# Coca-Cola Consolidated, Inc.: Form 10-Q for the period ended Sep 29, 2019

- Company: [Coca-Cola Consolidated, Inc.](/companies/coke.md) (CIK 317540)
- Form: 10-Q
- Filed: 2019-11-05
- Accepted by EDGAR: Nov 5, 2019, 16:38 ET
- Period: 2019-09-29
- Accession: 0001564590-19-040437
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/317540/000156459019040437/coke-10q_20190929.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/317540/000156459019040437/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-09-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-07-01 to 2019-09-29 | $1.27bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-12-31 to 2019-09-29 | $3.65bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-07-01 to 2019-09-29 | $838.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2018-12-31 to 2019-09-29 | $2.39bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-07-01 to 2019-09-29 | $432.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-12-31 to 2019-09-29 | $1.26bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-07-01 to 2019-09-29 | $378.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2018-12-31 to 2019-09-29 | $1.12bn | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-07-01 to 2019-09-29 | $53.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-12-31 to 2019-09-29 | $141.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-07-01 to 2019-09-29 | $11.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-12-31 to 2019-09-29 | $35.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-07-01 to 2019-09-29 | $6.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-12-31 to 2019-09-29 | $10.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-07-01 to 2019-09-29 | $13.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2018-12-31 to 2019-09-29 | $21.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-07-01 to 2019-09-29 | $1.38 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2018-12-31 to 2019-09-29 | $2.29 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-07-01 to 2019-09-29 | $1.39 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2018-12-31 to 2019-09-29 | $2.30 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-07-01 to 2019-09-29 | 9,413,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-12-31 to 2019-09-29 | 9,409,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2018-12-31 to 2019-09-29 | $204.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2018-12-31 to 2019-09-29 | $96.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-12-31 to 2019-09-29 | $7.0m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2019-09-29 | $6.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-09-29 | $851.9m | us-gaap:AssetsCurrent |
| Total assets | at 2019-09-29 | $3.12bn | us-gaap:Assets |
| Current liabilities | at 2019-09-29 | $613.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-09-29 | $2.64bn | us-gaap:Liabilities |
| Long-term debt | at 2019-09-29 | $1.03bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2019-09-29 | $378.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 70,065 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 condensed consolidated financial statements of the Company and the accompanying notes to the condensed consolidated financial statements.

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

- The financial position as of September 29, 2019 and December 30, 2018.
- The results of operations and comprehensive income for the 13 week periods ended September 29, 2019 (the “third quarter” of fiscal 2019 (“2019”)) and September 30, 2018 (the “third quarter” of fiscal 2018 (“2018”)), and the 39 week periods ended September 29, 2019 (the “first nine months” of 2019) and September 30, 2018 (the “first nine months” of 2018).
- The changes in cash flows and equity for the first nine months of 2019 and the first nine months of 2018.

The condensed consolidated 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 85% 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.

Bottle/can net pricing is based on the invoice price charged to customers reduced by any 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 in the United States through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets.

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 5.6% in the third quarter of 2019, driven primarily by a 4.6% increase in volume, with strong performance in both Sparkling and Still categories. We cycled pricing initiatives that were implemented in the third quarter of 2018, thereby reducing the contribution from pricing as compared to the revenue growth in the first half of 2019. Revenue from our bottle/can Sparkling beverages increased 6.1% in the third quarter of 2019 as our Sparkling brands continue to demonstrate strength across our markets. Revenue from our Still beverages grew 9.4% in the third quarter of 2019, driven primarily by growth in our Sports Drinks category related to the introduction of BodyArmor products into our portfolio in the fourth quarter of 2018. Revenue grew 4.6% in the first nine months of 2019 through a combination of increased pricing, a continued product mix shift to higher revenue products and a 1.8% increase in physical case volume.

Gross margin declined 30 basis points in the third quarter of 2019 to 34.0%. On an adjusted basis, as defined in the “Adjusted Non‑GAAP Results” section below, gross margin declined 10 basis points versus the third quarter of 2018. The slight decline in gross margin can be attributed to the continued shift in product mix from Sparkling beverages to Still products, as well as certain costs incurred to optimize our manufacturing operations. Gross margin for the first nine months of 2019 increased 80 basis points on both an actual and an adjusted basis. This improvement is primarily the result of successful pricing actions executed in the second half of 2018 to overcome rising input costs.

Selling, delivery and administrative (“SD&A”) expenses in the third quarter of 2019 increased $10.1 million, or 2.7%, versus the third quarter of 2018, largely driven by increased payroll and other benefits expenses. SD&A expenses as a percentage of net sales improved 80 basis points in the third quarter of 2019 versus the third quarter of 2018, due primarily to a $10.3 million reduction in expenses related to our system transformation work, which concluded in the second quarter of 2019. Adjusted SD&A expenses in the third quarter of 2019 increased $18.8 million, or 5.2%, versus the third quarter of 2018, reflecting wage inflation and labor expense related to our higher volume. Our adjusted SD&A expenses as a percentage of net sales improved 10 basis points in the third quarter of 2019 versus the third quarter of 2018 (29.6% versus 29.7%, respectively).

Income from operations in the third quarter and the first nine months of 2019 was $53.8 million and $141.2 million, respectively. Adjusted income from operations was $58.7 million in the third quarter of 2019, an increase of $3.5 million from the third quarter of 2018. Adjusted income from operations was $157.0 million in the first nine months of 2019, an increase of $71.2 million from the same period last year.

Net income in the third quarter of 2019 was $13.0 million, compared to $25.2 million in the third quarter of 2018, a decline of $12.2 million. For the first nine months of 2019, net income increased $14.5 million compared to the first nine months of 2018. Net income for the third quarter and the first nine months of 2019 was adversely impacted by fair value adjustments to our acquisition related contingent consideration liability, driven by changes in the discount rate and future cash flow projections. Fair value adjustments to this liability are non-cash in nature and a routine part of our quarterly financial closing process.

Capital spending for the first nine months of 2019 was $96.7 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 future growth. Cash flows provided by operations for the first nine months of 2019 were $204.6 million, compared to $26.0 million in the same period of 2018. Improved cash generation continues to be a key management focus area as we strive 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 plant 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 successful opening of a new, automated distribution facility in Erlanger, Kentucky and the planned consolidation of the Company’s two manufacturing plants in the Memphis, Tennessee region by the end of fiscal 2020 are two examples of the Company’s commitment to drive efficiency and reinvest for long-term growth. 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. During the first nine months of 2019, the Company reduced its net debt by more than $77 million.

*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 $465.7 million in the first nine months of 2019 and $458.7 million in the first nine months 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

#### Third Quarter Results

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

*(in thousands)*

|  | Third Quarter 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $1,271,029 | $1,204,033 | $66,996 |
| Cost of sales | 838,805 | 791,317 | 47,488 |
| Gross profit | 432,224 | 412,716 | 19,508 |
| Selling, delivery and administrative expenses | 378,378 | 368,312 | 10,066 |
| Income from operations | 53,846 | 44,404 | 9,442 |
| Interest expense, net | 10,965 | 12,827 | (1,862) |
| Other income (expense), net | (20,711) | 1,696 | (22,407) |
| Gain on exchange transactions | - | 10,170 | (10,170) |
| Income before income taxes | 22,170 | 43,443 | (21,273) |
| Income tax expense | 6,624 | 16,493 | (9,869) |
| Net income | 15,546 | 26,950 | (11,404) |
| Less: Net income attributable to noncontrolling interest | 2,540 | 1,786 | 754 |
| **Net income attributable to Coca-Cola Consolidated, Inc.** | **$13,006** | **$25,164** | **$(12,158)** |
| Other comprehensive income, net of tax | 196 | 734 | (538) |
| **Comprehensive income attributable to Coca-Cola Consolidated, Inc.** | **$13,202** | **$25,898** | **$(12,696)** |

#### Items Impacting Operations and Financial Condition

#### Third Quarter 2019

- $18.7 million recorded in other income (expense), net as a result of an increase in the fair value of the Company’s acquisition related contingent consideration liability.

#### Third Quarter 2018

- $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 for the System Transformation transactions that closed during fiscal 2017.

### Net Sales

Net sales increased $67.0 million, or 5.6%, to $1.27 billion in the third quarter of 2019, as compared to $1.20 billion in the third quarter of 2018. The increase in net sales was primarily attributable to the following (in millions):

| Third Quarter 2019 | Attributable to: |
| ---: | --- |
| $46.9 | Increase in net sales related to increased sales volume |
| 25.9 | 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 |
| (8.9) | Decrease in sales volume to other Coca-Cola bottlers |
| 3.1 | Other |
| **$67.0** | **Total increase in net sales** |

Net sales by product category were as follows:

*(in thousands)*

| Bottle/can sales: | Third Quarter 2019 | 2018 | % Change |
| --- | ---: | ---: | ---: |
| Sparkling beverages (carbonated) | $657,507 | $619,705 | 6.1% |
| Still beverages (noncarbonated, including energy products) | 438,510 | 400,795 | 9.4% |
| **Total bottle/can sales** | **1,096,017** | **1,020,500** | **7.4%** |
| **Other sales:** |  |  |  |
| Sales to other Coca-Cola bottlers | 83,250 | 92,139 | (9.6)% |
| Post-mix and other | 91,762 | 91,394 | 0.4% |
| **Total other sales** | **175,012** | **183,533** | **(4.6)%** |
| **Total net sales** | **$1,271,029** | **$1,204,033** | **5.6%** |

Product category sales volume of physical cases in the third quarter of 2019 and the third 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 Third Quarter 2019 | 2018 | Bottle/Can Sales Volume % Change |
| --- | ---: | ---: | ---: |
| Sparkling beverages | 67.6% | 67.8% | 4.3% |
| Still beverages (including energy products) | 32.4% | 32.2% | 5.2% |
| **Total bottle/can sales volume** | **100.0%** | **100.0%** | **4.6%** |

As the Company introduces new products, it reassesses the category assigned at the SKU level, therefore categorization could differ from previously presented results to conform with current period categorization. Any differences are not considered material.

### 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 and 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 $47.5 million, or 6.0%, to $838.8 million in the third quarter of 2019, as compared to $791.3 million in the third quarter of 2018. The increase in cost of sales was primarily attributable to the following (in millions):

| Third Quarter 2019 | Attributable to: |
| ---: | --- |
| $36.2 | Increase in cost of sales related to increased sales volume |
| 18.8 | Increase in cost of sales primarily related to, in order of magnitude, the change in product mix to meet consumer preferences and an increase in concentrate costs |
| (10.1) | Decrease in sales volume to other Coca-Cola bottlers |
| 2.6 | Other |
| **$47.5** | **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 $34.8 million in the third quarter of 2019, as compared to $33.1 million in the third 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 increased by $10.1 million, or 2.7%, to $378.4 million in the third quarter of 2019, as compared to $368.3 million in the third quarter of 2018. SD&A expenses as a percentage of net sales decreased to 29.8% in the third quarter of 2019 from 30.6% in the third quarter of 2018. The increase in SD&A expenses was primarily attributable to the following (in millions):

| Third Quarter 2019 | Attributable to: |
| ---: | --- |
| $12.1 | Increase in employee benefit costs, including an increase in bonuses and incentives primarily related to improved financial results and an increase in employee salaries |
| (2.0) | Other |
| **$10.1** | **Total increase 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 plants 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 $161.0 million in the third quarter of 2019 and $157.5 million in the third quarter of 2018.

### Interest Expense, Net

Interest expense, net decreased $1.8 million to $11.0 million in the third quarter of 2019, as compared to $12.8 million in the third quarter of 2018. The decrease was primarily a result of lower average debt balances and lower average interest rates.

### Other Income (Expense), Net

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

*(in thousands)*

|  | Third Quarter 2019 | 2018 |
| --- | ---: | ---: |
| (Increase) decrease in the fair value of the acquisition related contingent consideration liability | $(18,749) | $2,373 |
| Non-service cost component of net periodic benefit cost | (1,962) | (677) |
| **Total other income (expense), net** | **$(20,711)** | **$1,696** |

Each reporting period, the Company adjusts its contingent consideration liability related to the distribution territories subject to sub-bottling fees 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, using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates and future cash flow projections. The life of these distribution assets is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.

The increase in the fair value of the acquisition related contingent consideration liability during the third quarter of 2019 was primarily driven by a decrease in the discount rate. The decrease in the fair value of the acquisition related contingent consideration liability during the third quarter of 2018 was primarily driven by changes to the future cash flow projections of the distribution territories subject to sub-bottling fees and an increase in the discount rate, partially offset by cash payments.

### Gain on Exchange Transactions

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

### Income Tax Expense

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 29.9% for the third quarter of 2019 and 38.0% for the third quarter of 2018. The decrease in the effective income tax rate was primarily driven by a decrease in uncertain tax positions due to the expiration of the applicable statute of limitations. The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 33.7% for the third quarter of 2019 and 39.6% for the third quarter of 2018.

### Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $2.5 million in the third quarter of 2019 and $1.8 million in the third 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 $0.2 million in the third quarter of 2019 and $0.7 million in the third quarter of 2018. The decrease was primarily a result of the Company entering into a fixed rate swap in July 2019 to hedge a portion of the interest rate risk on the Company’s term loan facility and a decrease in actuarial gains on the Company’s postretirement benefit plans.

#### First Nine Months Results

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

*(in thousands)*

|  | First Nine Months 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Net sales | $3,647,600 | $3,488,793 | $158,807 |
| Cost of sales | 2,390,289 | 2,313,728 | 76,561 |
| Gross profit | 1,257,311 | 1,175,065 | 82,246 |
| Selling, delivery and administrative expenses | 1,116,097 | 1,129,979 | (13,882) |
| Income from operations | 141,214 | 45,086 | 96,128 |
| Interest expense, net | 35,846 | 37,617 | (1,771) |
| Other expense, net | 67,743 | 3,612 | 64,131 |
| Gain on exchange transactions | - | 10,170 | (10,170) |
| Income before income taxes | 37,625 | 14,027 | 23,598 |
| Income tax expense | 10,801 | 3,387 | 7,414 |
| Net income | 26,824 | 10,640 | 16,184 |
| Less: Net income attributable to noncontrolling interest | 5,279 | 3,594 | 1,685 |
| **Net income attributable to Coca-Cola Consolidated, Inc.** | **$21,545** | **$7,046** | **$14,499** |
| Other comprehensive income, net of tax | 1,367 | 2,199 | (832) |
| **Comprehensive income attributable to Coca-Cola Consolidated, Inc.** | **$22,912** | **$9,245** | **$13,667** |

#### Items Impacting Operations and Financial Condition

#### First Nine Months 2019

- $62.0 million recorded in other expense, net as a result of an increase in the fair value of the Company’s acquisition related contingent consideration liability;
- $6.9 million of expenses related to the System Transformation transactions, the majority of which were information technology related costs; and
- $6.1 million adjustment to reflect 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 condensed consolidated financial statements.

#### First Nine Months 2018

- $32.7 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 for the System Transformation transactions that closed during fiscal 2017.

### Net Sales

Net sales increased $158.8 million, or 4.6%, to $3.65 billion in the first nine months of 2019, as compared to $3.49 billion in the first nine months of 2018. The increase in net sales was primarily attributable to the following (in millions):

| First Nine Months 2019 | Attributable to: |
| ---: | --- |
| $126.7 | 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 |
| 62.2 | Increase in net sales related to increased sales volume |
| (46.6) | Decrease in sales volume to other Coca-Cola bottlers |
| 16.5 | Other |
| **$158.8** | **Total increase in net sales** |

35

Net sales by product category were as follows:

*(in thousands)*

| Bottle/can sales: | First Nine Months 2019 | 2018 | % Change |
| --- | ---: | ---: | ---: |
| Sparkling beverages (carbonated) | $1,927,916 | $1,832,619 | 5.2% |
| Still beverages (noncarbonated, including energy products) | 1,201,564 | 1,108,621 | 8.4% |
| **Total bottle/can sales** | **3,129,480** | **2,941,240** | **6.4%** |
| **Other sales:** |  |  |  |
| Sales to other Coca-Cola bottlers | 254,200 | 300,819 | (15.5)% |
| Post-mix and other | 263,920 | 246,734 | 7.0% |
| **Total other sales** | **518,120** | **547,553** | **(5.4)%** |
| **Total net sales** | **$3,647,600** | **$3,488,793** | **4.6%** |

Product category sales volume of physical cases in the first nine months of 2019 and the first nine months 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 Nine Months 2019 | 2018 | Bottle/Can Sales Volume % Change |
| --- | ---: | ---: | ---: |
| Sparkling beverages | 69.7% | 70.5% | 0.7% |
| Still beverages (including energy products) | 30.3% | 29.5% | 4.4% |
| **Total bottle/can sales volume** | **100.0%** | **100.0%** | **1.8%** |

As the Company introduces new products, it reassesses the category assigned at the SKU level, therefore categorization could differ from previously presented results to conform with current period categorization. Any differences are not considered material.

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 Nine Months 2019 | 2018 |
| --- | ---: | ---: |
| Wal-Mart Stores, Inc. | 19% | 19% |
| The Kroger Company | 12% | 11% |
| **Total approximate percent of the Company’s total bottle/can sales volume** | **31%** | **30%** |
| **Approximate percent of the Company’s total net sales:** |  |  |
| Wal-Mart Stores, Inc. | 14% | 14% |
| The Kroger Company | 8% | 8% |
| **Total approximate percent of the Company’s total net sales** | **22%** | **22%** |

36

### Cost of Sales

Cost of sales increased $76.6 million, or 3.3%, to $2.39 billion in the first nine months of 2019, as compared to $2.31 billion in the first nine months of 2018. The increase in cost of sales was primarily attributable to the following (in millions):

| First Nine Months 2019 | Attributable to: |
| ---: | --- |
| $79.1 | Increase in cost of sales primarily related to, in order of magnitude, the change in product mix to meet consumer preferences, an increase in concentrate costs and an increase in commodity costs |
| (50.4) | Decrease in sales volume to other Coca-Cola bottlers |
| 41.9 | Increase in cost of sales related to increased sales volume |
| 6.0 | Other |
| **$76.6** | **Total increase in cost of sales** |

Total marketing funding support from The Coca‑Cola Company and other beverage companies was $100.8 million in the first nine months of 2019, as compared to $96.9 million in the first nine months of 2018.

### Selling, Delivery and Administrative Expenses

SD&A expenses decreased by $13.9 million, or 1.2%, to $1.12 million in the first nine months of 2019, as compared to $1.13 million in the first nine months of 2018. SD&A expenses as a percentage of net sales decreased to 30.6% in the first nine months of 2019 from 32.4% in the first nine months of 2018. The decrease in SD&A expenses was primarily attributable to the following (in millions):

| First Nine Months 2019 | Attributable to: |
| ---: | --- |
| $(25.5) | Decrease in System Transformation transactions expenses |
| 8.9 | Increase in employee benefit costs including employee salaries primarily as a result of an increase in bonuses and incentives primarily related to improved financial results, partially offset by workforce optimization completed in the second and fourth quarters of 2018 |
| 2.7 | Other |
| **$(13.9)** | **Total decrease in SD&A expenses** |

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 $465.7 million in the first nine months of 2019 and $458.7 million in the first nine months of 2018.

### Interest Expense, Net

Interest expense, net decreased $1.8 million to $35.8 million in the first nine months of 2019, as compared to $37.6 million in the first nine months of 2018. The decrease was primarily a result of lower average debt balances and lower average interest rates.

### Other Expense, Net

A summary of other expense, net is as follows:

*(in thousands)*

|  | First Nine Months 2019 | 2018 |
| --- | ---: | ---: |
| Increase in the fair value of the acquisition related contingent consideration liability | $62,017 | $1,584 |
| Non-service cost component of net periodic benefit cost | 5,882 | 2,028 |
| Other | (156) | - |
| **Total other expense, net** | **$67,743** | **$3,612** |

The increase in the fair value of the acquisition related contingent consideration liability during the first nine months of 2019 was primarily driven by a decrease in the discount rate and changes in future cash flow projections of the distribution territories subject to sub-bottling fees. The increase in the fair value of the acquisition related contingent consideration liability during the first nine months of 2018 was primarily driven by changes to the discount rate and future cash flow projections of the distribution territories subject to sub-bottling fees, partially offset by cash payments.

### Gain on Exchange Transactions

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

### Income Tax Expense

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 28.7% for the first nine months of 2019 and 24.1% for the first nine months of 2018. The increase in the effective income tax rate was primarily driven by non-recurring favorable adjustments resulting from the adoption of the Tax Cuts and Jobs Act included in the Company’s 2017 federal income tax return filed during the third quarter of 2018. The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 33.4% for the first nine months of 2019 and 32.5% for the first nine months of 2018. The Company anticipates the annualized effective income tax rate for 2019 will be in the low 30% range.

### Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $5.3 million in the first nine months of 2019 and $3.6 million in the first nine months 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 $1.4 million in the first nine months of 2019 and $2.2 million in the first nine months of 2018. The decrease was primarily a result of a decrease in actuarial gains on the Company’s postretirement benefit plans and the Company entering into a fixed rate swap in July 2019 to hedge a portion of the interest rate risk on the Company’s term loan facility.

### 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 Operating Decision Maker (the “CODM”). The Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM. The Company believes three operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated revenues and income from operations. The additional two 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 2019 | 2018 | First Nine Months 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Nonalcoholic Beverages(1) | $1,236,261 | $1,172,584 | $3,547,373 | $3,405,288 |
| All Other | 92,501 | 93,493 | 275,358 | 273,490 |
| Eliminations(2) | (57,733) | (62,044) | (175,131) | (189,985) |
| **Consolidated net sales** | **$1,271,029** | **$1,204,033** | **$3,647,600** | **$3,488,793** |
| **Income from operations:** |  |  |  |  |
| Nonalcoholic Beverages | $48,248 | $39,361 | $120,613 | $32,705 |
| All Other | 5,598 | 5,043 | 20,601 | 12,381 |
| **Consolidated income from operations** | **$53,846** | **$44,404** | **$141,214** | **$45,086** |

(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 $7.6 million in the third quarter of 2018 and $22.2 million in the first nine months of 2018. See Note 4 to the condensed consolidated 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)*

|  | Third Quarter 2019 Gross profit | SD&A expenses | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$432,224** | **$378,378** | **$53,846** | **$22,170** | **$13,006** | **$1.39** |
| Fair value adjustment of acquisition related contingent consideration(1) | - | - | - | 18,749 | 14,099 | 1.51 |
| Fair value adjustments for commodity hedges(2) | (487) | (74) | (413) | (413) | (311) | (0.04) |
| Capitalization threshold change for certain assets(3) | - | (1,732) | 1,732 | 1,732 | 1,302 | 0.14 |
| Supply chain optimization and consolidation(4) | 3,581 | - | 3,581 | 3,581 | 2,693 | 0.29 |
| Other tax adjustments(5) | - | - | - | - | 1,482 | 0.15 |
| **Total reconciling items** | **3,094** | **(1,806)** | **4,900** | **23,649** | **19,265** | **2.05** |
| **Adjusted results (non-GAAP)** | **$435,318** | **$376,572** | **$58,746** | **$45,819** | **$32,271** | **$3.44** |

*(in thousands, except per share data)*

|  | Third Quarter 2018 Gross profit | SD&A expenses | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$412,716** | **$368,312** | **$44,404** | **$43,443** | **$25,164** | **$2.69** |
| System Transformation transactions expenses(6) | 112 | (10,305) | 10,417 | 10,417 | 7,834 | 0.84 |
| Gain on exchange transactions(7) | - | - | - | (10,170) | (7,648) | (0.82) |
| Fair value adjustment of acquisition related contingent consideration(1) | - | - | - | (2,373) | (1,785) | (0.19) |
| Fair value adjustments for commodity hedges(2) | 260 | (209) | 469 | 469 | 353 | 0.04 |
| Other tax adjustments(5) | - | - | - | - | 3,918 | 0.41 |
| **Total reconciling items** | **372** | **(10,514)** | **10,886** | **(1,657)** | **2,672** | **0.28** |
| **Adjusted results (non-GAAP)** | **$413,088** | **$357,798** | **$55,290** | **$41,786** | **$27,836** | **$2.97** |

*(in thousands, except per share data)*

|  | First Nine Months 2019 Gross profit | SD&A expenses | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$1,257,311** | **$1,116,097** | **$141,214** | **$37,625** | **$21,545** | **$2.30** |
| System Transformation transactions expenses(6) | - | (6,915) | 6,915 | 6,915 | 5,200 | 0.56 |
| Fair value adjustment of acquisition related contingent consideration(1) | - | - | - | 62,017 | 46,637 | 4.98 |
| Fair value adjustments for commodity hedges(2) | 482 | 2,575 | (2,093) | (2,093) | (1,574) | (0.17) |
| Capitalization threshold change for certain assets(3) | - | (6,111) | 6,111 | 6,111 | 4,595 | 0.49 |
| Supply chain optimization and consolidation(4) | 4,875 | - | 4,875 | 4,875 | 3,666 | 0.39 |
| Other tax adjustments(5) | - | - | - | - | (2,178) | (0.24) |
| **Total reconciling items** | **5,357** | **(10,451)** | **15,808** | **77,825** | **56,346** | **6.01** |
| **Adjusted results (non-GAAP)** | **$1,262,668** | **$1,105,646** | **$157,022** | **$115,450** | **$77,891** | **$8.31** |

39

*(in thousands, except per share data)*

|  | First Nine Months 2018 Gross profit | SD&A expenses | Income from operations | Income before income taxes | Net income | Basic net income per share |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| **Reported results (GAAP)** | **$1,175,065** | **$1,129,979** | **$45,086** | **$14,027** | **$7,046** | **$0.75** |
| System Transformation transactions expenses(6) | 339 | (32,399) | 32,738 | 32,738 | 24,619 | 2.63 |
| Gain on exchange transactions(7) | - | - | - | (10,170) | (7,648) | (0.82) |
| Workforce optimization expenses(8) | - | (4,810) | 4,810 | 4,810 | 3,617 | 0.39 |
| Fair value adjustment of acquisition related contingent consideration(1) | - | - | - | 1,584 | 1,191 | 0.13 |
| Fair value adjustments for commodity hedges(2) | 2,776 | (363) | 3,139 | 3,139 | 2,361 | 0.25 |
| Other tax adjustments(5) | - | - | - | - | (1,880) | (0.20) |
| **Total reconciling items** | **3,115** | **(37,572)** | **40,687** | **32,101** | **22,260** | **2.38** |
| **Adjusted results (non-GAAP)** | **$1,178,180** | **$1,092,407** | **$85,773** | **$46,128** | **$29,306** | **$3.13** |

Following is an explanation of non-GAAP adjustments:

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

(2) 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.

(3) 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 condensed consolidated financial statements.

(4) Adjustment reflects expenses within the Nonalcoholic Beverages segment related to the impairment and accelerated depreciation of property, plant and equipment at certain of the Company’s manufacturing plants as the Company continues to optimize efficiency opportunities across its business.

(5) Adjustment reflects the impact from the reconciling items to reported results on the annualized adjusted effective income tax rate.

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

(7) Adjustment reflects gain on exchange transactions as a result of final post-closing adjustments made during the third quarter of 2018 for the System Transformation transactions that closed during fiscal 2017.

(8) Adjustment reflects severance and outplacement expenses relating to the Company’s optimization of its labor expense in the Nonalcoholic Beverages segment.

### Financial Condition

Total assets were $3.12 billion on September 29, 2019, which was an increase of $108.8 million from December 30, 2018. Net working capital, defined as current assets less current liabilities, was $238.7 million on September 29, 2019, which was an increase of $43.0 million from December 30, 2018.

Significant changes in net working capital on September 29, 2019 from December 30, 2018 were as follows:

- An increase in accounts receivable, trade of $11.6 million and an increase in accounts receivable from The Coca‑Cola Company of $15.5 million primarily as a result of the timing of cash receipts.
- An increase in inventories of $21.7 million primarily as a result of product launches and continued inventory mix shift.
- The addition of the current portion of obligations under operating leases of $14.9 million as a result of the Company recording balances for operating leases on its condensed consolidated balance sheets.
- An increase in accounts payable, trade of $39.7 million and an increase in accounts payable to The Coca‑Cola Company of $18.5 million primarily as a result of the timing of cash payments.
- A decrease in other accrued liabilities of $59.0 million primarily as a result of the timing of cash payments.

### 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 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 condensed consolidated 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 September 29, 2019 and December 30, 2018 was as follows:

*(in thousands)*

|  | Maturity Date | September 29, 2019 | December 30, 2018 |
| --- | --- | ---: | ---: |
| Senior notes and unamortized discount on senior notes(1)(2) | 4/15/2019 | $- | $109,922 |
| Term loan facility(1) | 6/7/2021 | 270,000 | 292,500 |
| Senior notes | 2/27/2023 | 125,000 | 125,000 |
| Revolving credit facility | 6/8/2023 | 35,000 | 80,000 |
| Senior notes and unamortized discount on senior notes(2) | 11/25/2025 | 349,946 | 349,939 |
| Senior notes | 10/10/2026 | 100,000 | - |
| Senior notes | 3/21/2030 | 150,000 | 150,000 |
| Debt issuance costs |  | (2,603) | (2,958) |
| **Total debt** |  | **$1,027,343** | **$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 (as discussed below). The Company intends to refinance principal payments due in the next 12 months under the term loan facility, 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 12 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.

In July 2019, the Company entered into a $100 million fixed rate swap maturing June 7, 2021, to hedge a portion of the interest rate risk on the Company’s term loan facility. This interest rate swap is designated as a cash flow hedging instrument and is not expected to be material to the condensed consolidated balance sheets. Changes in the fair value of this interest rate swap were classified as accumulated other loss on the condensed consolidated balance sheets and included in the condensed consolidated statements of comprehensive income.

As discussed below, in April 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. 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. As of September 29, 2019, the Company had outstanding borrowings of $35 million under the revolving credit facility, and therefore had $465 million borrowing capacity remaining.

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 September 29, 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. Standard & Poor’s rating outlook for the Company is negative and Moody’s rating outlook for the Company is stable. As of September 29, 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 12 months than the interest rates as of September 29, 2019, interest expense for the next 12 months would increase by approximately $2.1 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)*

|  | Third Quarter 2019 | 2018 | First Nine Months 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| **Beginning balance - Level 3 liability** | **$412,450** | **$374,537** | **$382,898** | **$381,291** |
| Measurement period adjustments(1) | - | (1,279) | - | 813 |
| Payments of acquisition related contingent consideration | (5,948) | (7,049) | (18,784) | (18,312) |
| Reclassification to current payables | (60) | - | (940) | (1,540) |
| Increase (decrease) in fair value | 18,749 | (2,373) | 62,017 | 1,584 |
| **Ending balance - Level 3 liability** | **$425,191** | **$363,836** | **$425,191** | **$363,836** |

(1) Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for distribution territories acquired or exchanged by the Company in April 2017 and October 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 Nine Months 2019 | 2018 |
| --- | ---: | ---: |
| Borrowings under revolving credit facility | $331,339 | $285,000 |
| Net cash provided by operating activities(1) | 204,583 | 26,030 |
| Proceeds from issuance of senior notes | 100,000 | 150,000 |
| Proceeds from the sale of property, plant and equipment | 1,028 | 3,555 |
| Proceeds from cold drink equipment | - | 3,789 |
| Acquisition of distribution territories and regional manufacturing plants, net of cash acquired and purchase price settlements | - | 1,811 |
| **Total cash sources** | **$636,950** | **$470,185** |
| **Cash Uses:** |  |  |
| Payments on revolving credit facility | $376,339 | $322,000 |
| Payments on term loan facility and senior notes | 132,500 | 7,500 |
| Additions to property, plant and equipment (exclusive of acquisitions) | 96,747 | 113,104 |
| Payments of acquisition related contingent consideration | 18,784 | 18,312 |
| Cash dividends paid | 7,026 | 7,014 |
| Payments on financing or capital lease obligations | 6,441 | 6,191 |
| Other distribution agreements | 4,654 | - |
| Investment in CONA Services LLC | 1,713 | 2,098 |
| Debt issuance fees | 305 | 1,531 |
| **Total cash uses** | **$644,509** | **$477,750** |
| **Net decrease in cash** | **$(7,559)** | **$(7,565)** |

(1) Net cash provided by operating activities in the first nine months of 2019 included net income tax payments of $5.5 million and pension plan contributions of $4.9 million. Net cash provided by operating activities in the first nine months of 2018 included a net refund of income tax payments of $20.0 million and pension plan contributions of $20.0 million.

### Cash Flows From Operating Activities

During the first nine months of 2019, cash provided by operating activities was $204.6 million, which was an increase of $178.6 million as compared to the first nine months of 2018. The 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 nine months of 2019, cash used in investing activities was $102.1 million, which was a decrease of $3.9 million as compared to the first nine months of 2018. The decrease was driven primarily by a reduction in additions to property, plant and equipment, as the Company remains focused on making prudent long-term investments to support its growth.

Additions to property, plant and equipment were $96.7 million during the first nine months of 2019. As of September 29, 2019, $8.9 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 $50 million to $80 million.

Additions to property, plant and equipment during the first nine months of 2018 were $113.1 million. As of September 30, 2018, $4.1 million of additions to property, plant and equipment were accrued in accounts payable, trade.

### Cash Flows From Financing Activities

During the first nine months of 2019, cash used in financing activities was $110.1 million and during the first nine months of 2018, cash provided by financing activities was $72.5 million. The change was primarily driven by net repayments on borrowings in the first nine months of 2019, stemming from improved financial results.

The Company had cash payments for acquisition related contingent consideration of $18.8 million during the first nine months of 2019 and $18.3 million during the first nine months of 2018. The Company anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to sub-bottling fees will be in the range of $25 million to $49 million.

In April 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, 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.

In 2018, the Company sold $150 million aggregate principal amount of senior unsecured notes due in 2030 to NYL Investors LLC (“NYL”) and certain of its affiliates pursuant to a 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, and will mature on March 21, 2030, unless earlier redeemed by the Company. The Company used the proceeds for general corporate purposes.

### Significant Accounting Policies

See Note 1, Note 4 and Note 9 to the condensed consolidated 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 29, 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 condensed consolidated 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 condensed consolidated statements of operations was as follows:

*(in thousands)*

|  | Third Quarter 2019 | 2018 | First Nine Months 2019 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Cost of sales - increase/(decrease) | $2,984 | $640 | $8,779 | $2,843 |
| SD&A expenses - increase/(decrease) | 582 | 50 | (1,403) | (305) |
| **Net impact** | **$3,566** | **$690** | **$7,376** | **$2,538** |

### 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 the Company 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, among others, statements relating to:

- 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 a real estate operating lease commitment will commence during the fourth quarter of 2019 and have a lease term of five years, and that the additional lease liability associated with this lease commitment is expected to be approximately $0.3 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 expectation that it will consolidate two manufacturing plants in the Memphis, Tennessee region by the end of fiscal 2020;
- 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 and that such non-GAAP financial measures allow users to better appreciate the impact of the Company’s information technology systems conversion on the Company’s performance;
- 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 principal payments due in the next 12 months under the term loan facility 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 condensed consolidated financial statements;
- the Company’s belief 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;
- 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 subject to sub-bottling fees, 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 $49 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 expectation that it will not make additional contributions to the two Company-sponsored pension plans during the fourth quarter of 2019;
- the Company’s belief that additions to property, plant and equipment for the remainder of 2019 are expected to be in the range of $50 million to $80 million and that total additions to property, plant and equipment in 2019 are expected to be in the range of $150 million to $180 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 network optimization and cost management;
- the Company’s expectation that its $100 million interest rate swap entered into in July 2019 will not be material to the condensed consolidated balance sheets;
- the Company’s belief that the annualized effective income 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 12 months than the interest rates as of September 29, 2019, interest expense for the next 12 months would increase by approximately $2.1 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 Note 1 to the condensed consolidated 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, 3,805 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 12 months than the interest rates as of September 29, 2019, interest expense for the next 12 months would increase by approximately $2.1 million. This amount was determined by calculating the effect of the hypothetical interest rate on the unhedged portion of the Company’s variable rate debt. This calculated, hypothetical increase in interest expense for the following 12 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 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, 961 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 September 29, 2019.

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 29, 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 Nov 5, 2019.
Source: SEC EDGAR, the filing index for accession 0001564590-19-040437. Last ingested by Listed: Nov 4, 2026, 17:26 ET. No prices; not investment advice.