Coca-Cola Consolidated, Inc.: Form 10-Q for the period ended Jul 2, 2017

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

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

• The financial position as of July 2, 2017 and January 1, 2017.
• The results of operations for the 13 week periods ended July 2, 2017 (“second quarter” of fiscal 2017 (“2017”)) and July 3, 2016 (“second quarter” of fiscal 2016 (“2016”)), and the 26 week periods ended July 2, 2017 (“first half” of 2017) and July 3, 2016 (“first half” of 2016).
• Comprehensive income for the second quarter and first half of 2017 and the second quarter and first half of 2016.
• Changes in equity for the first half of 2017 and the first half of 2016.
• The cash flows for the first half of 2017 and the first half of 2016.

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

Expansion Transactions

As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company has engaged in a series of transactions since April 2013 with The Coca‑Cola Company and Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, to significantly expand the Company’s distribution and manufacturing operations. This expansion includes acquisition of the rights to serve additional distribution territories previously served by CCR (the “Expansion Territories”) and related distribution assets (the “Distribution Territory Expansion Transactions”), as well as the acquisition of regional manufacturing facilities previously owned by CCR (the “Expansion Facilities”) and related manufacturing assets (the “Manufacturing Facility Expansion Transactions” and, together with the Distribution Territory Expansion Transactions, the “Expansion Transactions”). As of July 2, 2017, the Expansion Transactions completed and the respective net cash paid amounts are as follows:

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* These net cash paid amounts are subject to a final post-closing adjustment and, as a result, may either increase or decrease.

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

(in thousands)

(1) Includes the results of the YTD 2017 Expansion Transactions, as defined below, and the Expansion Territories and Expansion Facilities acquired in 2016 (the “2016 Expansion Transactions”).

(2) Includes the results of the portion of the 2016 Expansion Transactions completed through July 3, 2016.

Expansion Transactions

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

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

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

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

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

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

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

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

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

The April 2017 Expansion Territories acquisition was completed pursuant to the distribution asset purchase agreement entered into by the Company and CCR on April 13, 2017, and the April 2017 Expansion Facility acquisition was completed pursuant to the manufacturing asset purchase agreement entered into by the Company and CCR on April 13, 2017, as described in the Company’s Current Report on Form 8-K filed with the SEC on April 17, 2017 and filed as Exhibits 2.1 and 2.2, respectively, thereto.

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

Final Comprehensive Beverage Agreement

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

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

Final Regional Manufacturing Agreement

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

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

Bottling Agreement and RMA Conversions

Upon the consummation of the March 31, 2017 Expansion Transactions, each of the Company’s existing bottling agreements for The Coca‑Cola Company beverage brands, including each of the Company’s Initial CBAs, master bottle contracts, allied bottle contracts and other bottling agreements with The Coca‑Cola Company or CCR that authorize the Company to produce and/or distribute the Covered Beverages or Related Products (collectively, the “Bottling Agreements”), were automatically amended, restated and converted into the Final CBA (the “Bottling Agreement Conversion”) pursuant to the territory conversion agreement entered into by the Company, The Coca‑Cola Company and CCR on September 23, 2015, as described in the September 2015 Form 8-K and filed as Exhibit 10.1 thereto (as amended by the First Amendment to Territory Conversion Agreement filed as Exhibit 10.47 to the Company’s Annual Report on Form 10-K filed with the SEC on March 18, 2016, the “Territory Conversion Agreement”). The Bottling Agreement Conversion included all of the Company’s Bottling Agreements for the Expansion Territories and for all other territories in the United States where the Company (or one of its affiliates) has rights to market, promote, distribute and sell beverage products owned or licensed by The Coca‑Cola Company (the “Legacy Territories”), provided that the sub-bottling payment required under the Final CBA does not apply with regards to the Legacy Territories.

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

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

Expansion Facilities Discount and Legacy Facilities Credit Letter Agreement

In connection with the Company’s acquisitions of the Expansion Facilities and the impact on transaction value from certain adjustments made by The Coca‑Cola Company to the authorized pricing under the Final RMA on sales of Authorized Covered Beverages produced by the Company at the Expansion Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers, the Company and The Coca‑Cola Company also entered into a letter agreement on March 31, 2017 (as amended, the “Manufacturing Facilities Letter Agreement”), pursuant to which The Coca‑Cola Company agreed to provide the Company with an aggregate valuation adjustment discount of $33.1 million (the “Expansion Facilities Discount”) on the purchase prices for the Expansion Facilities. The parties agreed to apply $22.9 million of the total Expansion Facilities Discount upon the Company’s acquisition of the March 2017 Expansion Facilities, representing the portion of the Expansion Facilities Discount applicable to (i) the March 2017 Expansion Facilities and (ii) the Expansion Facilities previously acquired by the Company from CCR, and agreed to apply an additional $5.4 million of the total Expansion Facilities Discount upon the Company’s acquisition of the April 2017 Expansion Facility. The portion of the Expansion Facilities Discount attributable to each of the remaining Expansion Facilities to be acquired by the Company will be applied at the closing of each such future transaction.

The Manufacturing Facilities Letter Agreement also establishes a mechanism to compensate the Company with a payment or credit for the net economic impact to the Legacy Facilities of the changes made by The Coca‑Cola Company to the authorized pricing under the Final RMA on sales of Authorized Covered Beverages produced by the Company at the Legacy Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers versus the Company’s historical returns for products produced at the Legacy Facilities prior to the RMA Conversion (the “Legacy Facilities Credit”). The Coca‑Cola Company and the Company amended the formula for the calculation of the Legacy Facilities Credit pursuant to an amendment dated June 22, 2017 (the “Amendment to the Manufacturing Facilities Letter Agreement”) and have agreed to work together to calculate the Legacy Facilities Credit as promptly as reasonably practicable. A summary of the Manufacturing Facilities Letter Agreement is provided in the April 2017 Form 8-K and the Manufacturing Facilities Letter Agreement is filed as Exhibit 10.8 to the Q1 2017 Form 10-Q. A copy of the Amendment to the Manufacturing Facilities Letter Agreement is filed as Exhibit 10.3 to this Report.

Somerset Letter of Intent

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

Our Business and the Nonalcoholic Beverage Industry

Coca‑Cola Bottling Co. Consolidated, a Delaware corporation, produces, markets and distributes nonalcoholic beverages in 16 states. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest independent Coca‑Cola bottler in the United States. Approximately 93% of our total bottle/can volume to retail customers consist of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage brands including

Dr Pepper, Sundrop and Monster Energy. Our purpose is to honor God, serve others, pursue excellence and grow profitably. Our stock is traded on the NASDAQ exchange under the symbol “COKE.”

We offer a range of flavors designed to meet the demands of our consumers. Our product offerings include both sparkling and still beverages. Sparkling beverages are carbonated beverages and the Company’s principal sparkling beverage is Coca‑Cola. Still beverages include energy products and noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks.

There are two main categories of sales, which include bottle/can sales and other sales. Bottle/can sales include products packaged in plastic bottles and aluminum cans. Other sales include sales to other Coca‑Cola bottlers and “post-mix” products. Post-mix products are dispensed through equipment that mixes the fountain syrup with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.

Net sales by product category were as follows:

(in thousands)

(1) During the second quarter of 2016, energy products were moved from the category of sparkling beverages to still beverages, which has been reflected in all periods presented. Total bottle/can sales remain unchanged in prior periods.

The nonalcoholic beverage market is highly competitive. Competitive products include nonalcoholic sparkling beverages and still beverages, which are noncarbonated beverages such as bottled water, energy drinks, tea, ready to drink coffee, enhanced water, juices and sports drinks. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of Pepsi-Cola and, in some regions, local bottlers of Dr Pepper, Royal Crown and/or 7‑Up products.

The principal methods of competition in the nonalcoholic beverage industry are point-of-sale merchandising, new product introductions, new vending and dispensing equipment, packaging changes, pricing, price promotions, product quality, retail space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition.

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

Areas of Emphasis

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

Revenue Management: Revenue management requires a strategy that reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based decision-making. Revenue management has been and continues to be a key driver which has a significant impact on the Company’s results of operations.

Product Innovation and Beverage Portfolio Expansion: Innovation of both new brands and packages has been and is expected to continue to be important to the Company’s overall revenue. Recent product introductions from the Company and The Coca‑Cola Company include new flavor varieties within certain brands such as Fanta Sparkling Fruit, Minute Maid Refreshment, Monster, Dasani Drops, NOS, and Dasani Sparkling. New packaging introductions over the last several years include the 253 ml bottle, the 1.25-liter bottle, the 7.5-ounce sleek can, the 2-liter contour bottle for Coca‑Cola products, and the 16-ounce bottle/24-ounce bottle package.

Distribution Cost Management: Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs, including warehouse costs, were $259.2 million in the first half of 2017 and $180.4 million in the first half of 2016. Management of these costs will continue to be a key area of emphasis for the Company.

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

Productivity: A key driver in the Company’s selling, delivery and administrative (“S,D&A”) expense management relates to ongoing improvements in labor productivity and asset productivity.

Results of Operations

Second Quarter Results

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

(in thousands)

Items Impacting Operations and Financial Condition

The following items affect the comparability of the financial results:

Second Quarter 2017

• $472.6 million in net sales and $15.3 million of operating income related to Expansion Territories and Expansion Facilities;
• $16.2 million recorded in other expense as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to Expansion Territories;
• $11.5 million of expenses related to acquiring and transitioning Expansion Territories and Expansion Facilities; and
• $9.4 million recorded in other expense for net working capital and other fair value adjustments related to the January 2016 Expansion Transactions that were made beyond one year from the acquisition date. This amount remains payable to The Coca‑Cola Company.

Second Quarter 2016

• $162.8 million in net sales and $13.5 million of operating income related to Expansion Territories;
• $16.3 million recorded in other expense as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to Expansion Territories; and
• $7.0 million of expenses related to acquiring and transitioning Expansion Territories.

Net Sales

Net sales increased $328.9 million, or 39.1%, to $1.17 billion in the second quarter of 2017, as compared to $840.4 million in the second quarter of 2016. The increase in net sales was primarily attributable to the following (in millions):

The Company’s bottle/can sales to retail customers accounted for approximately 84% of the Company’s total net sales in the second quarter of 2017, as compared to approximately 85% in the second quarter of 2016. Bottle/can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the volume generated in each package and the channels in which those packages are sold.

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

Bottle/can volume to retail customers, excluding the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions, increased 1.3% in the second quarter of 2017, which represented a 0.8% increase in sparkling beverages and a 2.6% increase in still beverages as compared to the second quarter of 2016.

Cost of Sales

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

Cost of sales increased $233.4 million, or 44.8%, to $754.1 million in the second quarter of 2017, as compared to $520.7 million in the second quarter of 2016. The increase in cost of sales was primarily attributable to the following (in millions):

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

The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca‑Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the local territories served by the Company. The Company also benefits from national advertising programs conducted by The Coca‑Cola Company and other beverage companies. Certain of the marketing expenditures by The Coca‑Cola Company and other beverage companies are made pursuant to annual arrangements. Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $32.5 million in the second quarter of 2017, as compared to $25.9 million in the second quarter of 2016.

The Company’s cost of sales may not be comparable to other peer companies, as some peer companies include all costs related to their distribution network in cost of sales. The Company includes a portion of these costs in S,D&A expenses.

S,D&A Expenses

S,D&A expenses include the following: sales management labor costs, distribution costs from sales distribution centers to customer locations, sales distribution center warehouse costs, depreciation expense related to sales centers, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangibles and administrative support labor and operating costs.

S,D&A expenses increased by $102.9 million, or 38.8%, to $367.9 million in the second quarter of 2017, as compared to $265.0 million in the second quarter of 2016. S,D&A expenses as a percentage of net sales remained flat at 31.5% in both the second quarter of 2017 and the second quarter of 2016. The increase in S,D&A expenses was primarily attributable to the following (in millions):

Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, are included in S,D&A expenses and totaled $143.0 million in the second quarter of 2017 and $100.9 million in the second quarter of 2016.

Interest Expense, Net

Interest expense, net, increased $0.6 million, or 6.4%, to $10.4 million in the second quarter of 2017, as compared to $9.8 million in the second quarter of 2016.

Other Expense, Net

Other expense, net, included a noncash charge of $16.2 million in the second quarter of 2017 and a noncash charge of $16.3 million in the second quarter of 2016, each as a result of fair value adjustments of the Company’s contingent consideration liability related to the Expansion Territories driven primarily by a change in projected future operating results of the Expansion Territories subject to sub-bottling fees.

Each reporting period, the Company adjusts its contingent consideration liability related to the Expansion Territories to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the Final CBA using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates; projected future operating results; and post-closing settlement of cash purchase prices for the Expansion Territories. These future expected sub-bottling payments extend through the life of the related distribution asset acquired in each Distribution Territory Expansion Transaction, which is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.

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

Income Tax Expense

The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes, was 33.1% for the second quarter of 2017 and 38.0% for the second quarter of 2016. The decrease in the effective tax rate was primarily driven by repricing of net deferred liabilities related to certain state legislation enacted during the second quarter of 2017 that lowered the corporate tax rate in that state and a lower income before income taxes as compared to the recorded noncontrolling interest in the second quarter of 2017 as compared to the second quarter of 2016. The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 37.1% for the second quarter of 2017 and 40.5% for the second quarter of 2016.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest, which is related to the portion of Piedmont owned by The Coca‑Cola Company, of $1.2 million in the second quarter of 2017 and $1.7 million in the second quarter of 2016.

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $0.5 million in the second quarter of 2017 and $0.3 million in the second quarter of 2016. The increase was primarily a result of actuarial losses on the Company’s pension and postretirement benefit plans.

First Half Results

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

(in thousands)

Items Impacting Operations and Financial Condition

The following items affect the comparability of the financial results:

First Half 2017

• $737.6 million in net sales and $19.8 million of operating income related to Expansion Territories and Expansion Facilities;
• $28.4 million recorded in other expense as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to Expansion Territories;
• $19.2 million of expenses related to acquiring and transitioning Expansion Territories and Expansion Facilities; and
• $9.4 million recorded in other expense for net working capital and other fair value adjustments related to the January 2016 Expansion Transactions that were made beyond one year from the acquisition date. This amount remains payable to The Coca‑Cola Company.

First Half 2016

• $198.1 million in net sales and $14.7 million of operating income related to Expansion Territories;
• $33.4 million recorded in other expense as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to Expansion Territories;
• $13.4 million of expenses related to acquiring and transitioning Expansion Territories; and
• $4.0 million of additional expense related to increased charitable contributions.

Net Sales

Net sales increased $569.2 million, or 38.8%, to $2.03 billion in the first half of 2017, as compared to $1.47 billion in the first half of 2016. The increase in net sales was primarily attributable to the following (in millions):

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

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

Bottle/can volume to retail customers, excluding the YTD 2017 Expansion Transactions and the 2016 Expansion Transactions, increased 1.9% in the first half of 2017, which represented a 1.0% increase in sparkling beverages and a 4.1% increase in still beverages as compared to the first half of 2016.

The Company’s products are sold and distributed through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During the first half of 2017, approximately 65% of the Company’s bottle/can volume to retail customers was sold for future consumption, while the remaining bottle/can volume to retail customers was sold for immediate consumption.

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

Cost of Sales

Cost of sales increased $385.6 million, or 42.7%, to $1.29 billion in the first half of 2017, as compared to $902.2 million in the first half of 2016. The increase in cost of sales was primarily attributable to the following (in millions):

Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $56.9 million in the first half of 2017, as compared to $46.3 million in the first half of 2016.

S,D&A Expenses

S,D&A expenses increased by $189.8 million, or 38.2%, to $686.3 million in the first half of 2017, as compared to $496.5 million in the first half of 2016. S,D&A expenses as a percentage of net sales decreased to 33.7% in the first half of 2017 from 33.9% in the first half of 2016. The increase in S,D&A expenses was primarily attributable to the following (in millions):

Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, totaled $259.2 million in the first half of 2017 and $180.4 million in the first half of 2016.

Interest Expense, Net

Interest expense, net, increased $0.7 million, or 3.9%, to $19.9 million in the first half of 2017, as compared to $19.2 million in the first half of 2016.

Other Expense, Net

Other expense, net, included a noncash charge of $28.4 million in the first half of 2017 and a noncash charge of $33.4 million in the first half of 2016, each as a result of fair value adjustments of the Company’s contingent consideration liability related to the Expansion Territories. The adjustment in the first half of 2017 was primarily a result of a change in the risk-free interest rate and the final settlement of territory values for the Paducah and Pikeville, Kentucky Expansion Territory acquisitions and the Norfolk, Fredericksburg and Staunton, Virginia, and Elizabeth City, North Carolina Expansion Territory acquisitions, which closed in May 2015 and October 2015, respectively. The adjustment in the first half of 2016 was driven primarily by a change in projected future operating results of the Expansion Territories subject to sub-bottling fees and a change in the risk-free interest rate.

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

Income Tax Expense

The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes, was 1.6% for the first half of 2017 and 40.1% for the first half of 2016. The decrease in the effective tax rate was primarily driven by lower income before income taxes as compared to the recorded noncontrolling interest and a reduction in the valuation allowance resulting from the

Company’s assessment of its ability to use certain loss carryforwards. The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 3.9% for the first half of 2017 and 49.8% for the first half of 2016.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest, which is related to the portion of Piedmont owned by The Coca‑Cola Company, of $1.9 million in the first half of 2017 and $2.7 million in the first half of 2016.

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $0.9 million in the first half of 2017 and $0.6 million in the first half of 2016. The increase was primarily a result of actuarial losses on the Company’s pension and postretirement benefit plans.

Segment Operating Results

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

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

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

(in thousands)

(1) The entire net sales elimination for each period presented represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are either recognized at fair market value or cost depending on the nature of the transaction.

Comparable /Adjusted Results

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

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

(in thousands, except per share data)

(in thousands, except per share data)

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

(in thousands, except per share data)

46

(in thousands, except per share data)

Financial Condition

Total assets increased to $2.89 billion on July 2, 2017, from $2.45 billion on January 1, 2017. The increase in total assets is primarily attributable to the Expansion Transactions, contributing to an increase in total assets of $278.7 million from January 1, 2017. In addition, the Company had additions to property, plant and equipment of $79.6 million during the first half of 2017, which excludes $161.2 million in property, plant and equipment acquired in the YTD 2017 Expansion Transactions.

Net working capital, defined as current assets less current liabilities, was $209.3 million on July 2, 2017, which was an increase of $73.4 million from January 1, 2017.

Significant changes in net working capital on July 2, 2017 from January 1, 2017 were as follows:

• An increase in accounts receivable, trade of $117.5 million primarily as a result of accounts receivable from the YTD 2017 Expansion Transactions.
• An increase of $19.7 million in accounts receivable from The Coca‑Cola Company and an increase of $52.3 million in accounts payable to The Coca‑Cola Company, primarily as a result of activity from the YTD 2017 Expansion Transactions, the timing of payments and a $4.4 million increase in the fee received from CCR for the conversion of the Company’s bottling agreements to the Final CBA on March 31, 2017, which was subject to a final adjustment.
• An increase in inventories of $56.9 million primarily as a result of inventories from the YTD 2017 Expansion Transactions.
• An increase in accounts payable, trade of $47.8 million primarily as a result of purchases from the YTD 2017 Expansion Transactions.
• An increase in other accrued liabilities of $49.8 million primarily as a result of the timing of payments.

Liquidity and Capital Resources

Capital Resources

The Company’s sources of capital include cash flows from operations, available credit facilities and the issuance of debt and equity securities. The Company has obtained the majority of its long-term debt, other than capital leases, from public markets and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, including the proposed acquisition of previously announced additional Expansion Territories and Expansion Facilities, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of these consolidated condensed financial statements. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future.

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

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

The Company currently believes all banks participating in the Company’s Revolving Credit Facility have the ability to and will meet any funding requests from the Company. The Company had outstanding borrowings on the Revolving Credit Facility of $200.0 million on July 2, 2017 and $152.0 million on January 1, 2017.

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

The Revolving Credit Facility, the Term Loan Facility and the Private Shelf Facility include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreements. The Company was in compliance with these covenants as of July 2, 2017. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources for the next twelve months.

The indentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts.

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

The Company’s credit ratings are reviewed periodically by the respective rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material impact on the Company’s financial position or results of operations. There were no changes in these credit ratings during the first half of 2017 from the prior year and the credit ratings are currently stable. As of July 2, 2017, the Company’s credit ratings were as follows:

Net debt and capital lease obligations were as follows:

(in thousands)

(1) The non-GAAP measure “Total net debt and capital lease obligations” is used to provide investors with additional information which management believes is helpful in the evaluation of the Company’s capital structure and financial leverage. This non-GAAP financial information is not presented elsewhere in this Report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

The Company is subject to interest rate risk on its floating rate debt, including the Company’s $450 million Revolving Credit Facility and its $300 million Term Loan Facility. Assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of July 2, 2017, interest expense for the next twelve months would increase by approximately $5.0 million.

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

(in thousands)

Cash Sources and Uses

The primary sources of cash for the Company in the first half of 2017 were debt financings and a one-time fee paid to the Company by CCR pursuant to the Territory Conversion Agreement, in connection with the conversion of the Bottling Agreements to the Final CBA. The primary uses of cash in the first half of 2017 were acquisitions of Expansion Territories and Expansion Facilities and additions to property, plant and equipment. The primary source of cash for the Company in the first half of 2016 was debt financings. The primary uses of cash in the first half of 2016 were debt repayments, acquisitions of Expansion Territories and Expansion Facilities and additions to property, plant and equipment. A summary of cash-based activity is as follows:

(in thousands)

(1) Excludes income tax refunds and payments and the bottling conversion agreement fee. This line item is a non-GAAP measure and is used to provide investors with additional information which management believes is helpful in the evaluation of the Company’s cash sources and uses. This non-GAAP financial information is not presented elsewhere in this Report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

Cash Flows From Operating Activities

During the first half of 2017, cash provided by operating activities was $179.0 million, which was an increase of $117.8 million as compared to the first half of 2016. In addition to the cash generated from the Expansion Territories, the increase was driven by an $87.1 million, one-time fee paid to the Company by CCR pursuant to the Territory Conversion Agreement.

Cash Flows From Investing Activities

During the first half of 2017, cash used in investing activities was $315.2 million, which was an increase of $54.5 million as compared to the first half of 2016. The increase was driven primarily by $227.8 million in cash used to finance the Expansion Transactions.

Additions to property, plant and equipment during the first half of 2017 were $79.6 million, of which $10.4 million were accrued in accounts payable, trade. These additions exclude $161.2 million in property, plant and equipment acquired in the YTD 2017 Expansion Transactions and $8.4 million in proceeds from cold drink equipment. Additions to property, plant and equipment during the first half of 2017 were funded with cash flows from operations and available credit facilities. The Company anticipates additions to property, plant and equipment for the remainder of 2017 will be in the range of $100 million to $150 million, excluding any additional Expansion Transactions expected to close in 2017.

In addition to the Expansion Transactions, the Company made a $15.6 million payment to The Coca‑Cola Company during the first quarter of 2017 in order to acquire rights to market, promote, distribute and sell glacéau products in certain geographic territories and for The Coca‑Cola Company to terminate a distribution arrangement with the prior distributor in these territories.

Additions to property, plant and equipment during the first half of 2016 were $79.6 million, of which $9.1 million were accrued in accounts payable, trade. These additions exclude $159.0 million in property, plant and equipment acquired in the 2016 Expansion Transactions completed during the first half of 2016.

Cash Flows From Financing Activities

During the first half of 2017, cash provided by financing activities was $157.9 million, which was a decrease of $35.4 million as compared to the first half of 2016. The decrease was driven primarily by a reduction in net borrowings on the Revolving Credit Facility and senior notes. The one-time fee paid to the Company by CCR in connection with the conversion of the Company’s bottling agreements to the Final CBA contributed to this reduction.

During the first half of 2017, the Company had cash payments of $6.6 million for acquisition related contingent consideration. The anticipated amount the Company could pay annually under the acquisition related contingent consideration arrangements for the Expansion Transactions is in the range of $20 million to $37 million.

Significant Accounting Policies

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

Off-Balance Sheet Arrangements

The Company is a member of two manufacturing cooperatives and has guaranteed $33.4 million of debt for these entities as of July 2, 2017. In addition, the Company has an equity ownership in each of the entities. The members of both cooperatives consist solely of Coca‑Cola bottlers. The Company does not anticipate either of these cooperatives will fail to fulfill their commitments. The Company further believes each of these cooperatives has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss from the Company’s guarantees.

As of July 2, 2017, the Company’s maximum exposure under these guarantees, if both cooperatives borrowed up to their aggregate borrowing capacity, would have been $74.3 million, including the Company’s equity interests. See Note 13 to the consolidated condensed financial statements for additional information.

Hedging Activities

The Company uses derivative financial instruments to manage its exposure to movements in certain commodity prices. Fees paid by the Company for derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment to cost of sales or S,D&A expenses.

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. The net impact of the commodity hedges on the consolidated condensed statements of operations was as follows:

(in thousands)

Cautionary Information Regarding Forward-Looking Statements

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

• the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements;
• the Company’s expectation that certain amounts of goodwill will, or will not, be deductible for tax purposes;
• the Company’s belief that the manufacturing cooperatives whose debt the Company guarantees have sufficient assets and the ability to adjust selling prices of their products to adequately mitigate the risk of material loss from the Company’s guarantees and that the cooperatives will perform their obligations under their debt commitments;
• the Company’s belief that it has, and that CCR and other bottlers 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 it is competitive in its territories with respect to the principal methods of competition in the nonalcoholic beverage industry;
• the Company’s belief that certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance, including information which the Company believes is helpful in the evaluation of its 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, including the proposed acquisition of previously announced additional Expansion Territories and Expansion Facilities, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months;
• the Company’s belief that all of the banks participating in the Company’s Revolving Credit Facility have the ability to and will meet any funding requests from the Company;
• the Company’s estimate of the useful lives of certain acquired intangible assets and property, plant and equipment;
• the Company’s estimate that a 10% increase in the market price of certain commodities included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $54.9 million, assuming no change in volume;
• the Company’s expectation that the amount of uncertain tax positions may change over the next 12 months but will not have a significant impact on the consolidated condensed financial statements;
• the Company’s expectation that certain territories of CCR will be sold to bottlers that are neither members of CONA nor users of the CONA System;
• the Company’s belief that the amount it could pay annually under the acquisition related contingent consideration arrangements for the Expansion Transactions will be in the range of $20 million to $37 million;
• the Company’s belief that the covenants in its Revolving Credit Facility, Term Loan Facility and Private Shelf Facility will not restrict its liquidity or capital resources for the next twelve months;
• the Company’s belief that other parties to certain of its contractual arrangements will perform their obligations;
• the Company’s belief that contributions to the two Company-sponsored pension plans will be in the range of $10 million to $12 million for the remainder of 2017;
• the Company’s expectation that it will not withdraw from its participation in the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund;
• the Company’s expectation that additions to property, plant and equipment for the remainder of 2017 will be in the range of $100 million to $150 million, excluding any additional Expansion Transactions expected to close in 2017;
• 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 expansion, revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity; and
• the Company’s hypothetical calculation that, if market interest rates average 1% more over the next twelve months than the interest rates as of July 2, 2017, interest expense for the next twelve months would increase by approximately $5.0 million, assuming no changes in the Company’s financial structure.

These forward-looking statements may be identified by the use of the words “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” and other similar terms and expressions. Various risks, uncertainties and other factors may cause the Company’s actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in Part I – Item 1A of our Annual Report on Form 10-K for 2016, as well as other factors discussed throughout this Report, including, without limitation, the factors described under “Significant Accounting Policies” in Part I – Item 2 above, or in other filings or statements made by the Company. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.

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

The Company is exposed to certain market risks that arise in the ordinary course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for trading purposes. A discussion of the Company’s primary market risk exposure and interest rate risk is presented below.

Debt and Derivative Financial Instruments

The Company is subject to interest rate risk on its floating rate debt, including the Company’s $450 million Revolving Credit Facility and its $300 million Term Loan Facility. Assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of July 2, 2017, interest expense for the next twelve months would increase by approximately $5.0 million. This amount was determined by calculating the effect of the hypothetical interest rate on the Company’s variable rate debt. This calculated, hypothetical increase in interest expense for the following twelve months may be different from the actual increase in interest expense from a 1% increase in interest rates due to varying interest rate reset dates on the Company’s floating debt.

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

Raw Material and Commodity Price Risk

The Company is also subject to commodity price risk arising from price movements for certain commodities included as part of its raw materials. The Company manages this commodity price risk in some cases by entering into contracts with adjustable prices to hedge commodity purchases. The Company periodically uses derivative commodity instruments in the management of this risk. The Company estimates a 10% increase in the market prices of these commodities over the current market prices would cumulatively increase costs during the next 12 months by approximately $54.9 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,D&A expenses.

Effects of Changing Prices

The annual rate of inflation in the United States, as measured by year-over-year changes in the consumer price index, was 2.1% in 2016, as compared to 0.7% in 2015. Inflation in the prices of those commodities important to the Company’s business is reflected in changes in the consumer price index, but commodity prices are volatile and in recent years have moved at a faster rate of change than the consumer price index.

The principal effect of inflation in both commodity and consumer prices on the Company’s operating results is to increase costs, both of goods sold and S,D&A. Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover these increased costs and may reduce their volume of purchases of those products. In that event, selling price increases may not be sufficient to offset completely the Company’s cost increases.

As of the end of the period covered by this Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of July 2, 2017.

There has been no change in the Company’s internal control over financial reporting during the quarter ended July 2, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the factors disclosed in Part I, Item 1A Risk Factors in the Company’s Annual Report on Form 10‑K for the year ended January 1, 2017.