UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended |
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
COCA‑COLA CONSOLIDATED, INC.
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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(I.R.S. Employer |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 27, 2019, there were
COCA‑COLA CONSOLIDATED, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2019
INDEX
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Page |
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Item 1. |
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2 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
29 |
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Item 3. |
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46 |
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Item 4. |
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47 |
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Item 1. |
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48 |
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Item 1A. |
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48 |
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Item 6. |
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48 |
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49 |
PART I - FINANCIAL INFORMATION
Item 1. |
Financial Statements. |
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Third Quarter |
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First Nine Months |
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(in thousands, except per share data) |
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2019 |
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2018 |
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2019 |
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2018 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, delivery and administrative expenses |
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Income from operations |
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Interest expense, net |
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Other income (expense), net |
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( |
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Gain on exchange transactions |
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- |
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- |
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Income before income taxes |
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Income tax expense |
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Net income |
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Less: Net income attributable to noncontrolling interest |
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Net income attributable to Coca-Cola Consolidated, Inc. |
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$ |
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$ |
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$ |
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$ |
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Basic net income per share based on net income attributable to Coca-Cola Consolidated, Inc.: |
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Common Stock |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of Common Stock shares outstanding |
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Class B Common Stock |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of Class B Common Stock shares outstanding |
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Diluted net income per share based on net income attributable to Coca-Cola Consolidated, Inc.: |
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Common Stock |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of Common Stock shares outstanding – assuming dilution |
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Class B Common Stock |
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$ |
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$ |
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$ |
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$ |
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Weighted average number of Class B Common Stock shares outstanding – assuming dilution |
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Cash dividends per share: |
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Common Stock |
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$ |
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$ |
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$ |
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$ |
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Class B Common Stock |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
2
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Third Quarter |
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First Nine Months |
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(in thousands) |
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2019 |
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2018 |
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2019 |
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2018 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income, net of tax: |
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Defined benefit plans reclassification including pension costs: |
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Actuarial gains |
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Prior service benefits |
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Postretirement benefits reclassification included in benefits costs: |
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Actuarial gains |
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Prior service costs |
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( |
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( |
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( |
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Interest rate swap |
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( |
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- |
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( |
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- |
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Foreign currency translation adjustment |
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( |
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( |
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( |
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( |
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Other comprehensive income, net of tax |
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Comprehensive income |
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Less: Comprehensive income attributable to noncontrolling interest |
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Comprehensive income attributable to Coca-Cola Consolidated, Inc. |
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$ |
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$ |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
3
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data) |
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September 29, 2019 |
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December 30, 2018 |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Accounts receivable, trade |
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Allowance for doubtful accounts |
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( |
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( |
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Accounts receivable from The Coca-Cola Company |
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Accounts receivable, other |
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Inventories |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Right of use assets - operating leases |
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- |
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Leased property under financing or capital leases, net |
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Other assets |
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Goodwill |
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Distribution agreements, net |
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Customer lists and other identifiable intangible assets, net |
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Total assets |
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$ |
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$ |
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LIABILITIES AND EQUITY |
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Current Liabilities: |
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Current portion of obligations under operating leases |
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$ |
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$ |
- |
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Current portion of obligations under financing or capital leases |
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Accounts payable, trade |
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Accounts payable to The Coca-Cola Company |
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Other accrued liabilities |
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Accrued compensation |
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Accrued interest payable |
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Total current liabilities |
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Deferred income taxes |
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Pension and postretirement benefit obligations |
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Other liabilities |
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Noncurrent portion of obligations under operating leases |
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- |
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Noncurrent portion of obligations under financing or capital leases |
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Long-term debt |
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Total liabilities |
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Commitments and Contingencies |
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Equity: |
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Common Stock, $ |
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Class B Common Stock, $ |
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Capital in excess of par value |
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Retained earnings |
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Accumulated other comprehensive loss |
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( |
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( |
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Treasury stock, at cost: Common Stock – |
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( |
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( |
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Treasury stock, at cost: Class B Common Stock – |
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( |
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( |
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Total equity of Coca-Cola Consolidated, Inc. |
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Noncontrolling interest |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
4
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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First Nine Months |
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(in thousands) |
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2019 |
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2018 |
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Cash Flows from Operating Activities: |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation expense from property, plant and equipment and financing or capital leases |
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Fair value adjustment of acquisition related contingent consideration |
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Amortization of intangible assets and deferred proceeds, net |
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Loss on sale of property, plant and equipment |
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Deferred income taxes |
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Impairment of property, plant and equipment |
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Stock compensation expense |
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Amortization of debt costs |
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Gain on exchange transactions |
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- |
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( |
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Change in current assets less current liabilities |
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( |
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( |
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Change in other noncurrent assets |
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Change in other noncurrent liabilities |
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( |
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Other |
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Total adjustments |
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Net cash provided by operating activities |
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$ |
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$ |
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Cash Flows from Investing Activities: |
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Additions to property, plant and equipment (exclusive of acquisitions) |
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$ |
( |
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$ |
( |
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Other distribution agreements |
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( |
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- |
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Investment in CONA Services LLC |
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( |
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( |
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Proceeds from the sale of property, plant and equipment |
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Proceeds from cold drink equipment |
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- |
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Acquisition of distribution territories and regional manufacturing plants, net of cash acquired and purchase price settlements |
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- |
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Net cash used in investing activities |
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$ |
( |
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$ |
( |
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Cash Flows from Financing Activities: |
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Payments on revolving credit facility |
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$ |
( |
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$ |
( |
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Borrowings under revolving credit facility |
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Payments on term loan facility and senior notes |
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( |
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( |
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Proceeds from issuance of senior notes |
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Payments of acquisition related contingent consideration |
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( |
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( |
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Cash dividends paid |
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( |
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( |
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Payments on financing or capital lease obligations |
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( |
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( |
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Debt issuance fees |
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( |
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( |
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Net cash provided by (used in) financing activities |
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$ |
( |
) |
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$ |
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Net decrease in cash |
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$ |
( |
) |
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$ |
( |
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Cash at beginning of period |
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Cash at end of period |
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$ |
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$ |
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Significant noncash investing and financing activities: |
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Right of use assets obtained in exchange for lease obligations |
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$ |
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$ |
- |
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Additions to property, plant and equipment accrued and recorded in accounts payable, trade |
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Issuance of Class B Common Stock in connection with stock award |
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See accompanying notes to condensed consolidated financial statements.
5
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands, except share data) |
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Common Stock |
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Class B Common Stock |
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Capital in Excess of Par Value |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Treasury Stock - Common Stock |
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Treasury Stock - Class B Common Stock |
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Total Equity of Coca-Cola Consolidated, Inc. |
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Non- controlling Interest |
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Total Equity |
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Balance on December 31, 2017 |
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$ |
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$ |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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- |
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- |
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- |
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- |
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|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock ($ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Class B Common Stock ($ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Issuance of |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Balance on September 30, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance on December 30, 2018 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock ($ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Class B Common Stock ($ |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
Issuance of |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
|
|
Reclassification of stranded tax effects |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Balance on September 29, 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
COCA‑COLA CONSOLIDATED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Significant Accounting Policies and New Accounting Pronouncements
The condensed consolidated financial statements include the accounts of Coca‑Cola Consolidated, Inc. and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented:
|
• |
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 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10‑K for 2018 filed with the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant Accounting Policies
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its condensed consolidated financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10‑K for 2018 under the caption “Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements” in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” a discussion of the Company’s most critical accounting policies, which are those the Company believes to be the most important to the portrayal of its financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is contemplated and prior to making such change.
Recently Adopted Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2018‑02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which provides the option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. This standard is required to be applied either in the period of adoption or retrospectively to each period in which the changes in the U.S. federal corporate income tax rate pursuant to the Tax Act are recognized. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and can be early adopted. The Company adopted ASU 2018‑02 in the first quarter of 2019 and recognized a cumulative effect adjustment to the opening balance of retained earnings in 2019. The cumulative effect adjustment increased retained earnings by $
In February 2016, the FASB issued ASU 2016-02, “Leases” (the “lease standard”). The lease standard requires lessees to recognize a right-to-use asset and a lease liability for virtually all leases (other than leases meeting the definition of a short-term lease). The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods beginning the following fiscal year. The Company adopted the lease standard in the first quarter of 2019 using the optional transition method. See Note 9 to the condensed consolidated financial statements for additional information on the Company’s adoption of the lease standard.
7
Recently Issued Pronouncements
In June 2016, the FASB issued ASU 2016‑13, “Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses at the point a loss is probable to occur, rather than expected to occur, which will generally result in earlier recognition of allowances for credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2016‑13 will have on its condensed consolidated financial statements.
2.Related Party Transactions
The Coca‑Cola Company
The Company’s business consists primarily of the production, marketing and distribution of nonalcoholic beverages of The Coca‑Cola Company, which is the sole owner of the formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.
As of September 29, 2019, The Coca‑Cola Company owned approximately
The following table summarizes the significant transactions between the Company and The Coca‑Cola Company:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Payments made by the Company to The Coca-Cola Company for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrate, syrup, sweetener and other purchases |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Customer marketing programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cold drink equipment parts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand investment programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments made by The Coca-Cola Company to the Company for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing funding support payments |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Fountain delivery and equipment repair fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Presence marketing funding support on the Company’s behalf |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilitating the distribution of certain brands and packages to other Coca-Cola bottlers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cold drink equipment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company completed a series of transactions from April 2013 to October 2017 with The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, and Coca‑Cola Bottling Company United, Inc., an independent bottler that is unrelated to the Company, to significantly expand the Company’s distribution and manufacturing operations (the “System Transformation”). The System Transformation included the acquisition and exchange of rights to serve distribution territories and related distribution assets, as well as the acquisition and exchange of regional manufacturing plants and related manufacturing assets.
In fiscal 2017, The Coca‑Cola Company agreed to provide the Company a fee to compensate the Company for the net economic impact of changes made by The Coca‑Cola Company to the authorized pricing on sales of covered beverages produced at certain manufacturing plants owned by Company (the “Legacy Facilities Credit”). The Company immediately recognized the portion of the Legacy Facilities Credit applicable to a regional manufacturing plant divested in fiscal 2017 and the remaining balance of the Legacy Facilities Credit will be amortized as a reduction to cost of sales over a period of
8
Coca‑Cola Refreshments USA, Inc.
The Company, The Coca-Cola Company and CCR entered into a comprehensive beverage agreement on March 31, 2017 (as amended, the “CBA”). Pursuant to the CBA, the Company is required to make quarterly sub-bottling payments to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in distribution territories the Company acquired from CCR as part of the System Transformation, excluding territories the Company acquired in an exchange transaction. These sub-bottling payments are based on gross profit derived from sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, beverage product or certain cross-licensed brands.
Sub-bottling payments to CCR were $
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Current portion of acquisition related contingent consideration |
|
$ |
|
|
|
$ |
|
|
Noncurrent portion of acquisition related contingent consideration |
|
|
|
|
|
|
|
|
Total acquisition related contingent consideration |
|
$ |
|
|
|
$ |
|
|
Upon the conversion of the Company’s then-existing bottling agreements in fiscal 2017 pursuant to the CBA, the Company received a fee from CCR (the “Territory Conversion Fee”). The Territory Conversion Fee was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of
Southeastern Container (“Southeastern”)
The Company is a shareholder of Southeastern, a plastic bottle manufacturing cooperative. The Company accounts for Southeastern as an equity method investment. The Company’s investment in Southeastern, which was classified as other assets in the condensed consolidated balance sheets, was $
South Atlantic Canners, Inc. (“SAC”)
The Company is a shareholder of SAC, a manufacturing cooperative in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights. The Company accounts for SAC as an equity method investment. The Company’s investment in SAC, which was classified as other assets in the condensed consolidated balance sheets, was $
The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Proceeds from management fees received from SAC were $
Coca‑Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”)
Along with other Coca‑Cola bottlers in the United States and Canada, the Company is a member of CCBSS, a company formed to provide certain procurement and other services with the intention of enhancing the efficiency and competitiveness of the Coca‑Cola bottling system. The Company accounts for CCBSS as an equity method investment and its investment in CCBSS is not material.
CCBSS negotiates the procurement for the majority of the Company’s raw materials, excluding concentrate, and the Company receives a rebate from CCBSS for the purchase of these raw materials. The Company had rebates due from CCBSS of $
In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $
9
CONA Services LLC (“CONA”)
The Company is a member of CONA, an entity formed with The Coca‑Cola Company and certain other Coca‑Cola bottlers to provide business process and information technology services to its members. The Company accounts for CONA as an equity method investment. The Company’s investment in CONA, which was classified as other assets in the condensed consolidated balance sheets, was $
Pursuant to an amended and restated master services agreement with CONA, the Company is authorized to use the Coke One North America system (the “CONA System”), a uniform information technology system developed to promote operational efficiency and uniformity among North American Coca‑Cola bottlers. In exchange for the Company’s rights to use the CONA System and receive CONA-related services, it is charged service fees by CONA. The Company incurred CONA service fees of $
Related Party Leases
The Company leases its headquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation, of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, is the majority stockholder and Morgan H. Everett, Senior Vice President and a director of the Company, is a minority stockholder. The annual base rent the Company is obligated to pay under this lease agreement is subject to adjustment for increases in the Consumer Price Index (the “CPI”) and the lease expires on
The Company leases the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina from Harrison Limited Partnership One, which is directly and indirectly owned by trusts of which J. Frank Harrison, III, and Sue Anne H. Wells, a director of the Company, are trustees and beneficiaries and of which Morgan H. Everett is a permissible, discretionary beneficiary. The annual base rent the Company is obligated to pay under this lease agreement is subject to an adjustment for an inflation factor and the lease expires on
A summary of rental payments related to these leases is as follows:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Company headquarters |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Snyder Production Center |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.Segments
The Company evaluates segment reporting in accordance with the FASB 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
10
The Company’s segment results are as follows:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages(1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eliminations(2) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Consolidated net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated income from operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
All Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
4.Revenue Recognition
The Company offers a range of nonalcoholic beverage products and flavors designed to meet the demands of its 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.
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 Company typically collects payment from customers
The Company’s sales are divided into
The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time (“point in time”). Point in time sales accounted for approximately
11
Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time (“over time”). Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the Company’s condensed consolidated financial statements.
The following table represents a disaggregation of revenue from contracts with customers:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Point in time net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages - point in time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total point in time net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over time net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonalcoholic Beverages - over time |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
All Other - over time |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total over time net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company participates in various sales programs with The Coca‑Cola Company, other beverage companies and customers to increase the sale of its products. Programs negotiated with customers include arrangements under which allowances can be earned for attaining agreed-upon sales levels. The cost of these various sales incentives are not considered a separate performance obligation and are included as deductions to net sales.
Allowance payments made to customers can be conditional on the achievement of sales volume targets and/or marketing commitments. Payments made in advance are recorded as prepayments and amortized in the condensed consolidated statements of operations over the relevant period for which the customer commitment is made. In the event there is no separate identifiable benefit or the fair value of such benefit cannot be established, the amortization of the prepayment is included as a reduction to net sales.
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. Management believes the effect on previously reported financial statements is not material. In addition, management believes the revised presentation provides consistency with other companies that operate in the beverage industry. Net sales and SD&A expenses were revised by $
The majority of the Company’s contracts include multiple performance obligations related to the delivery of specifically identifiable products, which generally have a duration of less than one year. For sales contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using stated contractual price, which represents the standalone selling price of each distinct good sold under the contract. Generally, the Company’s service contracts have a single performance obligation.
The Company sells its products and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company evaluates the collectability of its trade accounts receivable based on a number of factors, including the Company’s historic collections pattern and changes to a specific customer’s ability to meet its financial obligations. The Company has established an allowance for doubtful accounts to adjust the recorded receivable to the estimated amount the Company believes will ultimately be collected.
The nature of the Company’s contracts gives rise to several types of variable consideration, including prospective and retrospective rebates. The Company accounts for its prospective and retrospective rebates using the expected value method, which estimates the net price to the customer based on the customer’s expected annual sales volume projections.
12
The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than
5.Net Income Per Share
The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands, except per share data) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Numerator for basic and diluted net income per Common Stock and Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Coca-Cola Consolidated, Inc. |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Less dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total undistributed earnings |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock undistributed earnings – basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Class B Common Stock undistributed earnings – basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total undistributed earnings – basic |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock undistributed earnings – diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Class B Common Stock undistributed earnings – diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total undistributed earnings – diluted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock |
|
$ |
1,786 |
|
|
$ |
1,787 |
|
|
$ |
5,356 |
|
|
$ |
5,357 |
|
Common Stock undistributed earnings – basic |
|
|
8,123 |
|
|
|
17,422 |
|
|
|
11,066 |
|
|
|
24 |
|
Numerator for basic net income per Common Stock share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic net income per Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Class B Common Stock |
|
$ |
558 |
|
|
$ |
556 |
|
|
$ |
1,670 |
|
|
$ |
1,657 |
|
Class B Common Stock undistributed earnings – basic |
|
|
2,539 |
|
|
|
5,399 |
|
|
|
3,453 |
|
|
|
8 |
|
Numerator for basic net income per Class B Common Stock share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Common Stock |
|
$ |
1,786 |
|
|
$ |
1,787 |
|
|
$ |
5,356 |
|
|
$ |
5,357 |
|
Dividends on Class B Common Stock assumed converted to Common Stock |
|
|
558 |
|
|
|
556 |
|
|
|
1,670 |
|
|
|
1,657 |
|
Common Stock undistributed earnings – diluted |
|
|
10,662 |
|
|
|
22,821 |
|
|
|
14,519 |
|
|
|
32 |
|
Numerator for diluted net income per Common Stock share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for diluted net income per Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on Class B Common Stock |
|
$ |
558 |
|
|
$ |
556 |
|
|
$ |
1,670 |
|
|
$ |
1,657 |
|
Class B Common Stock undistributed earnings – diluted |
|
|
2,573 |
|
|
|
5,494 |
|
|
|
3,500 |
|
|
|
8 |
|
Numerator for diluted net income per Class B Common Stock share |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net income per Common Stock and Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock weighted average shares outstanding – basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock weighted average shares outstanding – basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands, except per share data) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Denominator for diluted net income per Common Stock and Class B Common Stock share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock weighted average shares outstanding – diluted (assumes conversion of Class B Common Stock to Common Stock) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common Stock weighted average shares outstanding – diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Class B Common Stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Class B Common Stock |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
NOTES TO TABLE
(1) |
For purposes of the diluted net income per share computation for Common Stock, all shares of Class B Common Stock are assumed to be converted; therefore, |
(2) |
For purposes of the diluted net income per share computation for Class B Common Stock, weighted average shares of Class B Common Stock are assumed to be outstanding for the entire period and not converted. |
(3) |
For periods presented during which the Company has net income, the denominator for diluted net income per share for Common Stock and Class B Common Stock included the dilutive effect of shares relative to the Long-Term Performance Equity Plan and the Performance Unit Award Agreement. For periods presented during which the Company has net loss, the unvested performance units granted pursuant to the Long-Term Performance Equity Plan and the Performance Unit Award Agreement are excluded from the calculation of diluted net loss per share, as the effect of these awards would be anti-dilutive. See Note 21 to the condensed consolidated financial statements for additional information on the Long-Term Performance Equity Plan and the Performance Unit Award Agreement. |
(4) |
The Long-Term Performance Equity Plan awards may be settled in cash and/or shares of the Company’s Class B Common Stock. Once an election has been made to settle an award in cash, the dilutive effect of shares relative to such award are prospectively removed from the denominator for the calculation of diluted net income per share. |
(5) |
The Company does |
6.Inventories
Inventories consisted of the following:
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Finished products |
|
$ |
|
|
|
$ |
|
|
Manufacturing materials |
|
|
|
|
|
|
|
|
Plastic shells, plastic pallets and other inventories |
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
|
|
|
$ |
|
|
7.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Repair parts |
|
$ |
|
|
|
$ |
|
|
Prepayments for sponsorship contracts |
|
|
|
|
|
|
|
|
Current portion of income taxes |
|
|
|
|
|
|
|
|
Prepaid marketing |
|
|
|
|
|
|
|
|
Prepaid software |
|
|
|
|
|
|
|
|
Other prepaid expenses and other current assets |
|
|
|
|
|
|
|
|
Total prepaid expenses and other current assets |
|
$ |
|
|
|
$ |
|
|
14
8.Property, Plant and Equipment, Net
The principal categories and estimated useful lives of property, plant and equipment, net were as follows:
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
|
Estimated Useful Lives |
||
Land |
|
$ |
|
|
|
$ |
|
|
|
|
Buildings |
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
|
|
|
|
|
|
|
|
Transportation equipment |
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures |
|
|
|
|
|
|
|
|
|
|
Cold drink dispensing equipment |
|
|
|
|
|
|
|
|
|
|
Leasehold and land improvements |
|
|
|
|
|
|
|
|
|
|
Software for internal use |
|
|
|
|
|
|
|
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, at cost |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
|
|
|
$ |
|
|
|
|
9.Leases
The Company leases office and warehouse space, machinery and other equipment under noncancelable operating lease agreements and also leases certain warehouse space under financing lease agreements. The Company adopted the lease standard using the optional transition method on December 31, 2018, the transition date, and elected to adopt the following practical expedients as accounting policy upon initial adoption of the lease standard:
• |
Short-term lease exception: |
• |
Election to not separate non-lease components: Allows the Company to not separate lease and non-lease components and to account for both components as a single component, recognized on its condensed consolidated balance sheets. |
• |
Package of practical expedients for transition: Allows the Company to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) any initial direct costs for any existing leases as of the transition date. |
• |
Additional transition method/relief: Allows the Company to apply the transition requirements in the lease standard as of the transition date, with any impact of initially applying the lease standard recognized as a cumulative effect adjustment to retained earnings in the period of adoption. This also requires the Company to maintain previous disclosure requirements for comparative periods. |
Upon adoption of the lease standard on December 31, 2018, the Company recorded right of use assets for operating leases of $
The Company used the following policies and assumptions to evaluate its population of leases:
• |
Determining a lease: The Company assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys the Company’s right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right of use assets and associated liabilities are recognized at the commencement date and initially measured based on the present value of lease payments over the defined lease term. |
• |
Allocating lease and non-lease components: The Company has elected the practical expedient to not separate lease and non-lease components for certain classes of underlying assets. The Company has equipment and vehicle lease agreements, which generally have the lease and associated non-lease components accounted for as a single lease component. The Company has real estate lease agreements with lease and non-lease components, which are generally accounted for separately where applicable. |
• |
Discount rate: The Company calculates the discount rate based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company calculates an incremental borrowing rate using a portfolio approach. The incremental borrowing rate is calculated using the contractual lease term and the Company’s borrowing rate. |
• |
Lease term: The Company does not recognize leases with a contractual term of less than 12 months on its condensed consolidated balance sheets. Lease expense for these short-term leases is expensed on a straight-line basis over the lease term. |
15
• |
Rent increases or escalation clauses: Certain leases contain scheduled rent increases or escalation clauses, which can be based on the CPI or other rates. The Company assesses each contract individually and applies the appropriate variable payments based on the terms of the agreement. |
• |
Renewal options and/or purchase options: Certain leases include renewal options to extend the lease term and/or purchase options to purchase the leased asset. The Company assesses these options using a threshold of reasonably certain, which is a high threshold and, therefore, the majority of the Company’s leases do not include renewal periods or purchase options for the measurement of the right of use asset and the associated lease liability. For leases the Company is reasonably certain to renew or purchase, those options are included within the lease term and, therefore, included in the measurement of the right of use asset and the associated lease liability. |
• |
Option to terminate: Certain leases include the option to terminate the lease prior to its scheduled expiration. This allows a contractually bound party to terminate its obligation under the lease contract, typically in return for an agreed-upon financial consideration. The terms and conditions of the termination options vary by contract. |
• |
Residual value guarantees, restrictions or covenants: The Company’s lease agreements do not contain residual value guarantees, restrictions or covenants. |
Following is a summary of the weighted average remaining lease term and weighted average discount rate for the Company’s population of leases as of September 29, 2019:
|
|
Operating Leases |
|
Financing Leases |
|
||
Weighted average remaining lease term |
|
|
|
|
|
||
Weighted average discount rate |
|
|
|
% |
|
|
% |
As of September 29, 2019, the Company had one real estate operating lease commitment that had not yet commenced. This lease commitment is expected to commence during the fourth quarter of 2019 and have a lease term of
Following is a summary of balances related to the Company’s lease portfolio within the Company’s condensed consolidated statements of operations for the third quarter and the first nine months of 2019:
(in thousands) |
|
Third Quarter 2019 |
|
|
First Nine Months 2019 |
|
||
Cost of sales impact: |
|
|
|
|
|
|
|
|
Operating leases costs |
|
$ |
|
|
|
$ |
|
|
Short-term and variable leases |
|
|
|
|
|
|
|
|
Depreciation expense from financing leases(1) |
|
|
|
|
|
|
|
|
Total cost of sales impact |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Selling, delivery and administrative expenses impact: |
|
|
|
|
|
|
|
|
Operating leases costs |
|
$ |
|
|
|
$ |
|
|
Short-term and variable leases |
|
|
|
|
|
|
|
|
Depreciation expense from financing leases(1) |
|
|
|
|
|
|
|
|
Total selling, delivery and administrative expenses impact |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net impact: |
|
|
|
|
|
|
|
|
Interest expense on financing lease obligations(2) |
|
$ |
|
|
|
$ |
|
|
Total interest expense, net impact |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Total lease cost |
|
$ |
|
|
|
$ |
|
|
(1) |
|
(2) |
|
16
The future minimum lease payments related to the Company’s lease portfolio include renewal options the Company has determined to be reasonably assured and exclude payments to landlords for real estate taxes and common area maintenance.
(in thousands) |
|
Operating Leases |
|
|
Financing Leases |
|
|
Total |
|
|||
Remainder of 2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments including interest |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Less: Amounts representing interest |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease principal payments |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion of lease liabilities - operating and financing leases |
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent portion of lease liabilities - operating and financing leases |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Following is a summary of future minimum lease payments for all noncancelable operating leases and capital leases as of December 30, 2018:
(in thousands) |
|
Operating Leases |
|
|
Capital Leases |
|
|
Total |
|
|||
2019 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments including interest |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Less: Amounts representing interest |
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease principal payments |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Current portion of lease liabilities - capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent portion of lease liabilities - capital leases |
|
|
|
|
|
$ |
|
|
|
|
|
|
Following is a summary of balances related to the Company’s lease portfolio within the Company’s condensed consolidated statement of cash flows for the first nine months of 2019:
(in thousands) |
|
First Nine Months 2019 |
|
|
Cash flows from operating activities impact: |
|
|
|
|
Operating leases |
|
$ |
|
|
Interest payments on financing lease obligations(1) |
|
|
|
|
Total cash flows from operating activities impact |
|
$ |
|
|
|
|
|
|
|
Cash flows from financing activities impact: |
|
|
|
|
Principal payments on financing lease obligations(1) |
|
$ |
|
|
Total cash flows from financing activities impact |
|
$ |
|
|
(1) |
|
17
10.Goodwill
A reconciliation of the activity for goodwill for the first nine months of 2019 and the first nine months of 2018 is as follows:
|
|
First Nine Months |
|
|||||
(in thousands) |
|
2019 |
|
|
2018 |
|
||
Beginning balance - goodwill |
|
$ |
|
|
|
$ |
|
|
Measurement period adjustments(1) |
|
|
|
|
|
|
( |
) |
Ending balance - goodwill |
|
$ |
|
|
|
$ |
|
|
(1) |
|
The Company’s goodwill resides entirely within the Nonalcoholic Beverages segment. The Company performs its annual impairment test of goodwill as of the first day of the fourth quarter of each fiscal year. During the first nine months of 2019, the Company did not experience any triggering events or changes in circumstances indicating the carrying amount of the Company’s goodwill exceeded its fair value.
11.Distribution Agreements, Net
Distribution agreements, net, which are amortized on a straight-line basis and have an estimated useful life of
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Distribution agreements at cost |
|
$ |
|
|
|
$ |
|
|
Less: Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Distribution agreements, net |
|
$ |
|
|
|
$ |
|
|
A reconciliation of the activity for distribution agreements, net for the first nine months of 2019 and the first nine months of 2018 is as follows:
|
|
First Nine Months |
|
|||||
(in thousands) |
|
2019 |
|
|
2018 |
|
||
Beginning balance - distribution agreements, net |
|
$ |
|
|
|
$ |
|
|
Other distribution agreements |
|
|
( |
) |
|
|
|
|
Measurement period adjustments(1) |
|
|
- |
|
|
|
|
|
Additional accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Ending balance - distribution agreements, net |
|
$ |
|
|
|
$ |
|
|
(1) |
|
12.Customer Lists and Other Identifiable Intangible Assets, Net
Customer lists and other identifiable intangible assets, net, which are amortized on a straight-line basis and have an estimated useful life of
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Customer lists and other identifiable intangible assets at cost |
|
$ |
|
|
|
$ |
|
|
Less: Accumulated amortization |
|
|
( |
) |
|
|
( |
) |
Customer lists and other identifiable intangible assets, net |
|
$ |
|
|
|
$ |
|
|
18
13.Other Accrued Liabilities
Other accrued liabilities consisted of the following:
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Accrued insurance costs |
|
$ |
|
|
|
$ |
|
|
Accrued marketing costs |
|
|
|
|
|
|
|
|
Current portion of acquisition related contingent consideration |
|
|
|
|
|
|
|
|
Employee and retiree benefit plan accruals |
|
|
|
|
|
|
|
|
Checks and transfers yet to be presented for payment from zero balance cash accounts |
|
|
|
|
|
|
|
|
Accrued taxes (other than income taxes) |
|
|
|
|
|
|
|
|
Commodity hedges at fair market value |
|
|
|
|
|
|
|
|
Current deferred proceeds from Territory Conversion Fee |
|
|
|
|
|
|
|
|
All other accrued expenses |
|
|
|
|
|
|
|
|
Total other accrued liabilities |
|
$ |
|
|
|
$ |
|
|
14.Derivative Financial Instruments
The Company is subject to the risk of increased costs arising from adverse changes in certain commodity prices. In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivative instruments. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recorded at fair value as either assets or liabilities in the Company’s condensed consolidated balance sheets. These derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. Derivative instruments held are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. Settlements of derivative agreements are included in cash flows from operating activities on the Company’s condensed consolidated statements of cash flows.
The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company would be exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these parties.
The following table summarizes pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification of such changes in the condensed consolidated statements of operations.
|
|
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
Classification of Gain (Loss) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Commodity hedges |
|
Cost of sales |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Commodity hedges |
|
Selling, delivery and administrative expenses |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Total gain (loss) |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
The following table summarizes the fair values and classification in the condensed consolidated balance sheets of derivative instruments held by the Company:
(in thousands) |
|
Balance Sheet Classification |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Commodity hedges at fair market value |
|
Other accrued liabilities |
|
$ |
|
|
|
$ |
|
|
Commodity hedges at fair market value |
|
Other liabilities |
|
|
|
|
|
|
- |
|
Total liabilities |
|
|
|
$ |
|
|
|
$ |
|
|
The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. Accordingly, the net amounts of derivative assets are recognized in either prepaid expenses and other current assets or other assets in the Company’s condensed consolidated balance sheets and the net amounts of derivative liabilities are recognized in other accrued liabilities or other liabilities in the condensed consolidated balance sheets.
19
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Gross derivative assets |
|
$ |
|
|
|
$ |
|
|
Gross derivative liabilities |
|
|
|
|
|
|
|
|
The following table summarizes the Company’s outstanding commodity derivative agreements:
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Notional amount of outstanding commodity derivative agreements |
|
$ |
|
|
|
$ |
|
|
Latest maturity date of outstanding commodity derivative agreements |
|
|
|
|
|
|
15.Fair Values of Financial Instruments
GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:
• |
Level 1: Quoted market prices in active markets for identical assets or liabilities. |
• |
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. |
• |
Level 3: Unobservable inputs that are not corroborated by market data. |
The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were
Financial Instrument |
|
Fair Value Level |
|
Method and Assumptions |
Deferred compensation plan assets and liabilities |
|
Level 1 |
|
The fair value of the Company’s non-qualified deferred compensation plan for certain executives and other highly compensated employees is based on the fair values of associated assets and liabilities, which are held in mutual funds and are based on the quoted market value of the securities held within the mutual funds. |
Commodity hedging agreements |
|
Level 2 |
|
The fair values of the Company’s commodity hedging agreements are based on current settlement values at each balance sheet date. The fair values of the commodity hedging agreements at each balance sheet date represent the estimated amounts the Company would have received or paid upon termination of these agreements. The Company’s credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair value of derivative financial instruments. |
Nonpublic variable rate debt |
|
Level 2 |
|
The carrying amounts of the Company’s nonpublic variable rate debt approximate their fair values due to variable interest rates with short reset periods. |
Nonpublic fixed rate debt |
|
Level 2 |
|
The fair values of the Company’s nonpublic fixed rate debt are based on estimated current market prices. |
Public debt securities |
|
Level 2 |
|
The fair values of the Company’s public debt securities are based on estimated current market prices. |
Acquisition related contingent consideration |
|
Level 3 |
|
The fair values of acquisition related contingent consideration are based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data. |
20
The following tables summarize, by assets and liabilities, the carrying amounts and fair values by level of the Company’s deferred compensation plan, commodity hedging agreements, debt and acquisition related contingent consideration:
|
|
September 29, 2019 |
|
|||||||||||||||||
|
|
Carrying |
|
|
Total |
|
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|||||
(in thousands) |
|
Amount |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Commodity hedging agreements |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Nonpublic variable rate debt |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Nonpublic fixed rate debt |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Public debt securities |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Acquisition related contingent consideration |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
December 30, 2018 |
|
|||||||||||||||||
|
|
Carrying |
|
|
Total |
|
|
Fair Value |
|
|
Fair Value |
|
|
Fair Value |
|
|||||
(in thousands) |
|
Amount |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
- |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation plan liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
Commodity hedging agreements |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Nonpublic variable rate debt |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Nonpublic fixed rate debt |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Public debt securities |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
Acquisition related contingent consideration |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
The acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC.
The future expected sub-bottling payments extend through the life of the applicable distribution assets acquired in each System Transformation transaction, which is generally
The acquisition related contingent consideration is the Company’s only Level 3 asset or liability. A reconciliation of the Level 3 activity is as follows:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Beginning balance - Level 3 liability |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Measurement period adjustments(1) |
|
|
- |
|
|
|
( |
) |
|
|
- |
|
|
|
|
|
Payments of acquisition related contingent consideration |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Reclassification to current payables |
|
|
( |
) |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Increase (decrease) in fair value |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Ending balance - Level 3 liability |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
(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. |
21
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. These fair value adjustments were recorded in other income (expense), net in the condensed consolidated statements of operations.
The anticipated amount the Company could pay annually under acquisition related contingent consideration arrangements is expected to be in the range of $
16.Income Taxes
The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was
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
The Company had uncertain tax positions, including accrued interest, of $
Prior tax years beginning in year
17.Pension and Postretirement Benefit Obligations
Pension Plans
There are
The components of net periodic pension cost were as follows:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Recognized net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company contributed $
22
Postretirement Benefits
The Company provides postretirement benefits for a portion of its current employees. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during covered employees’ periods of active service. The Company does not pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.
The components of net periodic postretirement benefit cost were as follows:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized net actuarial loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net periodic postretirement benefit cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
18.Other Liabilities
Other liabilities consisted of the following:
(in thousands) |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
||
Noncurrent portion of acquisition related contingent consideration |
|
$ |
|
|
|
$ |
|
|
Accruals for executive benefit plans |
|
|
|
|
|
|
|
|
Noncurrent deferred proceeds from Territory Conversion Fee |
|
|
|
|
|
|
|
|
Noncurrent deferred proceeds from Legacy Facilities Credit |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Total other liabilities |
|
$ |
|
|
|
$ |
|
|
19.Debt
Following is a summary of the Company’s debt:
(in thousands) |
|
Maturity Date |
|
Interest Rate |
|
|
Interest Paid |
|
Public or Nonpublic |
|
September 29, 2019 |
|
|
December 30, 2018 |
|
|||
Senior notes(1) |
|
|
|
|
|
|
|
|
Public |
|
$ |
- |
|
|
$ |
|
|
|
Term loan facility(1) |
|
|
|
|
|
|
|
|
Nonpublic |
|
|
|
|
|
|
|
|
|
Senior notes |
|
|
|
|
|
|
|
|
Nonpublic |
|
|
|
|
|
|
|
|
|
Revolving credit facility(2) |
|
|
|
|
|
|
|
|
Nonpublic |
|
|
|
|
|
|
|
|
|
Senior notes |
|
|
|
|
|
|
|
|
Public |
|
|
|
|
|
|
|
|
|
Senior notes |
|
|
|
|
|
|
|
|
Nonpublic |
|
|
|
|
|
|
- |
|
|
Senior notes |
|
|
|
|
|
|
|
|
Nonpublic |
|
|
|
|
|
|
|
|
|
Unamortized discount on senior notes(3) |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
( |
) |
Unamortized discount on senior notes(3) |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
(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 Company’s revolving credit facility has an aggregate maximum borrowing capacity of $ |
(3) |
The senior notes due in 2019 were issued at |
23
The Company mitigates its financing risk by using multiple financial institutions and only entering into credit arrangements with institutions with investment grade credit ratings. The Company monitors counterparty credit ratings on an ongoing basis.
In April 2019, the Company sold $
In July 2019, the Company entered into a $
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 agreements under which the Company’s nonpublic debt were issued 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
20.Commitments and Contingencies
Manufacturing Cooperatives
The Company is obligated to purchase at least
The following table summarizes the Company’s purchases from these manufacturing cooperatives:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Purchases from Southeastern |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Purchases from SAC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchases from manufacturing cooperatives |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
The Company guarantees a portion of SAC’s debt, which expires at various dates through 2021. The amounts guaranteed were $
24
Other Commitments and Contingencies
The Company has standby letters of credit, primarily related to its property and casualty insurance programs. These letters of credit totaled $
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of September 29, 2019, the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $
The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes that the ultimate disposition of these matters will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.
The Company is subject to audits by tax authorities in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolved with the authorities or potentially through the courts. Management believes the Company has adequately provided for any assessments likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the condensed consolidated financial statements.
21.Capital Transactions
During the first quarter of each year presented, J. Frank Harrison, III received shares of the Company’s Class B Common Stock in connection with his services as Chairman of the Board of Directors and Chief Executive Officer of the Company during the prior year, pursuant to a ten-year performance unit award agreement approved in 2008 (the “Performance Unit Award Agreement”). The Performance Unit Award Agreement expired at the end of
|
|
Fiscal Year |
|
|||||
|
|
2019 |
|
|
2018 |
|
||
Date of approval for award |
|
|
|
|
|
|
||
Fiscal year of service covered by award |
|
|
|
|
|
|
||
Shares settled in cash to satisfy tax withholding obligations |
|
|
|
|
|
|
|
|
Increase in Class B Common Stock shares outstanding |
|
|
|
|
|
|
|
|
Total Class B Common Stock awarded |
|
|
|
|
|
|
|
|
Compensation expense for the awards issued pursuant to the Performance Unit Award Agreement, recognized based on the closing price of the Company’s Common Stock on the last trading day prior to the end of each fiscal period, was $
In 2018, the Compensation Committee of the Company’s Board of Directors (the “Committee”) and the Company’s stockholders approved a long-term performance equity plan (the “Long-Term Performance Equity Plan”), which compensates J. Frank Harrison, III based on the Company’s performance. The Long-Term Performance Equity Plan succeeded the Performance Unit Award Agreement upon its expiration. Awards granted under the Long-Term Performance Equity Plan are earned based on the Company’s attainment during a performance period of certain performance measures, each as specified by the Committee. These awards may be settled in cash and/or shares of the Company’s Class B Common Stock, based on the average of the closing prices of the Company’s Common Stock during the last 20 trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which is included in SD&A expenses on the condensed consolidated statements of operations, was $
22.Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (“AOCI(L)”) is comprised of adjustments relative to the Company’s pension and postretirement medical benefit plans and foreign currency translation adjustments required for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.
25
A summary of AOCI(L) for the third quarter of 2019 and the third quarter of 2018 is as follows:
(in thousands) |
|
June 30, 2019 |
|
|
Pre-tax Activity |
|
|
Tax Effect |
|
|
September 29, 2019 |
|
||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
Prior service costs |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Prior service costs |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Interest rate swap |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Foreign currency translation adjustment |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Reclassification of stranded tax effects |
|
|
( |
) |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
(in thousands) |
|
July 1, 2018 |
|
|
Pre-tax Activity |
|
|
Tax Effect |
|
|
September 30, 2018 |
|
||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
Prior service costs |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Prior service costs |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Total |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
A summary of AOCI(L) for the first nine months of 2019 and the first nine months of 2018 is as follows:
(in thousands) |
|
December 30, 2018 |
|
|
Pre-tax Activity |
|
|
Tax Effect |
|
|
September 29, 2019 |
|
||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
Prior service costs |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Prior service costs |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Interest rate swap |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Foreign currency translation adjustment |
|
|
- |
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
Reclassification of stranded tax effects |
|
|
- |
|
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Total |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
(in thousands) |
|
December 31, 2017 |
|
|
Pre-tax Activity |
|
|
Tax Effect |
|
|
September 30, 2018 |
|
||||
Net pension activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
Prior service costs |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Net postretirement benefits activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
( |
) |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Prior service costs |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
Total |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
26
A summary of the impact of AOCI(L) on certain statements of operations line items is as follows:
|
|
Third Quarter 2019 |
|
|||||||||||||||||
(in thousands) |
|
Net Pension Activity |
|
|
Net Postretirement Benefits Activity |
|
|
Interest Rate Swap |
|
|
Foreign Currency Translation Adjustment |
|
|
Total |
|
|||||
Cost of sales |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
Selling, delivery and administrative expenses |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Subtotal pre-tax |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Income tax expense |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Total after tax effect |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
Third Quarter 2018 |
|
|||||||||||||
(in thousands) |
|
Net Pension Activity |
|
|
Net Postretirement Benefits Activity |
|
|
Foreign Currency Translation Adjustment |
|
|
Total |
|
||||
Cost of sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Selling, delivery and administrative expenses |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Subtotal pre-tax |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Total after tax effect |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
|
|
First Nine Months 2019 |
|
|||||||||||||||||
(in thousands) |
|
Net Pension Activity |
|
|
Net Postretirement Benefits Activity |
|
|
Interest Rate Swap |
|
|
Foreign Currency Translation Adjustment |
|
|
Total |
|
|||||
Cost of sales |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
|
|
Selling, delivery and administrative expenses |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Subtotal pre-tax |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Income tax expense |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
Total after tax effect |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
|
First Nine Months 2018 |
|
|||||||||||||
(in thousands) |
|
Net Pension Activity |
|
|
Net Postretirement Benefits Activity |
|
|
Foreign Currency Translation Adjustment |
|
|
Total |
|
||||
Cost of sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
- |
|
|
$ |
|
|
Selling, delivery and administrative expenses |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Subtotal pre-tax |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
Total after tax effect |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
27
23.Supplemental Disclosures of Cash Flow Information
Changes in current assets and current liabilities affecting cash flows were as follows:
|
|
First Nine Months |
|
|||||
(in thousands) |
|
2019 |
|
|
2018 |
|
||
Accounts receivable, trade, net |
|
$ |
( |
) |
|
$ |
( |
) |
Accounts receivable from The Coca-Cola Company |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, other |
|
|
( |
) |
|
|
|
|
Inventories |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
( |
) |
|
|
|
|
Accounts payable, trade |
|
|
|
|
|
|
|
|
Accounts payable to The Coca-Cola Company |
|
|
|
|
|
|
( |
) |
Other accrued liabilities |
|
|
( |
) |
|
|
( |
) |
Accrued compensation |
|
|
( |
) |
|
|
( |
) |
Accrued interest payable |
|
|
|
|
|
|
|
|
Change in current assets less current liabilities (exclusive of acquisitions) |
|
$ |
( |
) |
|
$ |
( |
) |
28
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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
29
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
30
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:
|
|
Third Quarter |
|
|
|
|
|
|||||
(in thousands) |
|
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. |
31
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:
|
|
Third Quarter |
|
|
|
|||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
% Change |
||
Bottle/can sales: |
|
|
|
|
|
|
|
|
|
|
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:
|
|
Bottle/Can Sales Volume |
|
|
|
|
|
|||||
|
|
Third Quarter |
|
|
Bottle/Can Sales |
|
||||||
Product Category |
|
2019 |
|
|
2018 |
|
|
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.
32
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.
33
Other Income (Expense), Net
A summary of other income (expense), net is as follows:
|
|
Third Quarter |
|
|||||
(in thousands) |
|
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.
34
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:
|
|
First Nine Months |
|
|
|
|
|
|||||
(in thousands) |
|
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:
|
|
First Nine Months |
|
|
|
|||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
% Change |
||
Bottle/can sales: |
|
|
|
|
|
|
|
|
|
|
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:
|
|
Bottle/Can Sales Volume |
|
|
|
|
|
|||||
|
|
First Nine Months |
|
|
Bottle/Can Sales |
|
||||||
Product Category |
|
2019 |
|
|
2018 |
|
|
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:
|
|
First Nine Months |
|
|||||
|
|
2019 |
|
|
2018 |
|
||
Approximate percent of the Company’s total bottle/can sales volume: |
|
|
|
|
|
|
|
|
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:
|
|
First Nine Months |
|
|||||
(in thousands) |
|
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.
37
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:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
2019 |
|
|
2018 |
|
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
38
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):
|
|
Third Quarter 2019 |
|
|||||||||||||||||||||
(in thousands, except per share data) |
|
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 |
|
|
|
Third Quarter 2018 |
|
|||||||||||||||||||||
(in thousands, except per share data) |
|
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 |
|
|
|
First Nine Months 2019 |
|
|||||||||||||||||||||
(in thousands, except per share data) |
|
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
|
|
First Nine Months 2018 |
|
|||||||||||||||||||||
(in thousands, except per share data) |
|
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. |
40
|
• |
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
41
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:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
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. |
42
Cash Sources and Uses
A summary of cash-based activity is as follows:
|
|
First Nine Months |
|
|||||
(in thousands) |
|
2019 |
|
|
2018 |
|
||
Cash Sources: |
|
|
|
|
|
|
|
|
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.
43
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:
|
|
Third Quarter |
|
|
First Nine Months |
|
||||||||||
(in thousands) |
|
2019 |
|
|
2018 |
|
|
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
44
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; |
45
|
• |
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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
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.
46
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.
Item 4.Controls and Procedures.
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.
47
PART II - OTHER INFORMATION
Item 1. |
Legal Proceedings. |
The Company is from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims and proceedings, the Company records reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. The Company does not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on its results of operations, financial position or cash flows. The Company maintains liability insurance for certain risks that is subject to certain self-insurance limits.
Item 1A. |
Risk Factors. |
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.
Item 6. |
Exhibits. |
Exhibit No. |
|
Description |
|
Incorporated by Reference or Filed/Furnished Herewith |
3.1 |
|
|
Exhibit 3.1 to the Company’s Quarterly Report on Form 10‑Q for the quarter ended July 2, 2017 (File No. 0-9286). |
|
3.2 |
|
Certificate of Amendment to the Restated Certificate of Incorporation of the Company. |
|
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 2, 2019 (File No. 0-9286). |
3.3 |
|
|
Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 2, 2019 (File No. 0-9286). |
|
10.1* |
|
|
Filed herewith. |
|
10.2* |
|
|
Filed herewith. |
|
10.3** |
|
|
Filed herewith. |
|
31.1 |
|
|
Filed herewith. |
|
31.2 |
|
|
Filed herewith. |
|
32 |
|
|
Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K. |
|
101.INS |
|
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
Filed herewith. |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document. |
|
Filed herewith. |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
Filed herewith. |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
Filed herewith. |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
Filed herewith. |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
Filed herewith. |
104 |
|
Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
Filed herewith. |
* Indicates a management contract or compensatory plan or arrangement.
** Certain confidential portions of this exhibit have been redacted in accordance with Item 601(b)(10) of Regulation S‑K.
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
COCA‑COLA CONSOLIDATED, INC. |
|
|
(REGISTRANT) |
|
|
|
|
Date: November 5, 2019 |
By: |
/s/ F. Scott Anthony |
|
|
F. Scott Anthony |
|
|
Executive Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer of the Registrant) |
|
|
|
|
|
|
|
|
|
|
|
|
Date: November 5, 2019 |
By: |
/s/ William J. Billiard |
|
|
William J. Billiard |
|
|
Senior Vice President and Chief Accounting Officer |
|
|
(Principal Accounting Officer of the Registrant) |
|
|
|
49