Acquisitions and Divestitures | 3. Acquisitions and Divestitures 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 2018 in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for such transactions. As of September 30, 2018, the cash purchase prices or settlement amounts for all System Transformation Transactions 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 entered 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 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 Collectively, the CCR Exchange Transaction, the Memphis Transaction and the United Exchange Transaction are the “October 2017 Transactions,” 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 summarized 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 The fair value of acquired assets and assumed liabilities in the October 2017 Acquisitions as of the acquisition date is summarized as follows: (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 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. |