control over financial reporting during the quarter ended SeptemberJune 30, 20182019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHEROTHER INFORMATION
The Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on its results of operations, financial position or cash flows. The Company maintains liability insurance for certain risks that is subject to certain self-insurance limits.
There have been no material changes in the Company’s risk factors from those disclosed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10‑K for 2017.
2018.
Number |
| Description |
| Incorporated by Reference or Filed Herewith |
3.1 |
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| Exhibit 3.1 to the Company’s Quarterly Report on Form 10‑Q for the quarter ended July 2, 2017 (File No. 0-9286). | |
3.2 |
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| Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on | |
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31.1 |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Filed herewith. |
31.2 |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Filed herewith. |
32 |
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| Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K. | |
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| Filed herewith. |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. | Filed herewith. | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith. | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith. | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | Filed herewith. | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith. | ||
104 | Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed herewith. |
* Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| COCA‑COLA | |
| (REGISTRANT) | |
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Date: | By: | /s/ |
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| Executive Vice President and Chief Financial Officer |
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| (Principal Financial Officer of the Registrant) |
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Date: | By: | /s/ William J. Billiard |
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| William J. Billiard |
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| Senior Vice President and Chief Accounting Officer |
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| (Principal Accounting Officer of the Registrant) |
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