# Coca-Cola Consolidated, Inc.: Form 10-Q for the period ended Sep 30, 2018

- Company: [Coca-Cola Consolidated, Inc.](/companies/coke.md) (CIK 317540)
- Form: 10-Q
- Filed: 2018-11-08
- Accepted by EDGAR: Nov 8, 2018, 17:04 ET
- Period: 2018-09-30
- Accession: 0001564590-18-028632
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317540/000156459018028632/coke-10q_20180930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317540/000156459018028632/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-02 to 2018-09-30 | $1.21bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $3.51bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-07-02 to 2018-09-30 | $791.3m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $2.31bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-07-02 to 2018-09-30 | $420.3m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $1.20bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-07-02 to 2018-09-30 | $375.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-01-01 to 2018-09-30 | $1.15bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-07-02 to 2018-09-30 | $44.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $45.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-02 to 2018-09-30 | $12.8m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $37.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-02 to 2018-09-30 | $16.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $3.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-07-02 to 2018-09-30 | $25.2m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $7.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-02 to 2018-09-30 | $2.69 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.75 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-07-02 to 2018-09-30 | $2.69 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-01-01 to 2018-09-30 | $0.75 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-07-02 to 2018-09-30 | 9,405,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 9,400,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-01-01 to 2018-09-30 | $26.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $113.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $7.0m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2018-09-30 | $9.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $845.2m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $3.07bn | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $558.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $2.60bn | us-gaap:Liabilities |
| Long-term debt | at 2018-09-30 | $1.19bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2018-09-30 | $372.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 83,753 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 September 30, 2018 and December 31, 2017.
- The results of operations and comprehensive income for the 13 week periods ended September 30, 2018 (“third quarter” of fiscal 2018 (“2018”)) and October 1, 2017 (“third quarter” of fiscal 2017 (“2017”)), and the 39 week periods ended September 30, 2018 (“first three quarters” of 2018) and October 1, 2017 (“first three quarters” of 2017).
- The changes in equity and cash flows for the first three quarters of 2018 and the first three quarters 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 94% 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: | Third Quarter 2018 | 2017 | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Sparkling beverages (carbonated) | $605,614 | $582,710 | $1,787,451 | $1,670,093 |
| Still beverages (noncarbonated, including energy products) | 413,282 | 384,495 | 1,142,764 | 1,009,508 |
| **Total bottle/can sales** | **1,018,896** | **967,205** | **2,930,215** | **2,679,601** |
| **Other sales:** |  |  |  |  |
| Sales to other Coca-Cola bottlers | 92,139 | 104,619 | 300,819 | 274,317 |
| Post-mix and other | 100,626 | 90,702 | 279,963 | 243,601 |
| **Total other sales** | **192,765** | **195,321** | **580,782** | **517,918** |
| **Total net sales** | **$1,211,661** | **$1,162,526** | **$3,510,997** | **$3,197,519** |

34

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

During the third quarter of 2018, our Company made meaningful progress towards the strategic priorities we set during the second quarter of 2018, even in the midst of continued challenges in the commodities and transportation markets. Our pricing actions delivered over 4% revenue growth versus the third quarter of 2017 on relatively flat volume of almost 87 million physical cases. Our performance during the third quarter of 2018 brings our year-to-date volume growth to 5.9% and our year-to-date revenue growth to 9.8%. Our organic case volume decline in the third quarter of 2018 was 0.4% versus the third quarter of 2017, and our year-to-date organic case volume growth was 0.3% versus the prior year period. Beginning in the fourth quarter of 2018, we will have cycled all of the transactions completed during our system transformation initiative, and results should be comparable on a year-over-year basis. As discussed last quarter, the mid-week July 4th holiday resulted in volume being split between the second and third quarters in 2018. Additionally, Hurricane Florence impacted our operations in much of our coastal territory in September, although identified incremental costs due to the storm were immaterial.

Integral to the strategic priorities we set during the second quarter of 2018, we implemented numerous pricing actions throughout our territory in the third quarter of 2018 to address our increased input costs. Gross margin in the third quarter of 2018 was 60 basis points lower than the third quarter of 2017 (34.7% in the third quarter of 2018 versus 35.3% in the third quarter of 2017), which reflects significant and sequential improvement over the gross margin declines we experienced in the first half of 2018. The primary drivers of the year-over-year margin decline remain (in order of significance): (i) rising commodity costs, (ii) the volume shift to lower-margin still products, and (iii) newly acquired territories generally experiencing margins lower than our legacy territories. We continue to refine our pricing strategies and focus on driving operating efficiencies in our supply chain to improve margin performance and address the rising input costs across the consumer products landscape.

Selling, delivery and administrative (“S,D&A”) expenses in the third quarter of 2018 increased approximately $3.0 million, or 0.8%, as compared to the third quarter of 2017. Notably, our S,D&A expenses as a percent of revenue declined to 31.0% in the third quarter of 2018 from 32.1% in the third quarter of 2017. We believe this leveraging of operating expenses was the result of our actions taken during the second quarter of 2018 and our strong revenue performance in the third quarter of 2018. These improvements were partially offset by the expenses associated with our continuing territory integration efforts. While we are pleased with our operating expense performance in the third quarter, we will continue to refine and optimize our operating model across our Company to drive improvements in efficiency and profitability.

Income from operations was $44.4 million in the third quarter of 2018, increasing from $37.5 million in the third quarter of 2017. We have completed our system transformation transactions and are nearing steady state from an IT system perspective. As such, we incurred $2.7 million less in system transformation expenses in the third quarter of 2018, as compared to the third quarter of 2017. We are encouraged with our progress in operating income performance and recognize we have additional improvement opportunities.

During the third quarter of 2018, we spent $10.4 million on system transformation expenses, which primarily related to the implementation of our integrated CONA information systems platform. We anticipate spending between $6 million and $8 million on system transformation expenses in the fourth quarter of 2018 and expect to see these expenses continue to decrease over the next few quarters.

Capital spending for the third quarter was approximately $27.8 million, bringing our year-to-date total capital investments to $113.1 million. We anticipate capital spending in the range of $25 million to $35 million in the fourth quarter of 2018. Diligent capital management processes have been put in place to continue our focus on debt reduction, while investing in the highest impact projects. In addition to our capital spending, the Company contributed $20 million to fund our pension plans during the third quarter of 2018.

We expect to begin distribution of the fast-growing premium sports drink, BodyArmor, in a portion of our territories in the fourth quarter of 2018. We are excited about the addition of BodyArmor to our powerful portfolio of brands, and, while we do not expect the impact on our 2018 results to be material, we do anticipate our BodyArmor distribution rights will provide ongoing benefits and round out our sports drink portfolio.

### 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. As of September 30, 2018, the cash purchase prices or settlement amounts for all System Transformation Transactions have been resolved according to the terms of the transaction agreements. The post-closing adjustments made during the third quarter of 2018 resulted in a $10.2 million net adjustment to the gain on exchange transactions in the consolidated condensed statements of operations.

The financial results of the System Transformation Transactions have been included in the Company’s consolidated condensed financial statements from their respective acquisition or exchange dates. Net sales and income from operations for certain territories and regional manufacturing facilities acquired and divested by the Company during 2017 are impracticable to separately calculate, as the operations were absorbed into territories and facilities owned by the Company prior to the System Transformation, and therefore have been omitted from the results below. Omission of net sales and income from operations for such territories and facilities is not considered material to the results presented below. The remaining 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)*

|  | Third Quarter 2018 | 2017 | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Impact to net sales - total 2017 System Transformation Transactions acquisitions | $308,825 | $221,034 | $896,179 | $454,174 |
| Impact to net sales - October 2017 Divestitures | - | 79,032 | - | 231,301 |
| **Total impact to net sales** | **$308,825** | **$300,066** | **$896,179** | **$685,475** |
| Impact to income from operations - total 2017 System Transformation Transactions acquisitions | $11,874 | $3,176 | $14,635 | $13,595 |
| Impact to income from operations - October 2017 Divestitures | - | 7,689 | - | 22,973 |
| **Total impact to income from operations** | **$11,874** | **$10,865** | **$14,635** | **$36,568** |

See Note 3 to the consolidated condensed financial statements for additional information on the October 2017 Divestitures.

### Areas of Emphasis

Key priorities for the Company include integration of the territories and regional manufacturing facilities acquired during the System Transformation, revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity.

*Revenue Management:* Revenue management requires a strategy that reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based decision-making. 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 $458.7 million in the first three quarters of 2018 and $407.1 million in the first three quarters 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

#### Third Quarter Results

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

*(in thousands)*

|  | Third Quarter 2018 | 2017 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $1,211,661 | $1,162,526 | $49,135 | 4.2% |
| Cost of sales | 791,317 | 752,202 | 39,115 | 5.2 |
| Gross profit | 420,344 | 410,324 | 10,020 | 2.4 |
| Selling, delivery and administrative expenses | 375,940 | 372,852 | 3,088 | 0.8 |
| Income from operations | 44,404 | 37,472 | 6,932 | 18.5 |
| Interest expense, net | 12,827 | 10,697 | 2,130 | 19.9 |
| Other income, net | 1,696 | 3,884 | (2,188) | (56.3) |
| Gain on exchange transactions | 10,170 | - | 10,170 | - |
| Income before income taxes | 43,443 | 30,659 | 12,784 | 41.7 |
| Income tax expense | 16,493 | 11,748 | 4,745 | 40.4 |
| Net income | 26,950 | 18,911 | 8,039 | 42.5 |
| Less: Net income attributable to noncontrolling interest | 1,786 | 1,595 | 191 | 12.0 |
| **Net income attributable to Coca-Cola Bottling Co. Consolidated** | **$25,164** | **$17,316** | **$7,848** | **45.3%** |

#### Items Impacting Operations and Financial Condition

The following items affect the comparability of the financial results:

#### Third Quarter 2018

- $308.8 million in net sales and $11.8 million of income from operations related to the 2017 System Transformation Transactions;
- $10.4 million of expenses related to the System Transformation; and
- $10.2 million net adjustment to the gain on exchange transactions as a result of final post-closing adjustments related to the 2017 System Transformation Transactions.

#### Third Quarter 2017

- $221.1 million in net sales and $3.2 million of income from operations related to the 2017 System Transformation Transactions;
- $79.0 million in net sales and $7.7 million of income from operations related to the October 2017 Divestitures;
- $13.2 million of expenses related to the acquisition and transition of the distribution territories and the regional manufacturing facilities acquired as part of the System Transformation; and
- $5.3 million recorded in other income, net as a result of a favorable fair value adjustment to the Company’s contingent consideration liability related to the distribution territories acquired as part of the System Transformation.

### Net Sales

Net sales increased $49.1 million, or 4.2%, to $1.21 billion in the third quarter of 2018, as compared to $1.16 billion in the third quarter of 2017. The increase in net sales was primarily attributable to the following (in millions):

| Third Quarter 2018 | Attributable to: |
| ---: | --- |
| $50.7 | Increase in net sales primarily related to bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences |
| (12.6) | Decrease in sales volume to other Coca-Cola bottlers |
| 11.0 | Increase in volume of external freight revenue to external customers (other than non-alcoholic beverages) |
| **$49.1** | **Total increase in net sales** |

The Company’s bottle/can sales to retail customers accounted for approximately 84% of the Company’s total net sales in the third quarter of 2018, as compared to approximately 83% in the third quarter of 2017. Bottle/can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold.

Product category sales volume of physical cases in the third quarter of 2018 and the third 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 Third Quarter 2018 | 2017 | Bottle/Can Sales Volume Increase / (Decrease) |
| --- | ---: | ---: | ---: |
| Sparkling beverages | 66.0% | 65.1% | 1.3% |
| Still beverages (including energy products) | 34.0% | 34.9% | (2.7)% |
| **Total bottle/can sales volume** | **100.0%** | **100.0%** | **(0.1)%** |

### 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 $39.1 million, or 5.2%, to $791.3 million in the third quarter of 2018, as compared to $752.2 million in the third quarter of 2017. The increase in cost of sales was primarily attributable to the following (in millions):

| Third Quarter 2018 | Attributable to: |
| ---: | --- |
| $42.9 | Increase in cost of sales primarily related to, in order of magnitude, commodities, the change in product mix to meet consumer preferences and higher costs in the territories acquired in the System Transformation |
| (12.7) | Decrease in sales volume to other Coca-Cola bottlers |
| 9.8 | Increase in costs related to increased volume of freight revenue to external customers (other than non-alcoholic beverages) |
| (0.9) | Other |
| **$39.1** | **Total increase in cost of sales** |

The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca‑Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the Company’s territories. Certain of the marketing expenditures by The Coca‑Cola Company and other beverage companies are made pursuant to annual arrangements. The Company also benefits from national advertising programs conducted by The Coca‑Cola Company and other beverage companies. Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $33.1 million in the third quarter of 2018, as compared to $32.5 million in the third 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 $3.0 million, or 0.8%, to $375.9 million in the third quarter of 2018, as compared to $372.9 million in the third quarter of 2017. S,D&A expenses as a percentage of net sales increased to 31.0% in the third quarter of 2018 from 32.1% in the third quarter of 2017. The increase in S,D&A expenses was primarily attributable to the following (in millions):

| Third Quarter 2018 | Attributable to: |
| ---: | --- |
| $(3.7) | Decrease in marketing expenses primarily related to sponsorship contracts |
| 2.9 | Increase in employee salaries including bonuses and incentives due to additional personnel added in the System Transformation and normal salary increases |
| 2.6 | Increase in fuel costs related to the movement of finished goods from sales distribution centers to customer locations primarily as a result of territories acquired in the System Transformation |
| 1.2 | Other individually immaterial expense increases primarily related to the System Transformation |
| **$3.0** | **Total increase in S,D&A expenses** |

Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, are included in S,D&A expenses and totaled $157.5 million in the third quarter of 2018 and $147.9 million in the third quarter of 2017.

As a result of the Company adopting Accounting Standards Update 2017-07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017‑07”) issued by the Financial Accounting Standards Board in March 2017, the Company reclassified $1.3 million from the third quarter of 2017 of non-service cost components of net periodic benefit cost and other benefit plan charges from S,D&A expenses to other income, net. The non-service cost component of net periodic benefit cost is included in the Nonalcoholic Beverages segment.

### Interest Expense, Net

Interest expense, net, increased $2.1 million to $12.8 million in the third quarter of 2018, as compared to $10.7 million in the third quarter of 2017. The increase was primarily a result of additional borrowings to finance the 2017 System Transformation Transactions and additional borrowings during 2018 to support working capital and capital expenditure needs.

### Other Income, Net

A summary of other income, net is as follows:

*(in thousands)*

|  | Third Quarter 2018 | 2017 |
| --- | ---: | ---: |
| Favorable fair value adjustment to acquisition related contingent consideration | $2,373 | $5,225 |
| Non-service cost component of net periodic benefit cost | (677) | (1,341) |
| **Total other income, net** | **$1,696** | **$3,884** |

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 third quarter of 2018 were primarily driven by changes to the risk-free interest rate and the projected future operating results of the distribution territories acquired as part of the System Transformation subject to sub-bottling fees, partially offset by cash payments. The fair value adjustments to the acquisition related contingent consideration liability during the third quarter of 2017 were primarily a result of a change in the risk-free interest rate.

### Gain on Exchange Transactions

As a result of final post-closing adjustments for the 2017 System Transformation Transactions made during the third quarter of 2018, the Company recorded a $10.2 million net adjustment to the gain on exchange transactions.

### Income Tax Expense

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 38.0% for the third quarter of 2018 and 38.3% for the third quarter of 2017. The decrease in the effective tax rate was primarily driven by higher income before income taxes for the third quarter of 2018 as compared to income before income taxes for the third quarter of 2017 and the corporate rate reduction due to the Tax Cuts and Jobs Act (the “Tax Act”) and its impact on prior estimates, which was offset by an increase in certain non-deductible expenses. 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 39.6% for the third quarter of 2018 and 40.4% for the third quarter of 2017.

### Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $1.8 million in the third quarter of 2018 and $1.6 million in the third 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 third quarter of 2018 and $0.4 million in the third quarter of 2017. The increase was primarily a result of actuarial gains on the Company’s pension plans.

#### First Three Quarters Results

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

*(in thousands)*

|  | First Three Quarters 2018 | 2017 | Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $3,510,997 | $3,197,519 | $313,478 | 9.8% |
| Cost of sales | 2,313,728 | 2,039,996 | 273,732 | 13.4 |
| Gross profit | 1,197,269 | 1,157,523 | 39,746 | 3.4 |
| Selling, delivery and administrative expenses | 1,152,183 | 1,056,446 | 95,737 | 9.1 |
| Income from operations | 45,086 | 101,077 | (55,991) | (55.4) |
| Interest expense, net | 37,617 | 30,607 | 7,010 | 22.9 |
| Other expense, net | (3,612) | (36,595) | 32,983 | (90.1) |
| Gain on exchange transactions | 10,170 | - | 10,170 | - |
| Income before income taxes | 14,027 | 33,875 | (19,848) | (58.6) |
| Income tax expense | 3,387 | 11,800 | (8,413) | (71.3) |
| Net income | 10,640 | 22,075 | (11,435) | (51.8) |
| Less: Net income attributable to noncontrolling interest | 3,594 | 3,462 | 132 | 3.8 |
| **Net income attributable to Coca-Cola Bottling Co. Consolidated** | **$7,046** | **$18,613** | **$(11,567)** | **(62.1)%** |

40

#### Items Impacting Operations and Financial Condition

The following items affect the comparability of the financial results:

#### First Three Quarters 2018

- $896.2 million in net sales and $14.6 million of income from operations related to the 2017 System Transformation Transactions;
- $32.7 million of expenses related to the System Transformation;
- $10.2 million net adjustment to the gain on exchange transactions as a result of final post-closing adjustments related to the 2017 System Transformation Transactions;
- $4.8 million recorded in S,D&A expenses related to severance and outplacement expenses incurred to optimize labor expense; and
- $3.1 million pre-tax unfavorable mark-to-market adjustments related to the Company’s commodity hedging program.

#### First Three Quarters 2017

- $454.2 million in net sales and $13.6 million of income from operations related to the 2017 System Transformation Transactions;
- $231.3 million in net sales and $23.0 million of income from operations related to the October 2017 Divestitures;
- $32.4 million of expenses related to the acquisition and transition of the distribution territories and the regional manufacturing facilities acquired as part of the System Transformation Transactions;
- $23.1 million recorded in other expense, net as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability related to the distribution territories acquired as part of the System Transformation; and
- $9.4 million recorded in other expense, net for net working capital and other fair value adjustments related to the System Transformation Transactions completed in January 2016 (the “January 2016 Transactions”) that were made beyond one year from the acquisition date.

### Net Sales

Net sales increased $313.5 million, or 9.8%, to $3.51 billion in the first three quarters of 2018, as compared to $3.20 billion in the first three quarters of 2017. The increase in net sales was primarily attributable to the following (in millions):

| First Three Quarters 2018 | Attributable to: |
| ---: | --- |
| $168.4 | Net sales increase related to increased volume, primarily related to the 2017 System Transformation Transactions |
| 86.4 | Increase in net sales primarily related to bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences |
| 26.5 | Increase in sales volume to other Coca-Cola bottlers |
| 25.2 | Increase in volume of external freight revenue to external customers (other than non-alcoholic beverages) |
| 7.0 | Other |
| **$313.5** | **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 three quarters of 2018, as compared to approximately 84% in the first three quarters of 2017.

Product category sales volume 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 Three Quarters 2018 | 2017 | Bottle/Can Sales Volume Increase |
| --- | ---: | ---: | ---: |
| Sparkling beverages | 68.7% | 67.9% | 7.2% |
| Still beverages (including energy products) | 31.3% | 32.1% | 3.3% |
| **Total bottle/can sales volume** | **100.0%** | **100.0%** | **5.9%** |

41

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 three quarters of 2018, approximately 66% of the Company’s bottle/can sales volume to retail customers was sold for future consumption, while the remaining bottle/can sales volume to retail customers was sold for immediate consumption.

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 Three Quarters 2018 | 2017 |
| --- | ---: | ---: |
| Wal-Mart Stores, Inc. | 19% | 19% |
| The Kroger Company | 11% | 9% |
| Food Lion, LLC | 6% | 6% |
| **Total approximate percentage of the Company’s total bottle/can sales volume** | **36%** | **34%** |
| **Approximate percentage of the Company’s total net sales:** |  |  |
| Wal-Mart Stores, Inc. | 14% | 14% |
| The Kroger Company | 8% | 7% |
| Food Lion, LLC | 4% | 4% |
| **Total approximate percentage of the Company’s total net sales** | **26%** | **25%** |

### Cost of Sales

Cost of sales increased $273.7 million, or 13.4%, to $2.31 billion in the first three quarters of 2018, as compared to $2.04 billion in the first three quarters of 2017. The increase in cost of sales was primarily attributable to the following (in millions):

| First Three Quarters 2018 | Attributable to: |
| ---: | --- |
| $118.4 | Increase in cost of sales primarily related to, in order of magnitude, commodities, the change in product mix to meet consumer preferences, higher costs in the territories acquired in the System Transformation and higher transportation costs |
| 103.0 | Cost of sales increase related to increased volume, primarily related to the 2017 System Transformation Transactions |
| 29.7 | Increase in sales volume to other Coca-Cola bottlers |
| 22.6 | Increase in costs related to increased volume of freight revenue to external customers (other than non-alcoholic beverages) |
| **$273.7** | **Total increase in cost of sales** |

Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $96.9 million in the first three quarters of 2018, as compared to $89.4 million in the first three quarters of 2017.

### S,D&A Expenses

S,D&A expenses increased by $95.7 million, or 9.1%, to $1.15 billion in the first three quarters of 2018, as compared to $1.06 billion in the first three quarters of 2017. S,D&A expenses as a percentage of net sales decreased to 32.8% in the first three quarters of 2018 from 33.0% in the first three quarters of 2017. The increase in S,D&A expenses was primarily attributable to the following (in millions):

| First Three Quarters 2018 | Attributable to: |
| ---: | --- |
| $44.6 | Increase in employee salaries including bonuses and incentives due to additional personnel added in the System Transformation and normal salary increases |
| 11.3 | Increase in employee benefit costs primarily due to additional group insurance expense, 401(k) employer matching contributions and bargaining pension plan expense for employees added in the System Transformation |
| 7.5 | 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 |
| 6.5 | Increase in software expenses primarily due to increased maintenance expense |
| 4.8 | Increase in fuel costs related to the movement of finished goods from sales distribution centers to customer locations primarily as a result of territories acquired in the System Transformation |
| 4.8 | Severance and outplacement expenses incurred to optimize labor expense in the Nonalcoholic Beverages segment |
| 3.1 | Increase in employer payroll taxes primarily due to additional personnel added from the System Transformation |
| 13.1 | Other individually immaterial expense increases primarily related to the System Transformation |
| **$95.7** | **Total increase in S,D&A expenses** |

During the first three quarters of 2018, the Company incurred $32.7 million of expenses related to the System Transformation, the majority of which were information technologies related costs. The Company anticipates System Transformation expenses for the remainder of 2018 to be in the range of $6 million to $8 million.

Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, are included in S,D&A expenses and totaled $458.7 million in the first three quarters of 2018 and $407.1 million in the first three quarters of 2017.

As a result of the Company adopting ASU 2017‑07, the Company reclassified $4.0 million in the first three quarters of 2017 of non-service cost components of net periodic benefit cost and other benefit plan charges from S,D&A expenses to other expense, net.

### Interest Expense, Net

Interest expense, net, increased $7.0 million to $37.6 million in the first three quarters of 2018, as compared to $30.6 million in the first three quarters of 2017. The increase was primarily a result of additional borrowings to finance the 2017 System Transformation Transactions and additional borrowings during the first three quarters of 2018 to support working capital and capital expenditure needs.

### Other Expense, Net

A summary of other expense, net is as follows:

*(in thousands)*

|  | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: |
| Unfavorable fair value adjustment to acquisition related contingent consideration | $(1,584) | $(23,140) |
| Non-service cost component of net periodic benefit cost | (2,028) | (4,025) |
| January 2016 Transactions settlement | - | (9,442) |
| Other | - | 12 |
| **Total other expense, net** | **$(3,612)** | **$(36,595)** |

43

The fair value adjustments to acquisition related contingent consideration liability in the first three quarters of 2018 were primarily driven by changes to the risk-free interest rate and the projected future operating results of the distribution territories acquired as part of the System Transformation subject to sub-bottling fees, partially offset by cash payments. The fair value adjustment to the acquisition related contingent consideration liability in the first three quarters of 2017 was primarily a result of a change in the risk-free interest rate.

### Gain on Exchange Transactions

As a result of final post-closing adjustments for the 2017 System Transformation Transactions made during the third quarter of 2018, the Company recorded a $10.2 million net adjustment to the gain on exchange transactions.

### Income Tax Expense

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 24.1% in the first three quarters of 2018 and 34.8% in the first three quarters of 2017. The decrease in the effective tax rate was primarily driven by the corporate rate reduction due to the Tax Act and its impact on prior estimates and lower income before income taxes, which was offset by an increase in certain non-deductible expenses. The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 32.5% in the first three quarters of 2018 and 38.8% in the first three quarters of 2017.

### Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $3.6 million in the first three quarters of 2018 and $3.5 million in the first three quarters 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 $2.2 million in the first three quarters of 2018 and $1.3 million in the first three quarters of 2017. The increase was primarily a result of actuarial gains on the Company’s pension plans.

### Segment Operating Results

The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board Accounting Standards Codification 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operation Decision Maker (“CODM”). The Company has concluded the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as a group, represent the CODM. In conjunction with the completion of the System Transformation Transactions in October 2017 and integration of acquired operations, management continues to assess whether changes are necessary to the Company’s reportable segments.

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

The Company’s segment results are as follows:

*(in thousands)*

| Net sales: | Third Quarter 2018 | 2017 | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Nonalcoholic Beverages(1) | $1,180,212 | $1,142,238 | $3,427,492 | $3,139,974 |
| All Other(1) | 93,493 | 81,439 | 273,490 | 220,734 |
| Eliminations(2) | (62,044) | (61,151) | (189,985) | (163,189) |
| **Consolidated net sales** | **$1,211,661** | **$1,162,526** | **$3,510,997** | **$3,197,519** |
| **Income from operations:** |  |  |  |  |
| Nonalcoholic Beverages | $39,361 | $33,867 | $32,705 | $90,254 |
| All Other | 5,043 | 3,605 | 12,381 | 10,823 |
| **Consolidated income from operations** | **$44,404** | **$37,472** | **$45,086** | **$101,077** |

44

(1) In order to correct an error in the prior year segment presentation, the Company revised net sales by $39.2 million for the third quarter of 2017 and $96.4 million for the first three quarters of 2017 to reflect 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 periods 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.

### 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):

*(in thousands)*

|  | Third Quarter 2018 | 2017 | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Total bottle/can sales | $1,018,896 | $967,205 | $2,930,215 | $2,679,601 |
| Total other sales | 192,765 | 195,321 | 580,782 | 517,918 |
| **Total net sales** | **$1,211,661** | **$1,162,526** | **$3,510,997** | **$3,197,519** |
| Total bottle/can sales | $1,018,896 | $967,205 | $2,930,215 | $2,679,601 |
| Less: Acquisition/divestiture related sales | 117,684 | 103,171 | 546,284 | 370,992 |
| **Organic net bottle/can sales (non-GAAP)(1)** | **$901,212** | **$864,034** | **$2,383,931** | **$2,308,609** |
| Increase in organic net bottle/can sales | 4.3% |  | 3.3% |  |

*(in millions)*

|  | Third Quarter 2018 | 2017 | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Physical case volume | 86.7 | 86.8 | 254.8 | 240.5 |
| Less: Acquisition/divestiture related physical case volume | 10.6 | 10.4 | 48.7 | 35.1 |
| **Organic physical case volume(1)** | **76.1** | **76.4** | **206.1** | **205.4** |
| Increase (decrease) in organic physical case volume | (0.4)% |  | 0.3% |  |

*(in thousands, except per share data)*

|  | Third Quarter 2018 Net sales | Gross profit | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$1,211,661** | **$420,344** | **$44,404** | **$43,443** | **$25,164** | **$2.69** |
| System Transformation Transactions expenses(2) | - | 112 | 10,417 | 10,417 | 7,834 | 0.83 |
| Gain on exchange transactions(3) | - | - | - | (10,170) | (7,648) | (0.82) |
| Fair value adjustment of acquisition related contingent consideration(4) | - | - | - | (2,373) | (1,785) | (0.19) |
| Fair value adjustments for commodity hedges(5) | - | 260 | 469 | 469 | 353 | 0.04 |
| Other tax adjustment(6) | - | - | - | - | 3,534 | 0.38 |
| **Total reconciling items** | **-** | **372** | **10,886** | **(1,657)** | **2,288** | **0.24** |
| **Adjusted results (non-GAAP)** | **$1,211,661** | **$420,716** | **$55,290** | **$41,786** | **$27,452** | **$2.93** |

45

*(in thousands, except per share data)*

|  | Third Quarter 2017 Net sales | Gross profit | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$1,162,526** | **$410,324** | **$37,472** | **$30,659** | **$17,316** | **$1.86** |
| System Transformation Transactions expenses(2) | - | 113 | 13,148 | 13,148 | 9,265 | 0.99 |
| Fair value adjustment of acquisition related contingent consideration(4) | - | - | - | (5,225) | (2,386) | (0.25) |
| Fair value adjustments for commodity hedges(5) | - | (2,042) | (3,401) | (3,401) | (2,187) | (0.24) |
| Other tax adjustment(6) | - | - | - | - | (1,690) | (0.18) |
| **Total reconciling items** | **-** | **(1,929)** | **9,747** | **4,522** | **3,002** | **0.32** |
| **Adjusted results (non-GAAP)** | **$1,162,526** | **$408,395** | **$47,219** | **$35,181** | **$20,318** | **$2.18** |

*(in thousands, except per share data)*

|  | First Three Quarters 2018 Net sales | Gross profit | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$3,510,997** | **$1,197,269** | **$45,086** | **$14,027** | **$7,046** | **$0.75** |
| System Transformation Transactions expenses(2) | - | 339 | 32,738 | 32,738 | 24,619 | 2.63 |
| Gain on exchange transactions(3) | - | - | - | (10,170) | (7,648) | (0.82) |
| Workforce optimization expenses(7) | - | - | 4,810 | 4,810 | 3,617 | 0.39 |
| Fair value adjustment of acquisition related contingent consideration(4) | - | - | - | 1,584 | 1,191 | 0.13 |
| Amortization of converted distribution rights, net(8) | - | 2,231 | 2,231 | 2,231 | 1,678 | 0.18 |
| Fair value adjustments for commodity hedges(5) | - | 2,776 | 3,139 | 3,139 | 2,361 | 0.25 |
| Other tax adjustment(6) | - | - | - | - | (2,648) | (0.28) |
| **Total reconciling items** | **-** | **5,346** | **42,918** | **34,332** | **23,170** | **2.48** |
| **Adjusted results (non-GAAP)** | **$3,510,997** | **$1,202,615** | **$88,004** | **$48,359** | **$30,216** | **$3.23** |

*(in thousands, except per share data)*

|  | First Three Quarters 2017 Net sales | Gross profit | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$3,197,519** | **$1,157,523** | **$101,077** | **$33,875** | **$18,613** | **$2.00** |
| System Transformation Transactions expenses(2) | - | 379 | 32,374 | 32,374 | 21,108 | 2.26 |
| January 2016 Transactions settlement(9) | - | - | - | 9,442 | 5,816 | 0.62 |
| Fair value adjustment of acquisition related contingent consideration(4) | - | - | - | 23,140 | 15,087 | 1.62 |
| Fair value adjustments for commodity hedges(5) | - | (2,066) | (2,541) | (2,541) | (1,657) | (0.18) |
| Other tax adjustment(6) | - |  | - | - | (2,156) | (0.23) |
| **Total reconciling items** | **-** | **(1,687)** | **29,833** | **62,415** | **38,198** | **4.09** |
| **Adjusted results (non-GAAP)** | **$3,197,519** | **$1,155,836** | **$130,910** | **$96,290** | **$56,811** | **$6.09** |

Following is an explanation of non-GAAP adjustments:

(1) Organic net bottle/can 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) Adjustment reflects gain on exchange transactions as a result of final post-closing adjustments for the 2017 System Transformation Transactions made during the third quarter of 2018.

(4) 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.

(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.

(7) Adjustment reflects severance and outplacement expenses relating to the Company’s optimization of its labor expense.

(8) 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 in the first quarter of 2018 associated with the conversion of the Company’s franchise rights.

(9) Adjustment includes a charge within other income (expense), net for net working capital and other fair value adjustments related to the Company’s acquisitions in the January 2016 Transactions, as part of the System Transformation, that were made beyond one year from the acquisition date.

### Financial Condition

Total assets were $3.07 billion on September 30, 2018, which was a decrease of $0.5 million from December 31, 2017. Net working capital, defined as current assets less current liabilities, was $286.6 million on September 30, 2018, which was an increase of $131.5 million from December 31, 2017.

Significant changes in net working capital on September 30, 2018 from December 31, 2017 were as follows:

- An increase in accounts receivable, trade of $36.4 million primarily as a result of the timing of cash receipts.
- A decrease in accounts receivable, other of $10.3 million primarily as a result of the timing of payments received for marketing funding and rebates.
- An increase in inventories of $46.3 million primarily as a result of rising commodity costs and expanded product selection offered by the Company.
- A decrease in prepaid and other current assets of $9.1 million primarily as a result of a decrease in the current portion of income taxes.
- A decrease in accounts payable, trade of $10.3 million primarily as a result of the timing of payments.
- A decrease in accounts payable to The Coca‑Cola Company of $28.2 million primarily as a result of the timing of purchases of raw materials and payments.
- A decrease in other accrued liabilities of $31.9 million primarily as a result of the timing of payments.
- A decrease in accrued compensation of $14.8 million primarily as a result of the timing of bonus and incentive payments in the first quarter of the fiscal year.

### Liquidity and Capital Resources

### Capital Resources

The Company’s sources of capital include cash flows from operations, available credit facilities and the issuance of debt and equity securities. The Company has obtained the majority of its long-term debt, other than capital leases, from public markets, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of these 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 June 8, 2018, the Company entered into a second amended and restated credit agreement for a five-year unsecured revolving credit facility (as amended, the “Revolving Credit Facility”), which amended and restated its prior credit agreement dated October 16, 2014. The Revolving Credit Facility has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. Borrowings under the Revolving Credit Facility bear interest at a floating base rate or a floating Eurodollar rate, at the Company’s option, plus an applicable margin dependent on the Company’s credit ratings. At the Company’s current credit ratings, the Company must pay an annual facility fee of 0.15% of the lenders’ aggregate commitments under the Revolving Credit Facility. The Revolving Credit Facility has a scheduled maturity date of June 8, 2023. As of September 30, 2018, the Company had borrowed $170.0 million under the Revolving Credit Facility, and therefore had $330.0 million borrowing capacity remaining. The Company currently believes all banks participating in the Revolving Credit Facility have the ability to and will meet any funding requests from the Company.

On March 21, 2018, the Company sold $150 million aggregate principal amount of senior unsecured notes due 2030 to NYL Investors LLC (“NYL”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated March 6, 2018 between the Company, NYL and the other parties thereto (as amended, the “NYL Shelf Facility”). These notes bear interest at 3.96%, payable quarterly in arrears on March 21, June 21, September 21 and December 21 of each year, and will mature on March 21, 2030 unless earlier redeemed by the Company. The Company used the proceeds for general corporate purposes.

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

In June 2016, the Company entered into a five-year term loan agreement for a senior unsecured term loan facility (as amended, the “Term Loan Facility”) in the aggregate principal amount of $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, at the Company’s option, plus an applicable margin dependent on the Company’s credit ratings.

During the third quarter of 2018, the Company amended each of the Revolving Credit Facility, the NYL Shelf Facility, the Prudential Shelf Facility and the Term Loan Facility to (i) align the calculation of the two financial covenants and certain events of default under each agreement and (ii) with regard to the Term Loan Facility, to revise the calculation of the rates at which borrowings bear interest to conform with the calculation of such rates under the Revolving Credit Facility.

Pursuant to the Term Loan Facility and the indenture under which the senior notes due in 2019 were issued, principal payments will be due in the next twelve months. The Company intends to refinance these amounts and has the capacity to do so under the Revolving Credit Facility, which is classified as long-term debt. As such, any amounts due in the next twelve months were classified as non-current as of September 30, 2018. See Note 11 to the consolidated condensed financial statements for additional information on the senior notes due in 2019.

The Revolving Credit Facility, the NYL Shelf Facility, the Prudential Shelf Facility and the Term Loan Facility include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreements. The Company was in compliance with these covenants as of September 30, 2018. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

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. During the second 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 September 30, 2018, the Company’s credit ratings were as follows:

|  | Long-Term Debt |
| --- | --- |
| Standard & Poor’s | BBB |
| Moody’s | Baa2 |

48

Total net debt and capital lease obligations as of September 30, 2018 and December 31, 2017 were as follows:

*(in thousands)*

|  | September 30, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| Debt | $1,194,109 | $1,088,018 |
| Capital lease obligations | 37,278 | 43,469 |
| Total debt and capital lease obligations | 1,231,387 | 1,131,487 |
| Less: Cash and cash equivalents | 9,337 | 16,902 |
| **Total net debt and capital lease obligations (1)** | **$1,222,050** | **$1,114,585** |

(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 September 30, 2018, interest expense for the next twelve months would increase by approximately $4.6 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. Following is a summary of the Level 3 activity:

*(in thousands)*

|  | Third Quarter 2018 | 2017 | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| **Beginning balance - Level 3 liability** | **$374,537** | **$319,102** | **$381,291** | **$253,437** |
| Increase due to System Transformation Transactions acquisitions | - | - | - | 46,086 |
| Measurement period adjustments(1) | (1,279) | - | 813 | - |
| Payment of acquisition related contingent consideration | (7,049) | (5,094) | (18,312) | (11,650) |
| Reclassification to current payables | - | 150 | (1,540) | (2,080) |
| (Favorable)/unfavorable fair value adjustment | (2,373) | (5,225) | 1,584 | 23,140 |
| **Ending balance - Level 3 liability** | **$363,836** | **$308,933** | **$363,836** | **$308,933** |

(1) Measurement period adjustments relate to post-closing adjustments made in relation to the April 2017 Transactions and the October 2017 Transactions in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement. See Note 3 to the consolidated condensed financial statements for additional information on the April 2017 Transactions and the October 2017 Transactions.

### Cash Sources and Uses

The primary sources of cash for the Company in the first three quarters of 2018 were debt financings. The primary uses of cash in the first three quarters of 2018 were repayments of debt and additions to property, plant and equipment. The primary sources of cash for the Company in the first three quarters of 2017 were debt financings, the Territory Conversion Fee (as defined below) received from The Coca‑Cola Company and operating activities. The primary uses of cash in the first three quarters of 2017 were repayments of debt, acquisitions of territories and regional manufacturing facilities as part of the System Transformation and additions to property, plant and equipment. A summary of cash-based activity is as follows:

*(in thousands)*

| Cash Sources: | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: |
| Borrowings under Revolving Credit Facility | $285,000 | $333,000 |
| Proceeds from issuance of Senior Notes | 150,000 | 125,000 |
| Territory Conversion Fee(1) | - | 87,066 |
| Adjusted cash provided by operating activities(2) | 26,030 | 141,672 |
| Refund of income tax payments | 23,573 | - |
| System Transformation acquisitions, net of cash acquired and purchase price settlements | 1,811 | - |
| Proceeds from cold drink equipment | 3,789 | 8,400 |
| Proceeds from the sale of property, plant and equipment | 3,555 | 493 |
| Other | 17 | 66 |
| **Total cash sources** | **$493,775** | **$695,697** |
| **Cash Uses:** |  |  |
| Payments on Revolving Credit Facility | $322,000 | $238,000 |
| System Transformation acquisitions, net of cash acquired and purchase price settlements | - | 227,769 |
| Additions to property, plant and equipment (exclusive of acquisitions) | 113,104 | 114,953 |
| Prepayment of funds for October 2017 Expansion Transactions | - | 56,498 |
| Pension plans contributions | 20,000 | 11,600 |
| Glacéau distribution agreement consideration | - | 15,598 |
| Payment of acquisition related contingent consideration | 18,312 | 11,650 |
| Payment on Term Loan Facility | 7,500 | - |
| Cash dividends paid | 7,014 | 6,995 |
| Principal payments on capital lease obligations | 6,191 | 5,594 |
| Income tax payments | 3,590 | 14,779 |
| Investment in CONA Services LLC | 2,098 | 1,976 |
| Debt issuance fees | 1,531 | 213 |
| **Total cash uses** | **$501,340** | **$705,625** |
| **Net decrease in cash** | **$(7,565)** | **$(9,928)** |

(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, net income tax payments/refunds and pension plan contributions. This line item is a non-GAAP measure and provides 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 three quarters of 2018, cash provided by operating activities was $26.0 million, which was a decrease of $176.4 million as compared to the first three quarters 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 three quarters of 2018, cash used in investing activities was $106.0 million, which was a decrease of $301.9 million as compared to the first three quarters 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 $113.1 million during the first three quarters of 2018. As of September 30, 2018, $4.1 million of additions to property, plant and equipment were accrued in accounts payable, trade. The Company anticipates additions to property, plant and equipment for the remainder of 2018 will be in the range of $25 million to $35 million.

Additions to property, plant and equipment during the first three quarters of 2017 were $115.0 million. As of October 1, 2017, $13.7 million of additions to property, plant and equipment were accrued in accounts payable, trade. These additions exclude $161.2 million in property, plant and equipment acquired in System Transformation Transactions and $8.4 million in proceeds from cold drink equipment.

### Cash Flows From Financing Activities

During the first three quarters of 2018, cash provided by financing activities was $72.5 million, which was a decrease of $123.0 million as compared to the first three quarters of 2017. The decrease was primarily driven by a reduced need for capital as a result of the Company’s completion of its System Transformation Transactions in October 2017.

The Company had cash payments for acquisition related contingent consideration of $18.3 million during the first three quarters of 2018 and $11.7 million during the first three quarters of 2017. 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 $25 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 September 30, 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 September 30, 2018, the Company’s maximum exposure under the guarantee, if SAC borrowed up to its aggregate borrowing capacity, would have been $32.1 million, including the Company’s equity interests. See Note 15 to 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)*

|  | Third Quarter 2018 | 2017 | First Three Quarters 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales - increase/(decrease) | $640 | $(2,446) | $2,843 | $(3,015) |
| S,D&A expenses - increase/(decrease) | 50 | (1,575) | (305) | (591) |
| **Net impact** | **$690** | **$(4,021)** | **$2,538** | **$(3,606)** |

### 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. These statements include:

- the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements;
- the Company’s expectations that the adoption of Accounting Standards Update 2016-02 “Leases,” (i) will have a material impact on its consolidated condensed balance sheets and (ii) will not have a material impact on its consolidated condensed statements of cash flows as the new guidance is non-cash in nature;
- the Company’s expectation that certain amounts of goodwill will, or will not, be deductible for tax purposes;
- the Company’s belief that, at any given time, less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers;
- the Company’s belief that 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 the banks participating in the Revolving Credit Facility have the ability to and will meet any funding requests from the Company;
- the Company’s intention to refinance amounts due in the next twelve months under the Term Loan Facility and the indenture under which the senior notes due in 2019 were issued using the capacity under the Revolving Credit Facility;
- the Company’s estimate of the useful lives of certain acquired intangible assets and property, plant and equipment;
- the Company’s estimate that a 10% increase in the market price of certain commodities included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $56.5 million, assuming no change in volume;
- the Company’s expectation that amounts due to United relating to the System Transformation exchange transaction between the Company and United will be paid by the Company during the fourth quarter of 2018;
- the Company’s 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 made by the Company;
- the Company’s belief that innovation of both new brands and packages will continue to be important to the Company’s overall revenue;
- the Company’s estimates of certain inputs used in its calculations, including estimated rates of return, estimates of bad debts and amounts that will ultimately be collected, and estimates of inputs used in the calculation and adjustment of the fair value of its acquisition related contingent consideration liability related to the distribution territories acquired as part of the System Transformation, such as the amounts that will be paid by the Company in the future under the CBA and the Company’s WACC;
- the Company’s expectation that certain territories of CCR will be sold to bottlers that are neither members of CONA nor users of the CONA System;
- the Company’s belief that the range of undiscounted amounts it could pay annually under the acquisition related contingent consideration arrangements for the System Transformation Transactions is expected to be between $25 million to $47 million;
- the Company’s belief that the covenants in the Revolving Credit Facility, the Term Loan Facility, the Prudential Shelf Facility and the NYL Shelf Facility will not restrict its liquidity or capital resources;
- the Company’s belief that other parties to certain of its contractual arrangements will perform their obligations;
- the Company’s expectation that it will not make additional contributions to the two Company-sponsored pension plans during the fourth quarter of 2018;
- the Company’s expectation that it will not withdraw from its participation in the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund (the “Teamsters Plan”);
- the Company’s expectation that the collective bargaining agreements covering the Teamsters Plan that expire at various times through April 2020 will be re-negotiated;
- the Company’s belief that System Transformation expenses will be in the range of $6 million to $8 million in the fourth quarter of 2018 and will decrease over the next few quarters;
- the Company’s belief that additions to property, plant and equipment for the remainder of 2018 are expected to be in the range of $25 million to $35 million;
- the Company’s belief that, while the addition of BodyArmor products to the Company’s portfolio of brands will not have a material impact on the Company’s 2018 results, BodyArmor will provide ongoing benefits and round out the Company’s sports drink portfolio;
- the Company’s belief that it has adequately provided for any assessments likely to result from audits by tax authorities in the jurisdictions in which the Company conducts business;
- the Company’s belief that key priorities include territory and manufacturing integration, revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity; and
- the Company’s hypothetical calculation that, if market interest rates average 1% more over the next twelve months than the interest rates as of September 30, 2018, interest expense for the next twelve months would increase by approximately $4.6 million, assuming no changes in the Company’s financial structure.

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 Securities and Exchange Commission.

## Market risk

As filed, 3,750 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 September 30, 2018, interest expense for the next twelve months would increase by approximately $4.6 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 $56.5 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, 951 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 September 30, 2018.

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 30, 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 Nov 8, 2018.
Source: SEC EDGAR, the filing index for accession 0001564590-18-028632. Last ingested by Listed: Nov 4, 2026, 17:26 ET. No prices; not investment advice.