# Coca-Cola Consolidated, Inc.: Form 10-Q for the period ended Mar 31, 2019

- Company: [Coca-Cola Consolidated, Inc.](/companies/coke.md) (CIK 317540)
- Form: 10-Q
- Filed: 2019-05-08
- Accepted by EDGAR: May 8, 2019, 17:25 ET
- Period: 2019-03-31
- Accession: 0001564590-19-017342
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317540/000156459019017342/coke-10q_20190331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317540/000156459019017342/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-12-31 to 2019-03-31 | $1.10bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-12-31 to 2019-03-31 | $713.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2018-12-31 to 2019-03-31 | $389.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2018-12-31 to 2019-03-31 | $369.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2018-12-31 to 2019-03-31 | $20.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-12-31 to 2019-03-31 | $12.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-12-31 to 2019-03-31 | −$3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-12-31 to 2019-03-31 | −$6.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-12-31 to 2019-03-31 | −$0.73 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-12-31 to 2019-03-31 | −$0.73 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-12-31 to 2019-03-31 | 9,360,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-12-31 to 2019-03-31 | $5.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2018-12-31 to 2019-03-31 | $29.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-12-31 to 2019-03-31 | $2.3m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2019-03-31 | $8.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-03-31 | $808.4m | us-gaap:AssetsCurrent |
| Total assets | at 2019-03-31 | $3.08bn | us-gaap:Assets |
| Current liabilities | at 2019-03-31 | $559.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-03-31 | $2.62bn | us-gaap:Liabilities |
| Long-term debt | at 2019-03-31 | $1.14bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2019-03-31 | $354.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,378 characters.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Consolidated, Inc., a Delaware corporation (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 March 31, 2019 and December 30, 2018.
- The results of operations and comprehensive income for the 13 week periods ended March 31, 2019 (the “first quarter” of fiscal 2019 (“2019”)) and April 1, 2018 (the “first quarter” of fiscal 2018 (“2018”)).
- The changes in cash flows and equity for the first quarter of 2019 and the first quarter of 2018.

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

We distribute, market and manufacture 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 Coca‑Cola bottler in the United States. Approximately 86% 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 companies, including BA Sports Nutrition, LLC (“BodyArmor”), Keurig Dr Pepper Inc. (“Dr Pepper”) and Monster Energy Company (“Monster Energy”). Our purpose is to honor God, to serve others, to pursue excellence and to grow profitably. Our stock is traded on the NASDAQ Global Select Market under the symbol “COKE.”

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

Our sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Other sales include sales to other Coca‑Cola bottlers, “post-mix” products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.

Net sales by product category were as follows:

*(in thousands)*

| Bottle/can sales: | First Quarter 2019 | 2018 |
| --- | ---: | ---: |
| Sparkling beverages (carbonated) | $585,973 | $560,105 |
| Still beverages (noncarbonated, including energy products) | 343,695 | 320,917 |
| **Total bottle/can sales** | **929,668** | **881,022** |
| **Other sales:** |  |  |
| Sales to other Coca-Cola bottlers | 81,673 | 101,734 |
| Post-mix and other | 91,571 | 82,001 |
| **Total other sales** | **173,244** | **183,735** |
| **Total net sales** | **$1,102,912** | **$1,064,757** |

29

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 PepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper 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 products 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

Revenue grew 3.6% in the first quarter of 2019 compared to the first quarter of 2018, driven by increases in the selling prices of our products. Volume for the quarter was flat to prior year as growth of still beverages sales offset declines of sparkling products sales. Bottle/can sales of sparkling beverages increased 4.6% in the first quarter of 2019 versus the prior year period, driven by increased selling prices and the introduction of new products into our portfolio, including Orange Vanilla Coke. Sales of still beverages grew 7.1% in the quarter compared to the prior year period, driven primarily by growth in our Sports Drinks and Energy categories. The first quarter of 2019 was our first full quarter of distribution of BodyArmor products, which helped to fuel our overall net sales growth.

Gross margin increased 170 basis points in the first quarter of 2019 to 35.3%, as compared to the first quarter of 2018. On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, gross margin increased 100 basis points over the prior year period. This improvement is primarily the result of pricing actions taken in the second half of 2018 to overcome significantly higher input costs. While input costs remain at elevated levels, overall commodity prices have been more stable during the first quarter of 2019, contributing to our first quarter margin improvement. In addition, our actions to optimize our supply chain and reduce our sourcing costs resulted in reduced transportation costs during the quarter compared to the first quarter of 2018.

Selling, delivery and administrative (“SD&A”) expenses in the first quarter of 2019 decreased $7.4 million, or 2.0%, as compared to the first quarter of 2018. Our SD&A as a percent of sales improved 190 basis points in the first quarter of 2019 versus the first quarter of 2018 (33.5% versus 35.4%, respectively) largely driven by a decrease in costs from our system transformation initiative. Our first quarter of 2019 results included $4.7 million of system transformation expenses relating to our information technology system conversion, an improvement of $7.5 million versus the first quarter of 2018. We expect our system conversion to be completed by the end of the second quarter of 2019. In addition, our first quarter 2019 expenses reflect the benefit of the operating structure changes we completed in 2018. While we are pleased with the progress we have made in SD&A expenses, we continue to look for opportunities to drive scale advantages and leverage our business model.

Income from operations was $20.2 million in the first quarter of 2019, an increase of $39.2 million from the first quarter of 2018. Adjusted income from operations was $20.7 million in the first quarter of 2019, up from an adjusted operating loss of $3.6 million in the first quarter of 2018. Operating results in the first half of 2019, as compared to the first half of 2018, benefit from results in 2018 that were negatively impacted by high commodity and transportation costs.

Capital spending for the first quarter of 2019 was $29.3 million. We continue to anticipate capital spending in fiscal 2019 will be in the range of $150 million to $180 million as we remain focused on making prudent, long-term investments to support the growth of the Company. Cash flows provided by operations for the first quarter of 2019 were $5.6 million, compared to cash flows used in operations of $80.7 million in the first quarter of 2018. Improved cash generation is a key focus area for 2019 as we work to improve our profitability, reduce our financial leverage and further strengthen our balance sheet.

### Areas of Emphasis

Key priorities for the Company include acquisition synergies and cost optimization, revenue management, free cash flow generation and debt repayment, distribution network optimization and cost management.

*Acquisition Synergies and Cost Optimization:* In October 2017, the Company completed a series of distribution territory and regional manufacturing facility acquisitions and exchanges with The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc., a wholly- owned subsidiary of The Coca‑Cola Company, and Coca‑Cola Bottling Company United, Inc., an independent bottler that is unrelated to the Company, to significantly expand the Company’s distribution and manufacturing operations (the “System Transformation”). As the Company continues to integrate these acquired territories and facilities into its operations, the Company remains focused on synergy and cost optimization opportunities across its business, including opportunities across its manufacturing network, distribution network and back office functions. The Company anticipates identifying, investing against and executing these synergy and cost optimization opportunities will be a key driver of its results of operations.

*Revenue Management:* Revenue management requires a strategy that reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based decision-making. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs and other market conditions. Revenue management has been and continues to be a key driver which has a significant impact on the Company’s results of operations.

*Free Cash Flow Generation and Debt Repayment:* Upon completion of the System Transformation transactions in October 2017, the Company’s debt balance exceeded $1.1 billion. Generating free cash flow and reducing its debt balance will continue to be a key focus for the Company. The Company has several initiatives in place to optimize free cash flow, improve profitability and prudently manage its capital expenditures in order to generate strong free cash flow and reduce its financial leverage.

*Distribution Network Optimization and Cost Management:* Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs, including warehouse costs, were $148.9 million in the first quarter of 2019 and $147.0 million in the first quarter of 2018. Management of these costs will continue to be a key area of emphasis for the Company. The Company believes that optimizing its expanded distribution footprint will be a key area of focus in the short-term in order to manage this significant cost to its business.

### Results of Operations

#### First Quarter Results

Our results of operations for the first quarter of 2019 and the first quarter of 2018 are highlighted in the table below and discussed in the following paragraphs:

*(in thousands)*

|  | First Quarter 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $1,102,912 | $1,064,757 | $38,155 |
| Cost of sales | 713,604 | 707,116 | 6,488 |
| Gross profit | 389,308 | 357,641 | 31,667 |
| Selling, delivery and administrative expenses | 369,154 | 376,638 | (7,484) |
| Income (loss) from operations | 20,154 | (18,997) | 39,151 |
| Interest expense, net | 12,886 | 12,046 | 840 |
| Other income (expense), net | (15,851) | 4,510 | (20,361) |
| Loss before income taxes | (8,583) | (26,533) | 17,950 |
| Income tax benefit | (3,005) | (12,971) | 9,966 |
| Net loss | (5,578) | (13,562) | 7,984 |
| Less: Net income attributable to noncontrolling interest | 1,253 | 623 | 630 |
| **Net loss attributable to Coca-Cola Consolidated, Inc.** | **$(6,831)** | **$(14,185)** | **$7,354** |
| Other comprehensive income, net of tax | 578 | 739 | (161) |
| **Comprehensive loss attributable to Coca-Cola Consolidated, Inc.** | **$(6,253)** | **$(13,446)** | **$7,193** |

31

#### Items Impacting Operations and Financial Condition

The following items affect the comparability of the financial results:

#### First Quarter 2019

- $14.0 million recorded in other income (expense), net as a result of an unfavorable fair value adjustment to the Company’s contingent consideration liability;
- $6.6 million pre-tax favorable mark-to-market adjustments related to the Company’s commodity hedging program; and
- $4.7 million of expenses related to the System Transformation transactions, the majority of which were information technology related costs.

#### First Quarter 2018

- $12.5 million of expenses related to the System Transformation transactions, the majority of which were information technology related costs;
- $5.2 million recorded in other income (expense), net as a result of a favorable fair value adjustment to the Company’s contingent consideration liability; and
- $3.0 million pre-tax unfavorable mark-to-market adjustments related to the Company’s commodity hedging program.

### Net Sales

Net sales increased $38.2 million, or 3.6%, to $1.10 billion in the first quarter of 2019, as compared to $1.06 billion in the first quarter of 2018. The increase in net sales was primarily attributable to the following (in millions):

| First Quarter 2019 | Attributable to: |
| ---: | --- |
| $46.1 | Increase in net sales primarily related to an increase in average bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences |
| (20.0) | Decrease in sales volume to other Coca-Cola bottlers |
| 5.7 | Increase in net sales related to increased volume |
| 6.4 | Other |
| **$38.2** | **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 first quarter of 2019, as compared to approximately 83% in the first quarter of 2018. 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. 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.

Product category sales volume of physical cases in the first quarter of 2019 and the first quarter of 2018 as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

| Product Category | Bottle/Can Sales Volume First Quarter 2019 | 2018 | Bottle/Can Sales Volume Increase / (Decrease) |
| --- | ---: | ---: | ---: |
| Sparkling beverages | 71.3% | 72.0% | (0.8%) |
| Still beverages (including energy products) | 28.7% | 28.0% | 2.8% |
| **Total bottle/can sales volume** | **100.0%** | **100.0%** | **0.2%** |

32

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 percent of the Company’s total bottle/can sales volume: | First Quarter 2019 | 2018 |
| --- | ---: | ---: |
| Wal-Mart Stores, Inc. | 20% | 19% |
| The Kroger Company | 12% | 12% |
| **Total approximate percent of the Company’s total bottle/can sales volume** | **32%** | **31%** |
| **Approximate percent of the Company’s total net sales:** |  |  |
| Wal-Mart Stores, Inc. | 14% | 14% |
| The Kroger Company | 9% | 8% |
| **Total approximate percent of the Company’s total net sales** | **23%** | **22%** |

### Cost of Sales

Inputs representing a substantial portion of the Company’s cost of sales include: (i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles and sweetener, (iii) concentrate costs, and (iv) manufacturing costs, including labor, overhead, warehouse costs. In addition, cost of sales includes shipping and handling costs related to the movement of finished goods from manufacturing plants to distribution centers, amortization expense of distribution rights, distribution fees of certain products and marketing credits from brand companies. Raw material costs represent approximately 20% of total cost of sales on an annual basis.

Cost of sales increased $6.5 million, or 0.9%, to $713.6 million in the first quarter of 2019, as compared to $707.1 million in the first quarter of 2018. The increase in cost of sales was primarily attributable to the following (in millions):

| First Quarter 2019 | Attributable to: |
| ---: | --- |
| $27.2 | Increase in cost of sales primarily related to, in order of magnitude, the change in product mix to meet consumer preferences, an increase in commodity and raw materials costs and an increase in concentrate costs, partially offset by reduction in transportation and sourcing costs |
| (20.7) | Decrease in sales volume to other Coca-Cola bottlers |
| **$6.5** | **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 $31.3 million in the first quarter of 2019, as compared to $30.4 million in the first quarter of 2018.

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

### Selling, Delivery and Administrative Expenses

SD&A expenses include the following: sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution center warehousing costs, 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.

SD&A expenses decreased by $7.4 million, or 2.0%, to $369.2 million in the first quarter of 2019, as compared to $376.6 million in the first quarter of 2018. SD&A expenses as a percentage of net sales increased to 33.5% in the first quarter of 2019 from 35.4% in the first quarter of 2018. The decrease in SD&A expenses was primarily attributable to the following (in millions):

| First Quarter 2019 | Attributable to: |
| ---: | --- |
| $(7.5) | Decrease in System Transformation transactions expenses |
| 3.0 | Increase in employee benefit costs including bonuses and incentives primarily related to improved financial results, partially offset by a decrease in employee salaries primarily as a result of workforce optimization completed in the second and fourth quarters of 2018 |
| (2.9) | Other individually immaterial expense decreases |
| **$(7.4)** | **Total decrease in SD&A expenses** |

The Company has three primary delivery systems: (i) bulk delivery for large supermarkets, mass merchandisers and club stores, (ii) advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premise accounts and (iii) full-service delivery for its full-service vending customers. Shipping and handling costs related to the movement of finished goods from manufacturing locations to distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from distribution centers to customer locations, including distribution center warehousing costs, are included in SD&A expenses and totaled $148.9 million in the first quarter of 2019 and $147.0 million in the first quarter of 2018.

In the first quarter of 2019, the Company incurred $4.7 million of System Transformation transactions expenses, which primarily included information technology systems conversions. The Company anticipates additional expenses related to the conversion of its information technology systems, which it expects to complete in the second quarter of 2019, will be in the range of $2 million to $3 million.

### Interest Expense, Net

Interest expense, net, increased $0.9 million to $12.9 million in the first quarter of 2019, as compared to $12.0 million in the first quarter of 2018. The increase was primarily a result of increases in short-term interest rates, partially offset by lower average debt balances in the first quarter of 2019, as compared to the first quarter of 2018.

### Other Income (Expense), Net

A summary of other income (expense), net is as follows:

*(in thousands)*

|  | First Quarter 2019 | 2018 |
| --- | ---: | ---: |
| Favorable/(unfavorable) fair value adjustment to acquisition related contingent consideration | $(14,046) | $5,186 |
| Non-service cost component of net periodic benefit cost | (1,961) | (676) |
| Other | 156 | - |
| **Total other income (expense), net** | **$(15,851)** | **$4,510** |

Each reporting period, the Company adjusts its contingent consideration liability related to the distribution territories acquired in the System Transformation transactions, excluding territories the Company acquired in an exchange transaction, to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the Company’s comprehensive beverage agreement, which extend through the life of the applicable distribution assets acquired in each System Transformation transaction, using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates and projected future operating results. The life of these distribution asset is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.

The fair value adjustments to the acquisition related contingent consideration liability during the first quarter of 2019 and the first quarter of 2018 were primarily a result of changes in the risk-free interest rate.

### Income Tax Benefit

The Company’s effective income tax rate, calculated by dividing income tax benefit by loss before income taxes, was 35.0% for the first quarter of 2019 and 48.9% for the first quarter of 2018. The decrease in the effective tax rate was primarily driven by improved financial results. The Company’s effective tax rate, calculated by dividing income tax benefit by loss before income taxes minus net income attributable to noncontrolling interest, was 30.6% for the first quarter of 2019 and 47.8% for the first quarter of 2018. The Company anticipates the annualized effective tax rate for 2019 will be in the low 30% range.

### Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $1.3 million in the first quarter of 2019 and $0.6 million in the first quarter of 2018, each related to the portion of Piedmont owned by The Coca‑Cola Company.

### Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $0.6 million in the first quarter of 2019 and $0.7 million in the first quarter of 2018. The decrease was primarily a result of a decrease in actuarial gains on the Company’s postretirement benefit plans.

### Segment Operating Results

The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board Accounting Standards Codification 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operation Decision Maker (“CODM”). The Company has concluded the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM.

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

The Company’s segment results are as follows:

*(in thousands)*

| Net sales: | First Quarter 2019 | 2018 |
| --- | ---: | ---: |
| Nonalcoholic Beverages(1) | $1,072,227 | $1,040,422 |
| All Other | 87,915 | 86,599 |
| Eliminations(2) | (57,230) | (62,264) |
| **Consolidated net sales** | **$1,102,912** | **$1,064,757** |
| **Income (loss) from operations:** |  |  |
| Nonalcoholic Beverages | $14,641 | $(22,745) |
| All Other | 5,513 | 3,748 |
| **Consolidated income (loss) from operations** | **$20,154** | **$(18,997)** |

(1) The Company historically presented consideration paid to customers under certain contractual arrangements for exclusive distribution rights and sponsorship privileges as a marketing expense within SD&A expenses. The Company has now determined such amounts should be presented as a reduction to net sales and has revised the presentation of previously issued financial statements to correct for this error. Net sales and SD&A expenses were revised by $7.3 million in the first quarter of 2018. See Note 3 to the consolidated condensed financial statements for additional information.

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

### Adjusted Non-GAAP Results

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance. Further, with the conversion of its information technology systems, the Company believes these non-GAAP financial measures allow users to better appreciate the impact of this conversion on the Company’s performance.

Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the

Company’s reported results prepared in accordance with GAAP. The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting. The following tables reconcile reported GAAP results to adjusted results (non-GAAP):

*(in thousands, except per share data)*

|  | First Quarter 2019 Gross profit | SD&A expenses | Income from operations | Income (loss) before income taxes | Net income (loss) | Basic net income (loss) per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$389,308** | **$369,154** | **$20,154** | **$(8,583)** | **$(6,831)** | **$(0.73)** |
| System Transformation transactions expenses(1) | - | (4,730) | 4,730 | 4,730 | 3,557 | 0.38 |
| Fair value adjustment of acquisition related contingent consideration(2) | - | - | - | 14,046 | 10,563 | 1.13 |
| Fair value adjustments for commodity hedges(3) | (3,905) | 2,715 | (6,620) | (6,620) | (4,978) | (0.53) |
| Capitalization threshold change for certain assets(4) | - | (2,476) | 2,476 | 2,476 | 1,862 | 0.20 |
| Other tax adjustment(5) | - | - | - | - | (845) | (0.09) |
| **Total reconciling items** | **(3,905)** | **(4,491)** | **586** | **14,632** | **10,159** | **1.09** |
| **Adjusted results (non-GAAP)** | **$385,403** | **$364,663** | **$20,740** | **$6,049** | **$3,328** | **$0.36** |

*(in thousands, except per share data)*

|  | First Quarter 2018 Gross profit | SD&A expenses | Loss from operations | Loss before income taxes | Net loss | Basic net loss per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$357,641** | **$376,638** | **$(18,997)** | **$(26,533)** | **$(14,185)** | **$(1.52)** |
| System Transformation transactions expenses(1) | 199 | (12,251) | 12,450 | 12,450 | 9,362 | 1.00 |
| Fair value adjustment of acquisition related contingent consideration(2) | - | - | - | (5,186) | (3,900) | (0.42) |
| Fair value adjustments for commodity hedges(3) | 2,765 | (202) | 2,967 | 2,967 | 2,231 | 0.24 |
| Other tax adjustment(5) | - | - | - | - | (2,343) | (0.25) |
| **Total reconciling items** | **2,964** | **(12,453)** | **15,417** | **10,231** | **5,350** | **0.57** |
| **Adjusted results (non-GAAP)** | **$360,605** | **$364,185** | **$(3,580)** | **$(16,302)** | **$(8,835)** | **$(0.95)** |

Following is an explanation of non-GAAP adjustments:

(1) Adjustment reflects expenses related to the System Transformation transactions, which primarily includes information technology systems conversions.

(2) This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates and projected future results of distribution territories acquired in the System Transformation.

(3) The Company enters into derivative instruments from time to time to hedge some or all of its projected purchases of aluminum, PET resin, diesel fuel and unleaded gasoline in order to mitigate commodity risk. The Company accounts for commodity hedges on a mark-to-market basis.

(4) Adjustment reflects the prospective change of increasing the capitalization thresholds on certain low-cost, short-lived assets. This change is not expected to be material to the consolidated condensed financial statements.

(5) Includes items impacting the Company’s effective tax rate.

### Financial Condition

Total assets were $3.08 billion on March 31, 2019, which was an increase of $65.8 million from December 30, 2018. Net working capital, defined as current assets less current liabilities, was $249.3 million on March 31, 2019, which was an increase of $53.6 million from December 30, 2018.

Significant changes in net working capital on March 31, 2019 from December 30, 2018 were as follows:

- A decrease in accounts receivable, trade of $11.4 million and an increase in accounts receivable from The Coca‑Cola Company of $11.5 million primarily as a result of the timing of cash receipts.
- An increase in inventories of $10.3 million primarily as a result of seasonal builds of inventory and product launches.
- The addition of the current portion of obligations under operating leases of $13.6 million as a result of the Company recording balances for operating leases on its consolidated condensed balance sheets.
- An increase in accounts payable, trade of $16.5 million as a result of seasonal builds of inventory.
- A decrease in other accrued liabilities of $52.5 million primarily as a result of the timing of cash payments.
- A decrease in accrued compensation of $31.9 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

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 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.

The Company’s total debt as of March 31, 2019 and December 30, 2018 was as follows:

*(in thousands)*

|  | Maturity Date | March 31, 2019 | December 30, 2018 |
| --- | --- | ---: | ---: |
| Senior notes(1) | 4/15/2019 | $110,000 | $110,000 |
| Term loan facility(1) | 6/7/2021 | 277,500 | 292,500 |
| Senior notes | 2/27/2023 | 125,000 | 125,000 |
| Revolving credit facility | 6/8/2023 | 129,000 | 80,000 |
| Senior notes | 11/25/2025 | 350,000 | 350,000 |
| Senior notes | 3/21/2030 | 150,000 | 150,000 |
| Unamortized discount on senior notes(2) | 4/15/2019 | (11) | (78) |
| Unamortized discount on senior notes(2) | 11/25/2025 | (59) | (61) |
| Debt issuance costs |  | (2,930) | (2,958) |
| **Total debt** |  | **$1,138,500** | **$1,104,403** |

(1) The senior notes due in 2019 were refinanced on April 10, 2019 using proceeds from the issuance of the senior notes due in 2026. The Company intends to refinance the term loan facility, which has principal payments that will be due in the next twelve months, and has the capacity to do so under its revolving credit facility, which is classified as long-term debt. As such, any amounts due in the next twelve months were classified as noncurrent.

(2) The senior notes due in 2019 were issued at 98.238% of par and the senior notes due in 2025 were issued at 99.975% of par.

The Company’s term loan facility matures on June 7, 2021. The original aggregate principal amount borrowed by the Company under the facility was $300 million and repayment of amounts outstanding began in 2018. The Company may request additional term loans under the term loan facility, provided the Company’s aggregate borrowings under the facility do not exceed $500 million.

The original aggregate principal amount borrowed by the Company on its senior notes due 2023, which mature on February 27, 2023, was $125 million. Through June 10, 2019, the Company may request the lender consider the purchase of additional senior unsecured notes of the Company in an aggregate principal amount of up to $175 million.

As discussed below, subsequent to the end of the first quarter of 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its affiliates. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to $200 million.

The Company’s revolving credit facility matures on June 8, 2023 and 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. As of March 31, 2019, the Company had borrowed $129 million under the revolving credit facility, and therefore had $371 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.

The indentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The Company’s nonpublic debt facilities include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreements. The Company was in compliance with these covenants as of March 31, 2019. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

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

The Company’s credit ratings are reviewed periodically by the respective rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material impact on the Company’s financial position or results of operations. In 2018, Standard & Poor’s reaffirmed the Company’s BBB rating and revised the Company’s rating outlook to negative. Moody’s rating outlook for the Company is currently stable. As of March 31, 2019, the Company’s credit ratings were as follows:

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

The Company is subject to interest rate risk on its variable 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 March 31, 2019, interest expense for the next twelve months would increase by approximately $4.1 million.

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

*(in thousands)*

|  | First Quarter 2019 | 2018 |
| --- | ---: | ---: |
| **Beginning balance - Level 3 liability** | **$382,898** | **$381,291** |
| Measurement period adjustment(1) | - | (1,059) |
| Payment of acquisition related contingent consideration | (6,237) | (5,882) |
| Reclassification to current payables | 2,300 | (360) |
| (Favorable)/unfavorable fair value adjustment | 14,046 | (5,186) |
| **Ending balance - Level 3 liability** | **$393,007** | **$368,804** |

(1) Measurement period adjustment relates to post-closing adjustments made in accordance with the terms and conditions of the asset purchase agreement for the distribution territories acquired by the Company in April 2017 as part of the System Transformation. All final post-closing adjustments for these transactions were completed during 2018.

### Cash Sources and Uses

A summary of cash-based activity is as follows:

*(in thousands)*

| Cash Sources: | First Quarter 2019 | 2018 |
| --- | ---: | ---: |
| Borrowings under revolving credit facility | $131,339 | $170,000 |
| Proceeds from issuance of senior notes | - | 150,000 |
| Adjusted cash provided by operating activities(1) | 4,211 | - |
| Refund of income tax payments | 948 | - |
| Proceeds from the sale of property, plant and equipment | 681 | 2,894 |
| Other | 437 | 13 |
| **Total cash sources** | **$137,616** | **$322,907** |
| **Cash Uses:** |  |  |
| Payments on revolving credit facility | $82,339 | $197,000 |
| Adjusted cash used in operating activities(1) | - | 78,515 |
| Additions to property, plant and equipment | 29,315 | 42,048 |
| Payments on term loan facility | 15,000 | - |
| Payment of acquisition related contingent consideration | 6,237 | 5,882 |
| Other distribution agreements | 4,654 | - |
| Cash dividends paid | 2,339 | 2,333 |
| Income tax payments | - | 2,244 |
| Principal payments on financing or capital lease obligations | 2,114 | 2,053 |
| Investment in CONA Services LLC | 486 | 1,070 |
| Debt issuance fees | 183 | 185 |
| **Total cash uses** | **$142,667** | **$331,330** |
| **Net decrease in cash** | **$(5,051)** | **$(8,423)** |

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

### Cash Flows From Operating Activities

During the first quarter of 2019, cash provided by operating activities was $5.6 million and during the first quarter of 2018, cash used in operating activities was $80.7 million. This increase was primarily a result of improved financial results and continued focus on working capital needs in order to optimize free cash flow.

### Cash Flows From Investing Activities

During the first quarter of 2019, cash used in investing activities was $33.8 million, which was a decrease of $6.4 million as compared to the first quarter of 2018. The decrease was driven primarily by a reduction in additions to property, plant and equipment, as we remain focused on making prudent long-term investments to support the growth of the Company.

Additions to property, plant and equipment were $29.3 million during the first quarter of 2019. As of March 31, 2019, $5.4 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 2019 will be in the range of $120 million to $150 million.

Additions to property, plant and equipment during the first quarter of 2018 were $42.0 million. As of April 1, 2018, $16.1 million of additions to property, plant and equipment were accrued in accounts payable, trade.

### Cash Flows From Financing Activities

During the first quarter of 2019, cash provided by financing activities was $23.1 million, which was a decrease of $89.4 million as compared to the first quarter of 2018. The decrease was primarily driven by improved financial results in the first quarter of 2019, as compared to the first quarter of 2018.

The Company had cash payments for acquisition related contingent consideration of $6.2 million during the first quarter of 2019 and $5.9 million during the first quarter of 2018. The Company anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories acquired as part of the System Transformation, excluding territories the Company acquired in exchange transactions, will be in the range of $25 million to $48 million.

In 2018, the Company sold $150 million aggregate principal amount of senior unsecured notes due 2030 to NYL Investors LLC (“NYL”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated March 6, 2018 between the Company, NYL and the other parties thereto. These notes bear interest at 3.96%, payable quarterly in arrears 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.

Subsequent to the end of the first quarter of 2019, on April 10, 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife and certain of its affiliates pursuant to a Note Purchase and Private Shelf Agreement dated January 23, 2019 between the Company, MetLife and the other parties thereto. These notes bear interest at 3.93%, payable quarterly in arrears on each January 10, April 10, July 10 and October 10, commencing on July 10, 2019, and will mature on October 10, 2026, unless earlier redeemed by the Company. The Company used the proceeds to refinance the senior notes due on April 15, 2019. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to $200 million.

### Significant Accounting Policies

See Note 1, Note 3 and Note 9 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 March 31, 2019. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee. See Note 20 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 SD&A expenses.

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

*(in thousands)*

|  | First Quarter 2019 | 2018 |
| --- | ---: | ---: |
| Cost of sales - increase/(decrease) | $(1,989) | $2,662 |
| SD&A expenses - increase/(decrease) | (2,373) | 8 |
| **Net impact** | **$(4,362)** | **$2,670** |

40

### Cautionary Information Regarding Forward-Looking Statements

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

- the Company’s beliefs and estimates regarding the impact of the adoption of certain new accounting pronouncements;
- the Company’s 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 expectation that certain operating leases will commence in the remainder of 2019 and have lease terms of 3 to 16 years and that the lease liability associated with these future leases is expected to be $23.4 million.
- 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 $58.3 million, assuming no change in volume;
- the Company’s expectation that the amount of uncertain tax positions may change over the next 12 months but that such changes will not have a significant impact on the consolidated condensed financial statements;
- the Company’s belief that 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 Company’s comprehensive beverage agreement and the Company’s WACC;
- the Company’s belief that the range of undiscounted amounts it could pay annually under the acquisition related contingent consideration arrangements is expected to be between $25 million to $48 million;
- the Company’s belief that the covenants in its nonpublic debt will not restrict its liquidity or capital resources;
- the Company’s belief that other parties to certain of its contractual arrangements will perform their obligations;
- the Company’s belief that contributions to the two Company-sponsored pension plans is expected to be in the range of $1 million to $2 million in 2019;
- 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 July 2021 will be re-negotiated;
- the Company’s belief that its additional expenses related to the conversion of its information technology systems, which it expects to complete in the second quarter of 2019, will be in the range of $2 million to $3 million;
- the Company’s belief that additions to property, plant and equipment for the remainder of 2019 are expected to be in the range of $120 million to $150 million;
- the Company’s belief that it has adequately provided for any assessments likely to result from audits by tax authorities in the jurisdictions in which the Company conducts business;
- the Company’s belief that key priorities include acquisition synergies and cost optimization, revenue management, free cash flow generation and debt repayment, distribution and network optimization and cost management;
- the Company’s belief that the annualized effective tax rate for 2019 will be in the low 30% range; 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 March 31, 2019, interest expense for the next twelve months would increase by approximately $4.1 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 2018, as well as other factors discussed throughout this Quarterly 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 the forward-looking statements in this Quarterly 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 Quarterly Report. The Company assumes no obligation to update any forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward-looking statements, these risks and uncertainties should be considered, together with the other risks described from time to time in the Company’s other reports and documents filed with the Securities and Exchange Commission.

## Market risk

As filed, 3,792 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 variable rate debt, including its revolving credit facility and 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 March 31, 2019, interest expense for the next twelve months would increase by approximately $4.1 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 variable rate debt.

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

### Raw Material and Commodity Price Risk

The Company is also subject to commodity price risk arising from price movements for certain commodities included as part of its raw materials. The Company manages this commodity price risk in some cases by entering into contracts with adjustable prices to hedge commodity purchases. The Company periodically uses derivative commodity instruments in the management of this risk. The Company estimates a 10% increase in the market prices of commodities included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $58.3 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 SD&A expenses.

### Effects of Changing Prices

The annual rate of inflation in the United States, as measured by year-over-year changes in the Consumer Price Index (the “CPI”), was 2.4% in 2018 and 2.1% in 2017. 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 SD&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, 953 characters.

As of the end of the period covered by this Quarterly Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2019.

There has been no change in the Company’s internal control over financial reporting during the quarter ended March 31, 2019 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 2018.

Filed May 8, 2019.
Source: SEC EDGAR, the filing index for accession 0001564590-19-017342. Last ingested by Listed: Nov 4, 2026, 17:26 ET. No prices; not investment advice.