# Coca-Cola Consolidated, Inc.: Form 10-Q for the period ended Apr 1, 2018

- Company: [Coca-Cola Consolidated, Inc.](/companies/coke.md) (CIK 317540)
- Form: 10-Q
- Filed: 2018-05-09
- Accepted by EDGAR: May 9, 2018, 17:18 ET
- Period: 2018-04-01
- Accession: 0001564590-18-012526
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317540/000156459018012526/coke-10q_20180401.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317540/000156459018012526/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-04-01.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Gross profit | 3 months, 2018-01-01 to 2018-04-01 | $364.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-01-01 to 2018-04-01 | $383.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-01-01 to 2018-04-01 | −$19.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-01-01 to 2018-04-01 | $12.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-04-01 | −$13.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-01-01 to 2018-04-01 | −$14.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-01-01 to 2018-04-01 | −$1.52 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-01-01 to 2018-04-01 | −$1.52 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-04-01 | 9,340,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 3 months, 2018-01-01 to 2018-04-01 | $42.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-01-01 to 2018-04-01 | $2.3m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2018-04-01 | $8.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-04-01 | $828.9m | us-gaap:AssetsCurrent |
| Total assets | at 2018-04-01 | $3.09bn | us-gaap:Assets |
| Current liabilities | at 2018-04-01 | $575.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-04-01 | $2.64bn | us-gaap:Liabilities |
| Long-term debt | at 2018-04-01 | $1.21bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2018-04-01 | $354.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,998 characters.

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 April 1, 2018 and December 31, 2017.
- The results of operations and comprehensive income for the 13 week periods ended April 1, 2018 (“first quarter” of fiscal 2018 (“2018”)) and April 2, 2017 (“first quarter” of fiscal 2017 (“2017”)).
- The changes in equity and cash flows for the first quarter of 2018 and the first quarter of 2017.

The 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, markets and manufactures 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 93% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage brands including Dr Pepper, Sundrop and Monster Energy. Our purpose is to honor God, 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.

Net sales by product category were as follows:

*(in thousands)*

| Bottle/can sales: | First Quarter 2018 | 2017 |
| --- | ---: | ---: |
| Sparkling beverages (carbonated) | $562,653 | $479,760 |
| Still beverages (noncarbonated, including energy products) | 324,580 | 256,058 |
| **Total bottle/can sales** | **887,233** | **735,818** |
| **Other sales:** |  |  |
| Sales to other Coca-Cola bottlers | 101,734 | 64,730 |
| Post-mix and other | 83,097 | 65,154 |
| **Total other sales** | **184,831** | **129,884** |
| **Total net sales** | **$1,072,064** | **$865,702** |

32

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-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 believe that we and other manufacturers 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.

### Executive Summary

Our Company delivered strong volume and sales growth during the first quarter of 2018. Volume increased to 78.0 million physical cases in the first quarter of 2018, from 65.2 million physical cases in the first quarter of 2017, an increase of 19.6%. Most of this growth was driven by acquisition (net of divestitures) results, as well as organic volume growth. In addition, we achieved price and mix realization greater than volume growth, which drove net sales growth for our total business. These results were driven by growth in both the sparkling and still beverage categories, with sparkling bottle/can sales growing 17.3% and still bottle/can sales growing 26.7%. While these volume and net sales results in the first quarter of 2018 were strong, we believe poor weather and product sourcing challenges associated with our evolving integrated business platform exerted significant pressure on our results in the first quarter of 2018, as compared to the first quarter of 2017. This pressure was partially offset by the shift of the Easter holiday.

While volume and top line growth were strong, we experienced margin compression compared to the same period last year. Gross margin declined in the first quarter of 2018, as compared to the first quarter of 2017. The primary drivers of this margin compression were (i) recent commodity and transportation cost pressures, (ii) the acquisition of new territories that generally experience margins lower than our legacy territories, and (iii) the continued volume shift to lower-margin still products to meet changing consumer preferences. We expect these drivers to continue throughout 2018, and we are taking pricing actions in certain markets to help offset the cost pressures. In addition to the operating headwinds in our business, structural changes in our underlying financial results reduced reported gross margins, which included (i) the amortization of our legacy distribution rights that converted from franchise rights in accordance with a comprehensive beverage agreement entered into by the Company, The Coca‑Cola Company and CCR on March 31, 2017 (as amended, the “CBA”), and (ii) the new profit margin structure on sales to other Coca‑Cola bottlers as part of the regional manufacturing agreement entered into by the Company and The Coca‑Cola Company on March 31, 2017, as amended.

Selling, delivery and administrative expenses increased in the first quarter of 2018 as compared to the first quarter of 2017, reflecting the increased volume delivered, incremental effort and costs associated with managing two enterprise resource planning systems and our continued costs to integrate our acquired territory into our overall business. While we were successful in leveraging our selling, delivery and administrative expenses on increased sales volume, we believe there are additional opportunities to secure scale advantages and further leverage our cost structure against our expanded territories. Initiatives are underway to address these scale opportunities, including both operational and back office synergies.

Income (loss) from operations in the first quarter of 2018 was lower than in the first quarter of 2017. We experienced an operating loss of $19.0 million in the first quarter of 2018, as compared to operating income of $15.0 million in the first quarter of 2017.

While we completed our System Transformation Transactions in October 2017, we continue integrating the acquired distribution territories, manufacturing facilities, and related operations and investing resources to improve efficiencies, capabilities and market share. While doing so, we are focused on balancing these investments with our overall financial management strategy and debt reduction goals. We have revised our capital spending plans for the balance of 2018 in order to optimize our focus on strategic capital priorities and operational initiatives. We now estimate spending between $160 million and $180 million on capital expenditures in 2018, as compared to our previous estimated range of $200 million to $230 million.

We also continue to devote significant time and resources to the System Transformation work, particularly converting all our legacy information technology systems to the new CONA system which, when completed, will enable us to operate on one integrated information technology system going forward. We expect this conversion to be completed later this year. During the first quarter of 2018, we incurred non-recurring expenses relating to our System Transformation of approximately $12.5 million, the majority of which were information technology-related costs. We anticipate incurring an additional $30 million to $35 million of related expenses in the remainder of 2018.

### System Transformation Transactions

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 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.

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 (loss) 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 (loss) 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:

*(in thousands)*

|  | First Quarter 2018 | 2017 |
| --- | ---: | ---: |
| Impact to net sales - total 2017 System Transformation Transactions acquisitions | $274,458 | $26,246 |
| Impact to net sales - October 2017 Divestitures(1) | - | 70,859 |
| **Total impact to net sales** | **$274,458** | **$97,105** |
| Impact to income (loss) from operations - total 2017 System Transformation Transactions acquisitions | $(935) | $96 |
| Impact to income (loss) from operations - October 2017 Divestitures(1) | - | 6,009 |
| **Total impact to income (loss) from operations** | **$(935)** | **$6,105** |

(1) 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. 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 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 Coffee 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.

*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 $147.0 million in the first quarter of 2018 and $116.2 million in the first quarter of 2017. 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

#### First Quarter Results

Our results of operations for the first quarter of 2018 and the first quarter of 2017 are highlighted in the table below and discussed in the following paragraphs:

*(in thousands)*

|  | First Quarter 2018 | 2017 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $1,072,064 | $865,702 | $206,362 | 23.8% |
| Cost of sales | 707,116 | 533,681 | 173,435 | 32.5 |
| Gross profit | 364,948 | 332,021 | 32,927 | 9.9 |
| Selling, delivery and administrative expenses | 383,945 | 317,071 | 66,874 | 21.1 |
| Income (loss) from operations | (18,997) | 14,950 | (33,947) | (227.1) |
| Interest expense, net | 12,046 | 9,470 | 2,576 | 27.2 |
| Other income (expense), net | 4,510 | (13,588) | 18,098 | 133.2 |
| Loss before income taxes | (26,533) | (8,108) | (18,425) | (227.2) |
| Income tax benefit | (12,971) | (3,691) | (9,280) | (251.4) |
| Net loss | (13,562) | (4,417) | (9,145) | (207.0) |
| Less: Net income attributable to noncontrolling interest | 623 | 634 | (11) | (1.7) |
| **Net loss attributable to Coca-Cola Bottling Co. Consolidated** | **$(14,185)** | **$(5,051)** | **$(9,134)** | **(180.8%)** |

#### Items Impacting Operations and Financial Condition

The following items affect the comparability of the financial results:

#### First Quarter 2018

- $274.5 million in net sales related to the 2017 System Transformation Transactions;
- $12.5 million of expenses related to the System Transformation;
- $5.2 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 territories acquired as part of the System Transformation;
- $3.0 million pre-tax unfavorable mark-to-market adjustments related to the Company’s commodity hedging program; and
- $2.2 million of net amortization expense associated with the conversion of the Company’s franchise rights to distribution rights for the distribution territories the Company served prior to the System Transformation.

#### First Quarter 2017

- $26.2 million in net sales related to the 2017 System Transformation Transactions;
- $70.9 million in net sales and $6.0 million of income from operations related to the distribution territories and the regional manufacturing facility divested by the Company in 2017 as part of the System Transformation exchange transactions with CCR and United;
- $12.2 million recorded in other expense as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to the territories acquired as part of the System Transformation; and
- $7.7 million of expenses related to the System Transformation.

### Net Sales

Net sales increased $206.4 million, or 23.8%, to $1.07 billion in the first quarter of 2018, as compared to $865.7 million in the first quarter of 2017. The increase in net sales was primarily attributable to the following (in millions):

| First Quarter 2018 | Attributable to: |
| ---: | --- |
| $177.4 | Net sales increase related to the 2017 System Transformation Transactions |
| 18.4 | Increase in bottle/can sales volume to retail customers in territories served by the Company prior to 2017 |
| (7.8) | Decrease in sales volume to other Coca-Cola bottlers in territories served by the Company prior to the System Transformation |
| 6.6 | Increase in external transportation revenue |
| 4.2 | Increase in sales price per unit to other Coca-Cola bottlers |
| 7.6 | Other |
| **$206.4** | **Total increase in net sales** |

The Company’s bottle/can sales to retail customers accounted for approximately 83% of the Company’s total net sales in the first quarter of 2018, as compared to approximately 85% in the first 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.

Product category sales volume of physical cases in the first quarter of 2018 and the first quarter of 2017 as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

| Product Category | Bottle/Can Sales Volume First Quarter 2018 | 2017 | Bottle/Can Sales Volume Increase |
| --- | ---: | ---: | ---: |
| Sparkling beverages | 72.0% | 72.5% | 18.9% |
| Still beverages (including energy products) | 28.0% | 27.5% | 21.8% |
| **Total bottle/can sales volume** | **100.0%** | **100.0%** | **19.6%** |

The Company’s products are sold and distributed through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During the first quarter of 2018, approximately 67% 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.

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:

| Approximate percentage of the Company’s total bottle/can sales volume: | First Quarter 2018 | 2017 |
| --- | ---: | ---: |
| Wal-Mart Stores, Inc. | 19% | 20% |
| The Kroger Company | 12% | 8% |
| Food Lion, LLC | 6% | 7% |
| **Total approximate percentage of the Company’s total bottle/can sales volume** | **37%** | **35%** |
| **Approximate percentage of the Company’s total net sales:** |  |  |
| Wal-Mart Stores, Inc. | 14% | 14% |
| The Kroger Company | 8% | 6% |
| Food Lion, LLC | 4% | 5% |
| **Total approximate percentage of the Company’s total net sales** | **26%** | **25%** |

### 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 the purchase 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.

Cost of sales increased $173.4 million, or 32.5%, to $707.1 million in the first quarter of 2018, as compared to $533.7 million in the first quarter of 2017. The increase in cost of sales was primarily attributable to the following (in millions):

| First Quarter 2018 | Attributable to: |
| ---: | --- |
| $130.5 | Cost of sales increase related to the 2017 System Transformation Transactions |
| 32.7 | Increase in purchases of finished goods and an increase in raw materials costs and manufacturing costs |
| 10.8 | Increase in bottle/can sales volume to retail customers in territories served by the Company prior to 2017 |
| (7.3) | Decrease in sales volume to other Coca-Cola bottlers in territories served by the Company prior to 2017 |
| 5.1 | Increase in external transportation cost of sales |
| 3.5 | Increase in cost due to the Company's commodity hedging program |
| (1.9) | Other |
| **$173.4** | **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 $30.4 million in the first quarter of 2018, as compared to $24.4 million in the first quarter of 2017.

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

### S,D&A Expenses

S,D&A expenses include the following: sales management labor costs, distribution costs from sales distribution centers to customer locations, sales distribution center warehouse costs, depreciation 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,D&A expenses increased by $66.8 million, or 21.1%, to $383.9 million in the first quarter of 2018, as compared to $317.1 million in the first quarter of 2017. S,D&A expenses as a percentage of net sales decreased to 35.8% in the first quarter of 2018 from 36.6% in the first quarter of 2017. The increase in S,D&A expenses was primarily attributable to the following (in millions):

| First Quarter 2018 | Attributable to: |
| ---: | --- |
| $34.7 | Increase in employee salaries including bonuses and incentives due to additional personnel added in the System Transformation and normal salary increases |
| 5.1 | 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 |
| 5.0 | 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 |
| 4.5 | Increase in expenses related to the System Transformation, primarily information technologies system conversions |
| 3.1 | Increase in employer payroll taxes primarily due to additional personnel added from the System Transformation |
| 10.3 | Other individually immaterial expense increases primarily related to the System Transformation |
| 4.1 | Other individually immaterial increases |
| **$66.8** | **Total increase in S,D&A expenses** |

37

During the first quarter of 2018, the Company incurred $12.5 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 will be in the range of $30 million to $35 million.

Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, are included in S,D&A expenses and totaled $147.0 million in the first quarter of 2018 and $116.2 million in the first 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” issued by the Financial Accounting Standards Board in March 2017, the Company reclassified $1.4 million for the non-service cost component of net periodic benefit cost from S,D&A expenses to other income (expense), net. The non-service cost component of net periodic benefit cost is included in the Nonalcoholic Beverages segment.

### Interest Expense, Net

Interest expense, net, increased $2.5 million to $12.0 million in the first quarter of 2018, as compared to $9.5 million in the first quarter of 2017. The increase was primarily a result of additional borrowings to finance the 2017 System Transformation Transactions and additional borrowings during the first quarter of 2018 to support working capital and capital expenditure needs.

### Other Income (Expense), Net

Other income (expense), net included noncash income of $5.2 million in the first quarter of 2018 and a noncash charge of $12.2 million in the first quarter of 2017, each as a result of fair value adjustments of the Company’s contingent consideration liability related to the distribution territories acquired as part of the System Transformation.

Each reporting period, the Company adjusts its contingent consideration liability related to the territories acquired as part of the System Transformation, excluding territories acquired pursuant to an exchange transaction, to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the 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 territories acquired as part of the System Transformation. These future expected sub-bottling payments extend through the life of the related 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 fair value adjustments to the acquisition related contingent consideration liability during the first quarter of 2018 were primarily driven by a change in the risk-free interest rate. The fair value adjustments to the acquisition related contingent consideration liability during the first quarter of 2017 were primarily a result of the final settlement of territory values for the Paducah and Pikeville, Kentucky distribution territory acquisition and the Norfolk, Fredericksburg and Staunton, Virginia, and Elizabeth City, North Carolina distribution territory acquisition, which closed in May 2015 and October 2015, respectively.

In addition, other income (expense), net includes the non-service cost component of net periodic benefit cost, which was $0.7 million during the first quarter of 2018 and $1.4 million during the first quarter of 2017.

### Income Tax Benefit

The Company’s effective income tax rate, calculated by dividing income tax benefit by loss before income taxes, was 48.9% for the first quarter of 2018 and 45.5% for the first quarter of 2017. The increase in the effective tax rate was primarily driven by an increase in non-deductible expenses and the repeal of the manufacturing deduction as part of the Tax Cuts and Jobs Act (the “Tax Act”). The Company’s effective tax rate, calculated by dividing income tax benefit by loss before income taxes minus net income attributable to noncontrolling interest, was 47.8% for the first quarter of 2018 and 42.2% for the first quarter of 2017.

### Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $0.6 million in both the first quarter of 2018 and the first quarter of 2017, 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 $0.7 million in the first quarter of 2018 and $0.4 million in the first quarter of 2017. The increase was primarily a result of actuarial gains 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, 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:

*(in thousands)*

| Net sales: | First Quarter 2018 | 2017 |
| --- | ---: | ---: |
| Nonalcoholic Beverages(1) | $1,047,729 | $847,945 |
| All Other(1) | 86,599 | 61,242 |
| Eliminations(2) | (62,264) | (43,485) |
| **Consolidated net sales** | **$1,072,064** | **$865,702** |
| **Income (loss) from operations:** |  |  |
| Nonalcoholic Beverages | $(22,745) | $12,876 |
| All Other | 3,748 | 2,074 |
| **Consolidated income (loss) from operations** | **$(18,997)** | **$14,950** |

(1) In order to correct an error in the prior year segment presentation, the Company revised net sales for the first quarter of 2017 to reflect $15.6 million of sales in the Nonalcoholic Beverages segment which were previously attributed to All Other. Total net sales remain unchanged in prior periods and these revisions were not considered material to the prior period presented.

(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. Asset eliminations relate to eliminations of intercompany receivables and payables between the Nonalcoholic Beverages segment and All Other.

### Organic / Adjusted 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 transactions 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) for the first quarter of 2018 and the first quarter of 2017:

*(in thousands)*

|  | First Quarter 2018 | 2017 |  |  |
| --- | ---: | ---: | --- | ---: |
| Total bottle/can sales | $887,233 | $735,818 |  |  |
| Total other sales | 184,831 | 129,884 |  |  |
| **Total net sales** | $1,072,064 | $865,702 |  | **First Quarter** |
|  |  |  | (in millions) | **2018** **2017** |
| Total bottle/can sales | $887,233 | $735,818 | Physical case volume | 78.0 65.2 |
| Less: Acquisition/divestiture related sales | 260,843 | 123,935 | Less: Acquisition/divestiture related physical case volume | 22.5 10.9 |
| **Organic net bottle/can sales (non-GAAP)(1)** | **$626,390** | **$611,883** | **Organic physical case volume(1)** | **55.5** **54.3** |
| Increase in organic net sales | 2.4% |  | Increase in organic physical case volume | 2.2% |

*(in thousands, except per share data)*

|  | First Quarter 2018 Net sales | Gross profit | Loss from operations | Loss before income taxes | Net loss | Basic net loss per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$1,072,064** | **$364,948** | **$(18,997)** | **$(26,533)** | **$(14,185)** | **$(1.52)** |
| System Transformation Transactions expenses(2) | - | 199 | 12,450 | 12,450 | 9,362 | 1.00 |
| Fair value adjustment of acquisition related contingent consideration(3) | - | - | - | (5,186) | (3,900) | (0.42) |
| Amortization of converted distribution rights, net(4) | - | 2,231 | 2,231 | 2,231 | 1,678 | 0.18 |
| Fair value adjustments for commodity hedges(5) | - | 2,765 | 2,967 | 2,967 | 2,231 | 0.24 |
| Other tax adjustment(6) | - | - | - | - | (2,856) | (0.30) |
| **Total reconciling items** | **-** | **5,195** | **17,648** | **12,462** | **6,515** | **0.70** |
| **Adjusted results (non-GAAP)** | **$1,072,064** | **$370,143** | **$(1,349)** | **$(14,071)** | **$(7,670)** | **$(0.82)** |

*(in thousands, except per share data)*

|  | First Quarter 2017 Net sales | Gross profit | Income from operations | Income (loss) before income taxes | Net income (loss) | Basic net income (loss) per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$865,702** | **$332,021** | **$14,950** | **$(8,108)** | **$(5,051)** | **$(0.54)** |
| System Transformation Transactions expenses(2) | - | 88 | 7,652 | 7,652 | 4,714 | 0.51 |
| Fair value adjustment of acquisition related contingent consideration(3) | - | - | - | 12,246 | 7,544 | 0.81 |
| Fair value adjustments for commodity hedges(5) | - | (698) | (327) | (327) | (201) | (0.02) |
| Other tax adjustment(6) | - | - | - | - | (747) | (0.09) |
| **Total reconciling items** | **-** | **(610)** | **7,325** | **19,571** | **11,310** | **1.21** |
| **Adjusted results (non-GAAP)** | **$865,702** | **$331,411** | **$22,275** | **$11,463** | **$6,259** | **$0.67** |

Following is an explanation of non-GAAP adjustments:

(1) Organic net sales and organic physical case volume include results from the Company’s distribution territories not impacted by acquisition or divestiture related activity during 2017.

(2) Adjustment reflects expenses related to the System Transformation, which primarily includes information technologies system conversions and professional fees and expenses related to due diligence.

(3) This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates, projected future results, and final settlements of acquired territory values.

(4) Concurrent with entering into the CBA on March 31, 2017, the Company converted its franchise rights for the territories the Company served prior to the System Transformation to distribution rights, to be amortized over an estimated useful life of 40 years. Adjustment reflects the net amortization expense associated with the conversion of the Company’s franchise rights.

(5) 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.

(6) Includes adjustments related to the Tax Act and other items impacting the Company’s effective tax rate.

### Financial Condition

Total assets increased $17.5 million to $3.09 billion on April 1, 2018, as compared to $3.07 billion on December 31, 2017. Net working capital, defined as current assets less current liabilities, was $253.9 million on April 1, 2018, which was an increase of $98.8 million from December 31, 2017.

Significant changes in net working capital on April 1, 2018 from December 31, 2017 were as follows:

- An increase in accounts receivable, trade of $23.2 million primarily as a result of the timing of cash receipts.
- A decrease in accounts receivable, other of $16.1 million primarily as a result of the timing of payments received for marketing funding and rebates.
- An increase in inventories of $23.5 million primarily as a result of a higher inventory valuation stemming from increased commodity and freight costs.
- An increase in accounts payable to The Coca‑Cola Company of $10.7 million primarily as a result of the timing of payments.
- A decrease in other accrued liabilities of $35.9 million primarily as a result of the timing of payments.
- A decrease in accrued compensation of $38.8 million primarily as a result of bonuses and incentives paid to personnel during the first quarter of 2018.

### 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 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.

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

The Company currently believes all banks participating in the Revolving Credit Facility have the ability to and will meet any funding requests from the Company. The Company had outstanding borrowings on the Revolving Credit Facility of $180.0 million on April 1, 2018 and $207.0 million on December 31, 2017.

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

Under the Company’s Term Loan Facility, $15 million will become due in 2018. The Company intends to repay this amount through use of its Revolving Credit Facility, which is classified as long-term debt. As such, the $15 million was classified as non-current as of April 1, 2018 and December 31, 2017.

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 (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 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.

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 (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.

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

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. Subsequent to the end of the first quarter of 2018, Standard & Poor’s reaffirmed the Company’s BBB rating and revised the Company’s rating outlook to negative from stable. Moody’s rating outlook for the Company is currently stable. As of April 1, 2018, 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 April 1, 2018 and December 31, 2017 were as follows:

*(in thousands)*

|  | April 1, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| Debt | $1,211,109 | $1,088,018 |
| Capital lease obligations | 41,416 | 43,469 |
| Total debt and capital lease obligations | 1,252,525 | 1,131,487 |
| Less: Cash and cash equivalents | 8,479 | 16,902 |
| **Total net debt and capital lease obligations (1)** | **$1,244,046** | **$1,114,585** |

(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 Revolving Credit Facility and the Term Loan Facility. Assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of April 1, 2018, interest expense for the next twelve months would increase by approximately $4.8 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. There were no transfers from Level 1 or Level 2. Fair value adjustments were noncash, and therefore did not impact the Company’s liquidity or capital resources. The following is a summary of the Level 3 activity:

*(in thousands)*

|  | First Quarter 2018 | 2017 |
| --- | ---: | ---: |
| **Beginning balance - Level 3 liability** | **$381,291** | **$253,437** |
| Increase due to System Transformation Transactions acquisitions | - | 42,316 |
| Measurement period adjustment(1) | (1,059) | - |
| Payment of acquisition related contingent consideration | (5,882) | - |
| Reclassification to current payables | (360) | (4,047) |
| (Favorable)/unfavorable fair value adjustment | (5,186) | 12,246 |
| **Ending balance - Level 3 liability** | **$368,804** | **$303,952** |

(1) Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the distribution asset purchase agreement and the manufacturing asset purchase agreement both entered into by the Company and CCR on April 13, 2017.

### Cash Sources and Uses

The primary sources of cash for the Company in the first quarter of 2018 were debt financings. The primary uses of cash in the first quarter of 2018 were repayments of debt, operating activities and additions to property, plant and equipment. The primary sources of cash for the Company in the first quarter 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 quarter 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:

*(in thousands)*

| Cash Sources: | First Quarter 2018 | 2017 |
| --- | ---: | ---: |
| Borrowings under Revolving Credit Facility | $170,000 | $120,000 |
| Proceeds from issuance of Senior Notes | 150,000 | 125,000 |
| Territory Conversion Fee(1) | - | 87,066 |
| Adjusted cash provided by operating activities(2) | - | 29,465 |
| Proceeds from the sale of property, plant and equipment | 2,894 | 211 |
| Other | 13 | 13 |
| **Total cash sources** | **$322,907** | **$361,755** |
| **Cash Uses:** |  |  |
| Payments on Revolving Credit Facility | $197,000 | $150,000 |
| System Transformation acquisitions, net of cash acquired | - | 139,958 |
| Adjusted cash used in operating activities(2) | 78,515 | - |
| Additions to property, plant and equipment (exclusive of acquisitions) | 42,048 | 41,580 |
| Glacéau distribution agreement consideration | - | 15,598 |
| Income tax payments | 2,244 | - |
| Payment of acquisition related contingent consideration | 5,882 | - |
| Cash dividends paid | 2,333 | 2,328 |
| Principal payments on capital lease obligations | 2,053 | 1,828 |
| Investment in CONA Services LLC | 1,070 | 134 |
| Other | 185 | 239 |
| **Total cash uses** | **$331,330** | **$351,665** |
| **Net increase (decrease) in cash** | **$(8,423)** | **$10,090** |

43

(1) This one-time fee (the “Territory Conversion Fee”) was paid to the Company upon the conversion of the Company’s then-existing bottling agreements to the CBA in March 2017 pursuant to a territory conversion agreement entered into by the Company, The Coca‑Cola Company and CCR in September 2015, as amended. The Territory Conversion Fee was 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 territories it served prior to the System Transformation of certain beverages owned by or licensed to The Coca‑Cola Company or Monster Energy Company on which the Company and its subsidiaries pay a facilitation fee to The Coca‑Cola Company.

(2) Adjusted cash provided by operating activities excludes amounts received with regard to the Territory Conversion Fee and adjusted cash used in operating activities excludes income tax payments. These line items are non-GAAP measures and provide investors with additional information which management believes is helpful in the evaluation of the Company’s cash sources and uses. This non-GAAP financial information is not presented elsewhere in this report and may not be comparable to the similarly titled measures used by other companies. Additionally, this information should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP.

### Cash Flows From Operating Activities

During the first quarter of 2018, cash used in operating activities was $80.7 million, which was a decrease of $197.2 million as compared to cash provided by operating activities of $116.5 million in the first quarter of 2017. The decrease was primarily a result of the non-reoccurrence of the Territory Conversion Fee, which was received during the first quarter of 2017, and changes in net working capital, as discussed above.

### Cash Flows From Investing Activities

During the first quarter of 2018, cash used in investing activities was $40.2 million, which was a decrease of $156.9 million as compared to the first quarter of 2017. The decrease was driven primarily by the Company’s completion of its System Transformation Transactions in October 2017.

Additions to property, plant and equipment were $42.0 million during the first quarter of 2018, of which $16.1 million were accrued in accounts payable, trade. The Company anticipates additions to property, plant and equipment for the remainder of 2018 will be in the range of $120 million to $135 million.

Additions to property, plant and equipment during the first quarter of 2017 were $41.6 million, of which $9.4 million were accrued in accounts payable, trade. These additions exclude $108.4 million in property, plant and equipment acquired in System Transformation Transactions.

### Cash Flows From Financing Activities

During the first quarter of 2018, cash provided by financing activities was $112.5 million, which was an increase of $21.9 million as compared to the first quarter of 2017. The increase was primarily driven by additional borrowings during the first quarter of 2018 to support working capital and capital expenditure needs.

During the first quarter of 2018, the Company had cash payments of $5.9 million for acquisition related contingent consideration. 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, will be in the range of $23 million to $47 million.

### Significant Accounting Policies

See Note 1 and Note 2 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, 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 April 1, 2018. 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 payment to the lenders up to the level of the guarantee. As of April 1, 2018, the Company’s maximum exposure under the guarantee, if SAC borrowed up to its aggregate borrowing capacity, would have been $31.3 million, including the Company’s equity interests. See Note 15 to the consolidated condensed financial statements for additional information.

### Hedging Activities

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

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

*(in thousands)*

|  | First Quarter 2018 | 2017 |
| --- | ---: | ---: |
| Cost of sales - increase/(decrease) | $2,662 | $(995) |
| S,D&A expenses - increase/(decrease) | 8 | 321 |
| **Net impact** | **$2,670** | **$(674)** |

### 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 acquisition related contingent consideration 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 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 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 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, 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 Revolving Credit Facility have the ability to and will meet any funding requests from the Company;
- the Company’s intention to repay the $15 million that will become due under the Term Loan Facility in 2018 through use of its 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 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 $54.6 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 consolidated condensed financial statements;
- the Company’s belief that the ultimate impact of the Tax Act could differ from the Company’s estimates, 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, changes in accounting standards, legislative actions, future actions by states within the U.S. and changes in estimates, analysis, interpretations and assumptions the Company has made;
- 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 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 $23 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 belief that contributions to the two Company-sponsored pension plans are expected to be in the range of $10 million to $20 million in 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 Company’s belief that System Transformation expenses for the remainder of 2018 will be in the range of $30 million to $35 million;
- the Company’s belief that additions to property, plant and equipment for the remainder of 2018 are expected to be in the range of $120 million to $135 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 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 April 1, 2018, interest expense for the next twelve months would increase by approximately $4.8 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, as well as other factors discussed throughout this report, including, without limitation, the factors described under “Significant Accounting Policies” in our consolidated condensed financial statements, or in other filings or statements made by the Company. All of the forward-looking statements in this report and other documents or statements are qualified by these and other factors, risks and uncertainties.

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

## Market risk

As filed, 3,745 characters.

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

### Debt and Derivative Financial Instruments

The Company is subject to interest rate risk on its floating rate debt, including the Revolving Credit Facility and the Term Loan Facility. Assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of April 1, 2018, interest expense for the next twelve months would increase by approximately $4.8 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 CBA. 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 $54.6 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 (the “CPI”), was 2.1% in 2017 and 2016. 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,D&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.

## Controls and procedures

As filed, 941 characters.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of April 1, 2018.

There has been no change in the Company’s internal control over financial reporting during the quarter ended April 1, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 175 characters.

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.

Filed May 9, 2018.
Source: SEC EDGAR, the filing index for accession 0001564590-18-012526. Last ingested by Listed: Nov 4, 2026, 17:26 ET. No prices; not investment advice.