10-K 1 coke-10k_20171231.htm 10-K coke-10k_20171231.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from                         to                        

 

Commission file number 0-9286

 

COCA-COLA BOTTLING CO. CONSOLIDATED

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

56-0950585

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

4100 Coca-Cola Plaza, Charlotte, North Carolina 28211

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (704) 557-4400

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $1.00 Par Value

 

The NASDAQ Global Select Market

 

Securities Registered Pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes      No  

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. Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

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

 

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

 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 Act). Yes      No  

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. 

 

 

Market Value as of June 30, 2017

Common Stock, $l.00 Par Value

 

$1,066,187,233

Class B Common Stock, $l.00 Par Value

 

*

 

*No market exists for the Class B Common Stock, which is neither registered under Section 12 of the Act nor subject to Section 15(d) of the Act. The Class B Common Stock is convertible into Common Stock on a share-for-share basis at the option of the holder.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

 Class

 

Outstanding as of February 16, 2018

Common Stock, $1.00 Par Value

 

7,141,447

Class B Common Stock, $1.00 Par Value

 

2,192,722

 


 

Documents Incorporated by Reference

Portions of the registrant’s definitive Proxy Statement to be filed pursuant to Section 14 of the Act with respect to the registrant’s 2018 Annual Meeting of Stockholders are incorporated by reference in Part III, Items 10-14.

 

 


 

Table of Contents

 

 

 

 

 

Page

 

 

 

 

 

Part I

 

 

 

 

 

Item 1.

 

Business

 

4

Item 1A.

 

Risk Factors

 

15

Item 1B.

 

Unresolved Staff Comments

 

22

Item 2.

 

Properties

 

22

Item 3.

 

Legal Proceedings

 

24

Item 4.

 

Mine Safety Disclosures

 

24

 

 

Executive Officers of the Registrant

 

25

 

 

 

 

 

Part II

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

27

Item 6.

 

Selected Financial Data

 

29

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

60

Item 8.

 

Financial Statements and Supplementary Data

 

61

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

119

Item 9A.

 

Controls and Procedures

 

119

Item 9B.

 

Other Information

 

119

 

 

 

 

 

Part III

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

120

Item 11.

 

Executive Compensation

 

120

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

120

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

120

Item 14.

 

Principal Accountant Fees and Services

 

120

 

 

 

 

 

Part IV

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

121

Item 16.

 

Form 10-K Summary

 

128

 

 

Signatures

 

130

 

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PART I

 

Item 1.

Business

 

Introduction

 

Coca‑Cola Bottling Co. Consolidated, a Delaware corporation (together with its majority-owned subsidiaries, the “Company,” “CCBCC,” “we,” “our” or “us”), distributes, markets and manufactures nonalcoholic beverages in territories spanning 14 states and the District of Columbia. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest independent Coca‑Cola bottler in the United States. Approximately 93% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage brands including Dr Pepper, Sundrop and Monster Energy. Our purpose is to honor God, to serve others, to pursue excellence and to grow profitably. Our stock is traded on the NASDAQ Global Select Market under the symbol “COKE.”

 

Ownership

 

As of December 31, 2017, The Coca‑Cola Company owned approximately 35% of the Company’s total outstanding Common Stock, representing approximately 5% of the total voting power of the Company’s Common Stock and Class B Common Stock voting together. As long as The Coca‑Cola Company holds the number of shares of Common Stock it currently owns, it has the right to have a designee proposed by the Company for nomination to the Company’s Board of Directors. J. Frank Harrison, III, the Chairman of the Board of Directors and Chief Executive Officer of the Company, and trustees of certain trusts established for the benefit of certain relatives of J. Frank Harrison, Jr. have agreed to vote the shares of the Company’s Class B Common Stock which they control, representing approximately 86% of the total voting power of the Company’s Common Stock and Class B Common Stock voting together, in favor of such designee. The Coca‑Cola Company does not own any shares of the Company’s Class B Common Stock.

 

Beverage Products

 

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 and “post-mix” products. 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 sales represented approximately 84%, 84% and 82% of total net sales for fiscal 2017 (“2017”), fiscal 2016 (“2016”) and fiscal 2015 (“2015”), respectively. The sparkling beverage category represented approximately 63%, 66% and 70% of total bottle/can sales during 2017, 2016 and 2015, respectively.

 

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The following table sets forth some of our principal products, including products of The Coca‑Cola Company and products licensed to us by other beverage companies.

 

The Coca-Cola Company Products

 

Beverage Products Licensed

Sparkling Beverages

 

Still Beverages

 

by Other Beverage Companies

Barqs Root Beer

 

Fanta Zero

 

Core Power(1)

 

Peace Tea

 

Diet Dr Pepper

Cherry Coke

 

Fresca

 

Dasani

 

POWERade

 

Dr Pepper

Cherry Coke Zero

 

Mello Yello

 

Dasani Flavors

 

POWERade Zero

 

Full Throttle

Coca-Cola

 

Mello Yello Zero

 

Dunkin’ Donuts Iced Coffee(1)

 

Tum-E Yummies

 

Monster Energy products

Coca-Cola Life

 

Minute Maid Sparkling

 

FUZE

 

Yup Milk(1)

 

NOS®

Coca-Cola Vanilla

 

Pibb Xtra

 

glacéau smartwater

 

ZICO

 

Sundrop

Coca-Cola Zero Sugar

 

Seagrams Ginger Ale

 

glacéau vitaminwater

 

 

 

 

Dasani Sparkling

 

Sprite

 

Gold Peak Tea

 

 

 

 

Diet Barqs Root Beer

 

Sprite Zero

 

Hi-C

 

 

 

 

Diet Coke

 

Surge

 

Honest Tea

 

 

 

 

Diet Coke Splenda®

 

TAB

 

Minute Maid Adult Refreshments

 

 

 

 

Fanta Flavors

 

 

 

Minute Maid Juices To Go

 

 

 

 

 

(1) Indicates brands for which The Coca‑Cola Company has a license, joint venture or strategic partnership.

 

System Transformation

 

We recently concluded a series of transactions with The Coca‑Cola Company and Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, which were initiated in April 2013 as part of The Coca‑Cola Company’s multi-year refranchising of its North American bottling territories (the “System Transformation”). Through several asset purchase and asset exchange transactions with The Coca‑Cola Company, CCR and Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to the Company, we significantly expanded our distribution and manufacturing operations through the acquisition and exchange of distribution territories and regional manufacturing facilities.

 

Following the completion of the System Transformation, we are party to several key agreements that (i) provide us with rights to distribute, market and manufacture beverage products and (ii) coordinate our role in the North American Coca‑Cola system. The following sections summarize certain of these key agreements.

 

Beverage Distribution and Manufacturing Agreements

 

We have rights to distribute, promote, market and sell certain nonalcoholic beverages of The Coca‑Cola Company pursuant to a comprehensive beverage agreement with The Coca‑Cola Company and CCR. We also have rights to manufacture, produce and package certain beverages bearing trademarks of The Coca‑Cola Company pursuant to a regional manufacturing agreement with The Coca‑Cola Company. These agreements, which are the principal agreements we have with The Coca‑Cola Company and its affiliates following completion of the System Transformation, are described below under the headings “Distribution Agreement with The Coca‑Cola Company and CCR” and “Manufacturing Agreement with The Coca‑Cola Company.”

 

In addition to our agreements with The Coca‑Cola Company and CCR, we also have rights to distribute certain beverage brands owned by other beverage companies, including Dr Pepper and Monster Energy, pursuant to agreements with such other beverage companies. These agreements are described below under the heading “Distribution Agreements with Other Beverage Companies.”

 

Distribution Agreement with The Coca‑Cola Company and CCR

 

We have exclusive rights to distribute, promote, market and sell certain beverages and beverage products of The Coca‑Cola Company in certain territories pursuant to a comprehensive beverage agreement with The Coca‑Cola Company and CCR entered into on March 31, 2017 (as amended, the “CBA”), in exchange for which we are required to make quarterly sub-bottling payments to CCR. The amount of these payments is based on gross profit derived from our sales of beverages and beverage products of The Coca‑Cola Company as well as certain cross-licensed beverage brands not owned or licensed by The Coca‑Cola Company. These sub-bottling payments to CCR are for the territories we acquired in the System Transformation, and are not applicable to those territories we served prior to the System Transformation or to those territories we acquired in an exchange transaction. Since March 31, 2017, we entered into a series of amendments to the CBA with The Coca‑Cola Company and CCR to add or remove, as applicable, all territories we acquired or exchanged after that date in the System Transformation.

 

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As of December 31, 2017, the estimated fair value of the contingent consideration related to future sub-bottling payments was $381.3 million. Each quarter, we adjust the liability to fair value to reflect the estimated fair value of the contingent consideration related to future sub-bottling payments. See Note 15 to the consolidated financial statements for additional information.

 

The CBA contains provisions that apply in the event of a potential sale of our company or our aggregate businesses related to the distribution, promotion, marketing and sale of beverages and beverage products of The Coca‑Cola Company. Pursuant to the CBA, we may only sell our distribution business to either The Coca‑Cola Company or third-party buyers approved by The Coca‑Cola Company. We may obtain a list of approved third-party buyers from The Coca‑Cola Company on an annual basis or can seek The Coca‑Cola Company’s approval of a potential buyer upon receipt of a third-party offer to purchase our distribution business. If we wish to sell our distribution business to The Coca‑Cola Company and are unable to agree with The Coca‑Cola Company on the terms of a binding purchase and sale agreement, including the purchase price for our distribution business, the CBA provides that we may either withdraw from negotiations or initiate a third-party valuation process to determine the purchase price and, upon this determination, opt to continue with our potential sale to The Coca‑Cola Company. If we elect to continue with our potential sale, The Coca‑Cola Company will then have the option to (i) purchase our distribution business at the purchase price determined by the third-party valuation process and pursuant to the sale terms set forth in the CBA (including, to the extent not otherwise agreed to by us and The Coca‑Cola Company, default non-price terms and conditions of the acquisition agreement), or (ii) elect not to purchase our distribution business, in which case the CBA will be automatically amended to, among other things, permit us to sell our distribution business to any third party without obtaining The Coca‑Cola Company’s prior approval.

 

The CBA further provides:

 

 

the right of The Coca‑Cola Company to terminate the CBA in the event of an uncured default by us, in which case The Coca‑Cola Company (or its designee) is required to acquire our distribution business;

 

the requirement that we maintain an annual equivalent case volume per capita change rate that is not less than one standard deviation below the median of the rates for all U.S. Coca‑Cola bottlers for the same period; and

 

the requirement that we make minimum, ongoing capital expenditures in our distribution business at a specified level.

 

The CBA prohibits us from producing, manufacturing, preparing, packaging, distributing, selling, dealing in or otherwise using or handling any beverages, beverage components or other beverage products (i) other than the beverages and beverage products of The Coca‑Cola Company and expressly permitted cross-licensed brands, and (ii) unless otherwise consented to by The Coca‑Cola Company. The CBA has a term of ten years and is renewable by us indefinitely for successive additional terms of ten years, unless earlier terminated as provided therein.

 

As part of the System Transformation, on March 31, 2017, each of our then-existing bottling agreements for The Coca‑Cola Company beverage brands was automatically amended, restated and converted into the CBA (the “Bottling Agreement Conversion”), pursuant to a territory conversion agreement we entered into with The Coca‑Cola Company and CCR on September 23, 2015 (as amended, the “Territory Conversion Agreement”). The Bottling Agreement Conversion included, subject to certain limited exceptions, all of our then-existing comprehensive beverage agreements, master bottle contracts, allied bottle contracts and other bottling agreements with The Coca‑Cola Company or CCR that authorized us to produce and/or distribute beverages and beverage products of The Coca‑Cola Company in all territories where we (or one of our affiliates) had rights to market, promote, distribute and sell beverage products owned or licensed by The Coca‑Cola Company.

 

In connection with the Bottling Agreement Conversion, each then-existing bottling agreement for The Coca‑Cola Company beverage brands between The Coca‑Cola Company and certain of our subsidiaries, including Piedmont Coca‑Cola Bottling Partnership, a partnership formed by us and The Coca‑Cola Company (“Piedmont”), was also amended, restated and converted into a comprehensive beverage agreement with The Coca‑Cola Company, pursuant to which the subsidiary was granted certain exclusive rights to distribute, promote, market and sell certain beverages and beverage products of The Coca‑Cola Company in certain territories. These comprehensive beverage agreements are substantially similar to the CBA and, as with the treatment of the territories served by the Company prior to the System Transformation under the CBA, do not require our subsidiaries to make quarterly sub-bottling payments to CCR.

 

Manufacturing Agreement with The Coca‑Cola Company

 

We have rights to manufacture, produce and package certain beverages and beverage products of The Coca‑Cola Company at our manufacturing facilities pursuant to a regional manufacturing agreement with The Coca‑Cola Company entered into on March 31, 2017 (as amended, the “RMA”). These beverages may be distributed by us for our own account in accordance with the CBA, or may be sold by us to certain other U.S. Coca‑Cola bottlers and to the Coca‑Cola North America division of The Coca‑Cola Company (“CCNA”) in accordance with the RMA. Pursuant to the RMA, the prices, or certain elements of the formulas used to determine the prices, that the Company charges for these sales to CCNA or other U.S. Coca‑Cola bottlers are unilaterally established by CCNA from

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time to time. Since March 31, 2017, we entered into a series of amendments to the RMA with The Coca‑Cola Company to add or remove, as applicable, all regional manufacturing facilities we acquired or exchanged after that date in the System Transformation.

 

Under the RMA, our aggregate business primarily related to the manufacture of certain beverages and beverage products of The Coca‑Cola Company and permitted third-party beverage products are subject to the same agreed upon sale process provisions in the CBA, including the obligation to obtain The Coca‑Cola Company’s prior approval of a potential purchaser of our manufacturing business and provisions for the sale of such business to The Coca‑Cola Company. The RMA requires that we make minimum, ongoing capital expenditures in our manufacturing business at a specified level. The Coca‑Cola Company has the right to terminate the RMA in the event of an uncured default by us under the CBA or in the event of an uncured breach of our material obligations under the RMA or the NPSG Governance Agreement (as defined below).

 

The RMA prohibits us from manufacturing any beverages, beverage components or other beverage products (i) other than the beverages and beverage products of The Coca‑Cola Company and certain expressly permitted cross‑licensed brands, and (ii) unless otherwise consented to by The Coca‑Cola Company. Subject to The Coca‑Cola Company’s termination rights, the RMA has a term that continues for the duration of the term of the CBA.

 

As part of the System Transformation and concurrent with the Bottling Agreement Conversion, on March 31, 2017, each of our then-existing manufacturing agreements with The Coca‑Cola Company were amended, restated and converted into the RMA.

 

Finished Goods Supply Arrangements

 

We have finished goods supply arrangements with other U.S. Coca‑Cola bottlers to buy and sell finished products produced under trademarks owned by The Coca‑Cola Company in accordance with the RMA, pursuant to which the prices, or certain elements of the formulas used to determine the prices, for such finished products are unilaterally established by CCNA from time to time. In most instances, the Company’s ability to negotiate the prices at which it purchases finished goods bearing trademarks owned by The Coca‑Cola Company from, and the prices at which it sells such finished goods to, other U.S. Coca‑Cola bottlers is limited pursuant to these pricing provisions, which could have an adverse impact on the Company’s profitability.

 

Distribution Agreements with Other Beverage Companies

 

In addition to our distribution and manufacturing agreements with The Coca‑Cola Company, we also have distribution agreements with other beverage companies, including Dr Pepper Snapple Group, Inc. (“Dr Pepper Snapple”) and Monster Energy Corporation (“Monster Energy”).

 

Our distribution agreements with Dr Pepper Snapple permit us to distribute Dr Pepper and/or Sundrop beverage brands, as well as certain post-mix products of Dr Pepper Snapple, and our distribution agreement with Monster Energy grants us the rights to distribute energy drink products offered, packaged and/or marketed by Monster Energy under the primary brand name “Monster.”

 

Under our distribution agreements with other beverage companies, the price for syrup or concentrate is set by the beverage company from time to time. Similar to the CBA, these beverage agreements contain restrictions on the use of trademarks, approved bottles, cans and labels and sale of imitations or substitutes, as well as termination for cause provisions. The territories covered by beverage agreements with other beverage companies are not always aligned with the territories covered by the CBA, but are generally within those territory boundaries.

 

Sales of beverages under these agreements with other beverage companies represented approximately 7%, 10% and 13% of our bottle/can sales volume to retail customers for each of 2017, 2016 and 2015, respectively.

 

Other Agreements related to the Coca‑Cola System

 

As part of the System Transformation process, we entered into agreements with The Coca‑Cola Company, CCR and other Coca‑Cola bottlers regarding product supply, information technology services and other aspects of the North American Coca‑Cola system, as described below. Many of these agreements involve new system governance structures providing for greater participation and involvement by bottlers which require increased demands on Company’s management and more collaboration and alignment by the participating bottlers in order to successfully implement Coca‑Cola system plans and strategies. We believe these system governance initiatives will benefit the Company and the Coca‑Cola system, but the failure of these mechanisms to function efficiently could impair our ability to realize their intended benefits.

 

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Incidence-Based Pricing Agreement with The Coca‑Cola Company

 

The Company has an incidence-based pricing agreement with The Coca‑Cola Company, which establishes the prices charged by The Coca‑Cola Company to the Company for (i) concentrates of sparkling and certain still beverages produced by the Company and (ii) certain purchased still beverages. Under the incidence-based pricing agreement with The Coca‑Cola Company, the prices charged by The Coca‑Cola Company are impacted by a number of factors, including the incidence rate in effect, our pricing and sales of finished products, the channels in which the finished products are sold and package mix. The Coca‑Cola Company has no rights under the incidence-based pricing agreement to establish the resale prices at which we sell its products, but does have rights to establish pricing under other agreements, including the RMA.

 

National Product Supply Governance Agreement

 

We are a member of a national product supply group (the “NPSG”), comprised of The Coca‑Cola Company and other Coca‑Cola bottlers who are regional producing bottlers (“RPBs”) in The Coca‑Cola Company’s national product supply system, pursuant to a national product supply governance agreement executed in October 2015 with The Coca‑Cola Company and other RPBs (the “NPSG Governance Agreement”). The stated objectives of the NPSG include, among others, (i) Coca‑Cola system strategic infrastructure investment and divestment planning; (ii) network optimization of all plant to distribution center sourcing; and (iii) new product/packaging infrastructure planning.

 

Under the NPSG Governance Agreement, the NPSG members established certain governance mechanisms, including a governing board (the “NPSG Board”) comprised of a representative of (i) the Company, (ii) The Coca‑Cola Company and (iii) each other RPB. As of December 31, 2017, the NPSG Board consisted of The Coca‑Cola Company, the Company and seven other RPBs. The NPSG Board makes and/or oversees and directs certain key decisions regarding the NPSG, including decisions regarding the management and staffing of the NPSG and the funding for its ongoing operations. Pursuant to the decisions of the NPSG Board made from time to time and subject to the terms and conditions of the NPSG Governance Agreement, each RPB is required to make investments in its respective manufacturing assets and implement Coca‑Cola system strategic investment opportunities consistent with the NPSG Governance Agreement. We are also obligated to pay a certain portion of the costs of operating the NPSG.

 

CONA Services LLC

 

We are a member of CONA Services LLC (“CONA”), an entity formed with The Coca‑Cola Company and certain other Coca‑Cola bottlers pursuant to a limited liability company agreement executed in January 2016 (as amended, the “CONA LLC Agreement”) to provide business process and information technology services to its members.

 

Under the CONA LLC Agreement, the business and affairs of CONA are managed by a board of directors comprised of representatives of its members (the “CONA Board”). All directors are entitled to one vote, regardless of the percentage interest in CONA held by each member. We currently have the right to designate one of the members of the CONA Board and have a percentage interest in CONA of approximately 20%. Most matters to be decided by the CONA Board require approval by a majority of a quorum of the directors, provided that the approval of 80% of the directors is required to, among other things, require members to make additional capital contributions, approve CONA’s annual operating and capital budgets, and approve capital expenditures in excess of certain agreed upon amounts.

 

Each CONA member is required to make capital contributions to CONA if and when approved by the CONA Board. No CONA member may transfer its membership interest (or any portion thereof) except to a purchaser of the member’s bottling business (or any portion thereof) and as permitted under the member’s comprehensive beverage agreement with The Coca‑Cola Company.

 

The CONA LLC Agreement further provides that, if CCR grants any major North American Coca‑Cola bottler other than a CONA member rights to (i) manufacture, produce and package or (ii) market, promote, distribute and sell Coca‑Cola products, CCR will require the bottler to become a CONA member, to implement the CONA System in the bottler’s operations and to enter into a master services agreement with CONA.

 

We also are party to an amended and restated master services agreement with CONA (the “CONA MSA”), pursuant to which CONA agreed to make available, and we became 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. As part of making the CONA System available to us, CONA provides us with certain business process and information technology services, including the planning, development, management and operation of the CONA System in connection with our direct store delivery and manufacture of products (collectively, the “CONA Services”). We are also authorized under the CONA MSA to use the CONA System in connection with our distribution, promotion, marketing, sale and manufacture of beverages we are authorized to distribute or manufacture under the CBA, the RMA or any other agreement with The Coca‑Cola Company, subject to the

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provisions of the CONA LLC Agreement and any licenses or other agreements relating to products or services provided by third parties and used in connection with the CONA System.

 

In exchange for our rights to use the CONA System and receive the CONA Services under the CONA MSA, we are charged service fees by CONA based on the number of physical cases of beverages we distributed or manufactured during the applicable period in the portion of our territories where the CONA Services have then been implemented. Upon the earlier of (i) all members of CONA beginning to use the CONA System in all territories in which they distribute and manufacture Coca‑Cola products (excluding certain territories of CCR that are expected to be sold to bottlers that are neither members of CONA nor users of the CONA System), or (ii) December 31, 2018, the service fees will be changed to be an amount per physical case of beverages distributed or manufactured in any portion of our territories equal to the aggregate costs incurred by CONA to maintain and operate the CONA System and provide the CONA Services divided by the total number of cases distributed or manufactured by all of the members of CONA, subject to certain exceptions and provided that the aggregate costs related to CONA’s manufacturing functionality will be borne solely amongst the CONA members who have rights to manufacture beverages of The Coca‑Cola Company. We are obligated to pay the service fees under the CONA MSA even if we are not using the CONA System for all or any portion of our distribution and manufacturing operations.

 

Amended and Restated Ancillary Business Letter

 

As part of the System Transformation, we entered into an amended and restated ancillary business letter with The Coca‑Cola Company on March 31, 2017 (the “Ancillary Business Letter”), pursuant to which we were granted advance waivers to acquire or develop certain lines of business involving the preparation, distribution, sale, dealing in or otherwise using or handling of certain beverage products that would otherwise be prohibited under the CBA or any similar agreement.

 

Under the Ancillary Business Letter, subject to certain limited exceptions, we are prohibited from acquiring or developing any line of business inside or outside of our territories governed by the CBA or any similar agreement prior to January 1, 2020 without the consent of The Coca‑Cola Company, which consent may not be unreasonably withheld. After January 1, 2020, The Coca‑Cola Company would be required to consent (which consent may not be unreasonably withheld) to our acquisition or development of (i) any grocery, quick service restaurant, or convenience and petroleum store business engaged in the sale of beverages, beverage components and other beverage products not otherwise authorized or permitted by the CBA, or (ii) any other line of business for which beverage activities otherwise prohibited under the CBA represent more than a certain threshold of net sales (subject to certain limited exceptions).

 

Distribution Territories and Regional Manufacturing Facilities

 

We are the largest independent Coca‑Cola bottler in the United States, distributing, marketing and manufacturing beverage products in territories spanning 14 states and the District of Columbia. In addition to the distribution territories and manufacturing facilities we continue to serve and operate in our historic operational footprint, which includes markets in North Carolina, South Carolina, central Tennessee, western Virginia and West Virginia, we now service and operate the following additional territories and manufacturing facilities acquired from CCR and United in the System Transformation:

9


 

 

Distribution Territories Acquired in System Transformation

 

Acquired

From

 

Acquisition

Date

Johnson City and Morristown, Tennessee

 

CCR

 

May 23, 2014

Knoxville, Tennessee

 

CCR

 

October 24, 2014

Cleveland and Cookeville, Tennessee

 

CCR

 

January 30, 2015

Louisville, Kentucky and Evansville, Indiana

 

CCR

 

February 27, 2015

Paducah and Pikeville, Kentucky

 

CCR

 

May 1, 2015

Lexington, Kentucky

 

CCR

 

May 1, 2015

Norfolk, Fredericksburg and Staunton, Virginia and Elizabeth City, North Carolina

 

CCR

 

October 30, 2015

Annapolis, Maryland Make-Ready Center

 

CCR

 

October 30, 2015

Easton and Salisbury, Maryland and Richmond and Yorktown, Virginia

 

CCR

 

January 29, 2016

Alexandria, Virginia and Capitol Heights and La Plata, Maryland

 

CCR

 

April 1, 2016

Baltimore, Hagerstown and Cumberland, Maryland

 

CCR

 

April 29, 2016

Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky

 

CCR

 

October 28, 2016

Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana

 

CCR

 

January 27, 2017

Indianapolis and Bloomington, Indiana and Columbus and Mansfield, Ohio

 

CCR

 

March 31, 2017

Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio

 

CCR

 

April 28, 2017

Memphis, Tennessee

 

CCR

 

October 2, 2017

Little Rock and West Memphis, Arkansas

 

CCR

 

October 2, 2017

Bluffton and Spartanburg, South Carolina(1)

 

United

 

October 2, 2017

 

(1) A portion of the Bluffton, South Carolina territory was acquired by Piedmont.

 

Regional Manufacturing Facilities Acquired in System Transformation

 

Acquired

From

 

Acquisition

Date

Sandston, Virginia

 

CCR

 

January 29, 2016

Silver Spring and Baltimore, Maryland

 

CCR

 

April 29, 2016

Cincinnati, Ohio

 

CCR

 

October 28, 2016

Indianapolis and Portland, Indiana

 

CCR

 

March 31, 2017

Twinsburg, Ohio

 

CCR

 

April 28, 2017

Memphis, Tennessee and West Memphis, Arkansas

 

CCR

 

October 2, 2017

 

As part of the System Transformation, the Company also divested certain of its distribution territories and one regional manufacturing facility in asset exchange transactions with CCR and United, summarized as follows:

 

Distribution Territories and Regional Manufacturing Facilities Exchanged in System Transformation

 

Acquired

By

 

Exchange

Date

Jackson, Tennessee

 

CCR

 

May 1, 2015

Leroy, Mobile and Robertsdale, Alabama, Panama City, Florida, Bainbridge, Columbus and Sylvester, Georgia, Ocean Springs, Mississippi and Mobile Alabama Regional Manufacturing Facility (the "Deep South") and Somerset, Kentucky

 

CCR

 

October 2, 2017

Florence, Alabama and Laurel, Mississippi

 

United

 

October 2, 2017

Northeastern Georgia(1)

 

United

 

October 2, 2017

 

(1) Territory exchanged by Piedmont.

10


 

Markets Served and Production and Distribution Facilities

 

As of December 31, 2017, we served approximately 65.0 million consumers within our territories, which comprised 9 principal markets. Certain information regarding each of these markets follows:

 

Market

 

Description

 

Approximate

Population

 

Production Facilities

 

Number of

Distribution

Facilities

Arkansas / Northwestern Mississippi

 

A significant portion of central and southern Arkansas and a portion of western Tennessee, including Little Rock and West Memphis, Arkansas, Memphis, Tennessee and a portion of northwestern Mississippi and surrounding areas.

 

3.5 million

 

West Memphis, AR

Memphis, TN

 

3

Indiana / Southeastern Illinois

 

A significant portion of Indiana and a portion of southeastern Illinois, including Anderson, Bloomington, Evansville, Fort Wayne, Indianapolis, Lafayette, South Bend and Terre Haute, Indiana and surrounding areas.

 

5.6 million

 

Indianapolis, IN

Portland, IN

 

8

Kentucky / West Virginia

 

A significant portion of northeastern Kentucky, the majority of West Virginia, a portion of southeastern Indiana, a majority of southern Ohio and a portion of southwestern Pennsylvania, including Lexington, Louisville and Pikeville, Kentucky, Clarksburg, Elkins, Parkersburg, Craigsville and Charleston, West Virginia and Cincinnati and Portsmouth, Ohio and surrounding areas.

 

7.4 million

 

Cincinnati, OH

 

12

Maryland / Delaware / District of Columbia / South-Central Pennsylvania

 

The entire state of Maryland, a majority of the state of Delaware, the District of Columbia, and a portion of south-central Pennsylvania, including Easton, Salisbury, Capitol Heights, La Plata, Baltimore, Hagerstown and Cumberland, Maryland and surrounding areas.

 

13.3 million

 

Baltimore, MD

Silver Spring, MD

 

7

North Carolina

 

The majority of North Carolina and a portion of southern Virginia, including Boone, Hickory, Mount Airy, Asheville, Charlotte, Greensboro, Fayetteville, Raleigh, Greenville, New Bern and Wilmington, North Carolina and surrounding areas.

 

9.0 million

 

Charlotte, NC

 

11

Ohio

 

The majority of Ohio, including Akron, Columbus, Dayton, Elyria, Lima, Mansfield, Toledo, Willoughby and Youngstown and surrounding areas.

 

7.0 million

 

Twinsburg, OH

 

11

South Carolina

 

The majority of South Carolina and a portion of eastern Tennessee, including Beaufort, Conway, Marion, Bluffton, Charleston, Columbia, Greenville, Myrtle Beach and Spartanburg, South Carolina and surrounding areas and surrounding areas.

 

5.0 million

 

None

 

9

Tennessee

 

A significant portion of central and eastern Tennessee and a portion of western Kentucky, including Nashville, Johnson City, Morristown, Knoxville, Cleveland and Cookeville, Tennessee and Paducah, Kentucky and surrounding areas.

 

4.2 million

 

Nashville, TN

 

7

Virginia

 

The majority of Virginia and a portion of southern West Virginia, including Roanoke, Norfolk, Staunton, Alexandria, Richmond, Yorktown and Fredericksburg, Virginia and Beckley, West Virginia and surrounding areas.

 

10.0 million

 

Roanoke, VA

Sandston, VA

 

12

Total

 

 

 

65.0 million

 

12

 

80

 

11


 

The Company is also a shareholder in South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative managed by the Company. The Company is obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. SAC is located in Bishopville, South Carolina, and the Company utilizes a portion of the production capacity from the Bishopville production facility.

 

Raw Materials

 

In addition to concentrates purchased from The Coca‑Cola Company and other beverage companies for use in our beverage manufacturing, we also purchase sweetener, carbon dioxide, plastic bottles, cans, closures and other packaging materials, as well as equipment for the distribution, marketing and production of nonalcoholic beverages.

 

We purchase all of our plastic bottles from Southeastern Container and Western Container, two manufacturing cooperatives we co-own with several other Coca‑Cola bottlers, and all of our aluminum cans from two domestic suppliers.

 

Along with all other U.S. Coca-Cola bottlers, we are a member of Coca-Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”), which was formed in 2003 to facilitate various procurement functions and the distribution of beverage products of The Coca‑Cola Company with the intent of enhancing the efficiency and competitiveness of the Coca‑Cola bottling system in the United States. CCBSS negotiates the procurement for the majority of our raw materials, excluding concentrate.

 

We are exposed to price risk on commodities such as aluminum, corn, PET resin (a petroleum- or plant-based product), and fuel, which affects the cost of raw materials used in the production of our finished products. Examples of the raw materials affected include aluminum cans and plastic bottles used for packaging and high fructose corn syrup used as a product ingredient. Further, we are exposed to commodity price risk on oil, which impacts our cost of fuel used in the movement and delivery of our products. We participate in commodity hedging and risk mitigation programs administered both by CCBSS and by the Company. In addition, there are no limits on the prices The Coca‑Cola Company and other beverage companies can charge for concentrate.

 

Customers and Marketing

 

The Company’s products are sold and distributed through various channels, including direct sales to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During 2017, approximately 65% of the Company’s bottle/can sales volume to retail customers was sold for future consumption, while the remaining bottle/can sales volume to retail customers was sold for immediate consumption. All of the Company’s beverage sales during 2017 were to customers in the United States.

 

The following table summarizes the percentage of our total bottle/can sales volume to our largest customers as well as the percentage of our total net sales that such volume represents:

 

 

 

Fiscal Year

 

 

 

2017

 

 

2016

 

 

2015

 

Approximate percent of the Company's total bottle/can sales volume

 

 

 

 

 

 

 

 

 

 

 

 

Wal-Mart Stores, Inc.

 

 

19

%

 

 

20

%

 

 

22

%

The Kroger Company

 

 

10

%

 

 

6

%

 

 

6

%

Food Lion, LLC

 

 

6

%

 

 

8

%

 

 

7

%

Total approximate percent of the Company's total bottle/can sales volume

 

 

35

%

 

 

34

%

 

 

35

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Approximate percent of the Company's total net sales

 

 

 

 

 

 

 

 

 

 

 

 

Wal-Mart Stores, Inc.

 

 

13

%

 

 

14

%

 

 

15

%

The Kroger Company

 

 

7

%

 

 

5

%

 

 

5

%

Food Lion, LLC

 

 

4

%

 

 

5

%

 

 

5

%

Total approximate percent of the Company's total net sales

 

 

24

%

 

 

24

%

 

 

25

%

 

The loss of Wal-Mart Stores, Inc., The Kroger Company or Food Lion, LLC as a customer could have a material adverse effect on the operating and financial results of the Company.

 

New product introductions, packaging changes and sales promotions are the primary sales and marketing practices in the nonalcoholic beverage industry and have required, and are expected to continue to require, substantial expenditures. Recent product introductions in our business include new flavor varieties within certain brands such as Sprite Cherry, POWERade Citrus Passionfruit, Monster Ultra Violet, Monster Juice Mango Loco, Peace Tea Georgia Peach, Peace Tea Razzleberry, Minute Maid 5% Berry Punch, Dunkin’ Donuts

12


 

Mocha Iced Coffee, Dunkin’ Donuts French Vanilla Iced Coffee and Coke Zero Sugar. Recent packaging introductions include the 13.7-ounce bottle for Dunkin’ Donuts Iced Coffees, 0.5-liter energy drink cans and eight-packs of 16-ounce energy drinks.

 

We sell our products primarily in non-refillable bottles and cans, in varying package configurations from market to market. For example, there may be as many as 28 different packages for Diet Coke within a single geographic area. Bottle/can sales volume to retail customers during 2017 was approximately 62% bottles and 38% cans.

 

We rely extensively on advertising in various media outlets, primarily online, television and radio, for the marketing of our products. The Coca‑Cola Company, Monster Energy and Dr Pepper Snapple (collectively, the “Beverage Companies”) make substantial expenditures on advertising programs in our territories from which we benefit. Although the Beverage Companies have provided us with marketing funding support in the past, our beverage agreements generally do not obligate the Beverages Companies to do so.

 

We also expend substantial funds on our own behalf for extensive local sales promotions of our products. Historically, these expenses have been partially offset by marketing funding support provided to us by the Beverage Companies in support of a variety of marketing programs, such as point-of-sale displays and merchandising programs. We consider the funds we expend for marketing and merchandising programs necessary to maintain or increase revenue.

 

In addition to our marketing and merchandising programs, we believe a sustained and planned charitable giving program to support communities is an essential component to the success of our brand and, by extension, our sales. In 2017, the Company made cash donations of approximately $5.8 million to various charities and donor-advised funds in light of the Company’s financial performance, expanded distribution territory footprint and future business prospects. The Company intends to continue its charitable contributions in future years, subject to the Company’s financial performance and other business factors.

 

Seasonality

 

Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters of the fiscal year. We believe that we and other manufacturers from whom we purchase finished goods have adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. See “Item 2. Properties” for information relating to utilization of our production facilities. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

 

Competition

 

The nonalcoholic beverage market is highly competitive for both sparkling and still beverages. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of Pepsi-Cola and, in some regions, local bottlers of Dr Pepper, Royal Crown and/or 7‑Up products.

 

The principal methods of competition in the nonalcoholic beverage industry are point-of-sale merchandising, new product introductions, new vending and dispensing equipment, packaging changes, pricing, price promotions, product quality, retail space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition.

 

Government Regulation

 

Our businesses are subject to various laws and regulations administered by federal, state and local governmental agencies of the United States, including laws and regulations governing the production, storage, distribution, sale, display, advertising, marketing, packaging, labeling, content, quality and safety of our products, our occupational health and safety practices, and the transportation and use of many of our products.

 

We are required to comply with a variety of U.S. laws and regulations, including but not limited to: the Federal Food, Drug and Cosmetic Act and various state laws governing food safety; the Food Safety Modernization Act; the Occupational Safety and Health Act; the Clean Air Act; the Clean Water Act; the Resource Conservation and Recovery Act; the Comprehensive Environmental Response, Compensation and Liability Act; the Federal Motor Carrier Safety Act; the Lanham Act; various federal and state laws and regulations governing competition and trade practices; various federal and state laws and regulations governing our employment practices, including those related to equal employment opportunity, such as the Equal Employment Opportunity Act and the National Labor Relations Act; and laws regulating the sale of certain of our products in schools.

 

13


 

As a manufacturer, distributor and seller of beverage products of the Beverage Companies in exclusive territories, we are subject to antitrust laws of general applicability. However, pursuant to the United States Soft Drink Interbrand Competition Act, soft drink bottlers, such as us, are permitted to have exclusive rights to manufacture, distribute and sell a soft drink product in a defined geographic territory if that soft drink product is in substantial and effective competition with other products of the same general class in the market. We believe such competition exists in each of the exclusive geographic territories in the United States in which we operate.

 

In response to the growing health, nutrition and obesity concerns of today’s youth, a number of states have regulations restricting the sale of soft drinks and other foods in schools, particularly elementary, middle and high schools. Many of these restrictions have existed for several years in connection with subsidized meal programs in schools. Restrictive legislation, if widely enacted, could have an adverse impact on our products, image and reputation.

 

Most beverage products sold by the Company are classified as food or food products and are therefore eligible for purchase using supplemental nutrition assistance (“SNAP”) benefits by consumers purchasing them for home consumption. Energy drinks with a nutrition facts label are also classified as food and are eligible for purchase for home consumption using SNAP benefits, whereas energy drinks classified as a supplement by the United States Food and Drug Administration (the “FDA”) are not. Regulators may restrict the use of benefit programs, including SNAP, to purchase certain beverages and foods.

 

Certain jurisdictions in which our products are sold have imposed, or are considering imposing, taxes, labeling requirements or other limitations on, or regulations pertaining to, the sale of certain of our products, ingredients or substances contained in, or attributes of, our products or commodities used in the manufacture of our products, including certain of our products that contain added sugars or sodium, exceed a specified caloric content, or include specified ingredients such as caffeine.

 

Legislation has been proposed in Congress and by certain state and local governments which would prohibit the sale of soft drink products in non-refillable bottles and cans or require a mandatory deposit as a means of encouraging the return of such containers, each in an attempt to reduce solid waste and litter. We are currently not impacted by this type of proposed legislation, but it is possible that similar or more restrictive legal requirements may be proposed or enacted within our territories in the future.

 

We are also subject to federal and local environmental laws, including laws related to water consumption and treatment, wastewater discharge and air emissions. Our facilities must comply with the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Resource Conservation and Recovery Act and other federal and state laws regarding handling, storage, release and disposal of wastes generated on-site and sent to third-party owned and operated off-site licensed facilities.

 

Environmental Remediation

 

We do not currently have any material capital expenditure commitments for environmental compliance or environmental remediation for any of our properties. We do not believe compliance with enacted or adopted federal, state and local provisions pertaining to the discharge of materials into the environment or otherwise relating to the protection of the environment will have a material impact on our consolidated financial statements or our competitive position.

 

Employees

 

As of December 31, 2017, we had approximately 16,500 employees, of which approximately 14,500 were full-time and 2,000 were part-time. Approximately 14% of our labor force is covered by collective bargaining agreements.

 

Exchange Act Reports

 

We make available free of charge through our website, www.cokeconsolidated.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statement and all amendments to these reports. These reports are available on our website as soon as reasonably practicable after such materials are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The information provided on our website is not part of this report and is not incorporated herein by reference.

 

The SEC also maintains a website, www.sec.gov, which contains reports, proxy and information statements and other information filed electronically with the SEC. Any materials that we file with the SEC may also be read and copied at the SEC’s Public Reference Room, 100 F Street, N.E., Room 1580, Washington, DC 20549. Information on the operations of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330.

 

14


 

Item 1A.

Risk Factors

 

In addition to other information in this Form 10-K, the following risk factors should be considered carefully in evaluating the Company’s business. The Company’s business, financial condition or results of operations could be materially and adversely affected by any of these risks.

 

The inability of the Company to successfully integrate the operations and employees acquired in the System Transformation into existing operations could adversely affect the Company’s business, culture or results of operations.

 

During the fourth quarter of 2017, the Company completed its System Transformation transactions, through which it acquired additional distribution territories and manufacturing facilities from CCR and United. Through these acquisitions and the additional resources needed to support the Company’s growth, the Company has grown from 6,700 employees serving 20.6 million customers in fiscal 2013 to 16,500 employees serving 65 million customers in 2017.

 

Although the System Transformation acquisitions are now complete, the Company continues to face risk in its ability to continue to integrate the Company’s culture, information technology systems, production, distribution, sales and administrative support activities, internal controls over financial reporting, environmental compliance and health and safety compliance, procedures and policies across all its territories.

 

The completed System Transformation acquisitions involve certain other financial and business risks. The Company may not realize a satisfactory return, including economic benefit and productivity levels, on the Company’s investments. In addition, the Company’s assumptions for potential growth, synergies or cost savings at the time of the distribution territory and manufacturing facilities acquisitions may prove to be incorrect. The occurrence of these events could adversely affect the Company’s financial condition or results of operations.

 

Changes in public and consumer perception and preferences or government regulations related to nonalcoholic beverages, including concerns or regulations related to obesity, public health, artificial ingredients and product safety, could reduce demand for the Company’s products and reduce profitability.

 

The Company’s business depends substantially on consumer tastes and preferences that change in often unpredictable ways. As the Company distributes, markets and manufactures beverage brands owned by others, the success of the Company’s business depends in large measure on working with the Beverage Companies. The Company is reliant upon the ability of The Coca‑Cola Company and other Beverage Companies to develop and introduce product innovations to meet the changing preferences of the broad consumer market, and failure to satisfy these consumer preferences could adversely affect the profitability of the Company’s business.

 

Health and wellness trends over the past several years have resulted in a shift in consumer preferences from sugar sweetened sparkling beverages to diet sparkling beverages, tea, sports drinks, enhanced water and bottled water. Consumers, public health officials, public health advocates and government officials are becoming increasingly concerned about the public health consequences associated with obesity, particularly among young people. The production and marketing of beverages are subject to the rules and regulations of the FDA and other federal, state and local health agencies, and extensive changes in these rules and regulations could increase the Company’s costs or adversely impact its sales. The Company cannot predict whether any such rules or regulations will be enacted or, if enacted, the impact that such rules or regulations could have on its business.

 

In addition, regulatory actions, activities by nongovernmental organizations and public debate and concerns about perceived negative safety and quality consequences of certain ingredients in the Company’s products, such as non-nutritive sweeteners, may erode consumers’ confidence in the safety and quality of the Company’s products, whether or not justified. These actions could result in additional governmental regulations concerning the production, marketing, labeling or availability of the Company’s products or the ingredients in such products, possible new taxes or negative publicity resulting from actual or threatened legal actions against the Company or other companies in the same industry, any of which could damage the reputation of the Company or reduce demand for the Company’s products, which could adversely affect the Company’s profitability.

 

The Company’s success also depends on its ability to maintain consumer confidence in the safety and quality of all its products. The Company has rigorous product safety and quality standards. However, if beverage products taken to market are or become contaminated or adulterated, the Company may be required to conduct costly product recalls and may become subject to product liability claims and negative publicity, which could cause its business and reputation to suffer.

 

15


 

The Company’s business and results of operations may be adversely affected by increased costs, disruption of supply or shortages of raw materials, fuel and other supplies.

 

Raw material costs, including the costs for plastic bottles, aluminum cans, resin and high fructose corn syrup, have historically been subject to significant price volatility and may continue to be in the future. International or domestic geopolitical or other events, including the imposition of any tariffs and/or quotas by the U.S. government on any of these raw materials, could adversely impact the supply and cost of these raw materials to us. In addition, there is no limit on the prices The Coca‑Cola Company and other Beverage Companies can charge for concentrate. If the Company cannot offset higher raw material costs with higher selling prices, effective commodity price hedging, increased sales volume or reductions in other costs, the Company’s profitability could be adversely affected.

 

In recent years, there has been consolidation among suppliers of certain of the Company’s raw materials, which could have an adverse effect on the Company’s ability to negotiate the lowest costs and, in light of the Company’s relatively low in-plant raw material inventory levels, has the potential for causing interruptions in the Company’s supply of raw materials and in its manufacture of finished goods.

 

The Company purchases all of its plastic bottles from Southeastern Container and Western Container, two manufacturing cooperatives the Company co-owns with several other Coca‑Cola bottlers, and all of its aluminum cans from two domestic suppliers. The inability of these plastic bottle or aluminum can suppliers to meet the Company’s requirements for containers could result in the Company not being able to fulfill customer orders and production demand until alternative sources of supply are located. The Company attempts to mitigate these risks by working closely with key suppliers and by purchasing business interruption insurance where appropriate. Failure of the aluminum can or plastic bottle suppliers to meet the Company’s purchase requirements could negatively impact inventory levels, customer confidence and results of operations, including sales levels and profitability.

 

The Company uses a combination of internal and external freight shipping and transportation services to transport and deliver products.  The Company’s freight cost and the timely delivery of our products may be adversely impacted by a number of factors which could reduce the profitability of the Company’s operations, including driver shortages, reduced availability of independent contractor drivers, higher fuel costs, weather conditions, traffic congestion, increased government regulation and other matters.

 

In addition, the Company uses significant amounts of fuel for its delivery fleet and other vehicles used in the distribution of its products. International or domestic geopolitical or other events could impact the supply and cost of fuel and could impact the timely delivery of the Company’s products to its customers. Although the Company strives to reduce fuel consumption and uses commodity hedges to manage the Company’s fuel costs, there can be no assurance the Company will succeed in limiting the impact of fuel price volatility on the Company’s business or future cost increases, which could reduce the profitability of the Company’s operations.

 

Technology failures or cyberattacks on the Company’s technology systems could disrupt the Company’s operations and negatively impact the Company’s reputation, business or results of operations.

 

The Company depends heavily upon the efficient operation of technological resources and a failure in these technology systems or controls could negatively impact the Company’s operations, business or results of operations. In addition, the Company continuously upgrades and updates current technology or installs new technology. The inability to implement upgrades, updates or installations in a timely manner, to train employees effectively in the use of new or updated technology, or to obtain the anticipated benefits of the Company’s technology could adversely impact results of operations or profitability.

 

The Company increasingly relies on information technology systems to process, transmit and store electronic information. For example, the Company’s production and distribution facilities, inventory management and driver handheld devices all utilize information technology to maximize efficiencies and minimize costs. Furthermore, a significant portion of the communication between personnel, customers and suppliers depends on information technology.

 

Like most companies, the Company’s information technology systems may be vulnerable to interruption due to a variety of events beyond the Company’s control, including, but not limited to, power outages, computer and telecommunications failures, computer viruses, other malicious computer programs and cyberattacks, denial-of-service attacks, security breaches, catastrophic events such as fires, tornadoes, earthquakes and hurricanes, usage errors by employees and other security issues.

 

The Company has technology security initiatives and disaster recovery plans in place to mitigate its risk to these vulnerabilities, however these measures may not be adequate or implemented properly to ensure that the Company’s operations are not disrupted. If the Company’s technology systems are damaged, breached, or cease to function properly, it may incur significant costs to repair or replace them, and the Company may suffer interruptions in operations, resulting in lost revenues, and delays in reporting its financial results.

16


 

 

Further, misuse, leakage or falsification of the Company’s information could result in violations of data privacy laws and regulations and damage the reputation and credibility of the Company. The Company may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to the Company, current or former employees, bottling partners, other customers, suppliers or consumers, and may become subject to legal action and increased regulatory oversight. The Company could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and information technology systems, including liability for stolen information, increased cybersecurity protection costs, litigation expense and increased insurance premiums.

 

Any failure or delay of the Company to transition to, and receive anticipated benefits from, the CONA System or the decisions made by the CONA Board could negatively impact the Company’s results of operations.

 

The Company is a member of CONA and party to the CONA MSA, pursuant to which the Company is an authorized user of the CONA System, a uniform information technology system developed to promote operational efficiency and uniformity among all North American Coca‑Cola bottlers. The Company is continuing the process of transitioning its legacy technology system platform to the CONA System for its manufacturing facilities, distribution facilities and corporate headquarters. The Company anticipates completing the transition of all locations to the CONA System by the end of fiscal 2018.

 

Although the Company believes it has taken the necessary steps to mitigate risk associated with a phased cut-over to the CONA System, including a comprehensive review of internal controls, extensive employee training, and additional verifications and testing to ensure data integrity, any service interruptions or delays in the Company’s transition to the CONA System could result in increased costs or adversely impact the Company’s results of operations. In addition, because other Coca‑Cola bottlers are also transitioning to the CONA System and would likely experience similar service interruptions or delays, the Company may not be able to have another bottler process orders on its behalf during any such event.

 

The Company currently has the right to designate one of the members of the CONA Board and has a percentage interest in CONA of approximately 20% but cannot unilaterally control the actions of CONA or the CONA Board. The Company faces the risk that a software solution beneficial to the Company is not approved by the CONA Board, requiring the Company to invest additional time and financial resources in developing a solution outside the CONA System to meet its requirements, or that the CONA Board makes decisions regarding CONA or the CONA System which may be different than decisions the Company would have made on its own behalf. Further, the Company remains obligated to pay service fees under the CONA MSA even if it is not using the CONA System for all or any portion of its distribution and manufacturing operations.

 

There is additional risk involved with the CONA System as the Company relies on CONA to make necessary upgrades and resolve ongoing or disaster-related technology issues with the CONA System and is limited in its authority and ability to timely resolve errors or make changes to the CONA software.

 

Miscalculation of the Company’s need for infrastructure investment could impact the Company’s financial results.

 

Significant changes from the Company’s expected returns on cold drink equipment, fleet, technology and supply chain infrastructure investments could adversely affect the Company’s consolidated financial results. Projected requirements for infrastructure investments may differ from actual levels if the Company does not achieve the sales volume growth it anticipates. The Company’s infrastructure investments are generally long-term in nature; therefore, it is possible the investments made today may not generate the returns expected by the Company as a result of future changes in the marketplace. In addition, the Company faces risk in determining the level of infrastructure investment needed in territories and facilities recently acquired in the System Transformation. Any failure of the Company to adequately forecast these infrastructure investment requirements could reduce the profitability of the Company’s operations.

 

Significant additional labeling or warning requirements may increase costs and inhibit sales of affected products.

 

The FDA occasionally proposes major changes to the nutrition labels required on all packaged foods and beverages, including those for most of the Company’s products. Any pervasive nutrition label changes could increase the Company’s costs and could inhibit sales of one or more of the Company’s major products.

 

Certain nutrition label changes announced by the FDA in 2016, which were originally to become effective in July 2018, have been delayed until 2020 or later. These proposed changes will require the Company and its competitors to revise nutrition labels to include updated serving sizes, information about total calories in a beverage product container and information about any added sugars or nutrients.

 

17


 

The Company’s financial condition can be impacted by the stability of the general economy.

 

Unfavorable changes in general economic conditions in the geographic markets in which the Company does business may have the temporary effect of reducing the demand for certain of the Company’s products. For example, economic forces may cause consumers to shift away from purchasing higher-margin products and packages sold through immediate consumption and other highly profitable channels. Adverse economic conditions could also increase the likelihood of customer delinquencies and bankruptcies, which would increase the risk of uncollectibility of certain accounts. Each of these factors could adversely affect the Company’s overall financial condition and operating results.

 

The Company’s capital structure, including its cash positions and debt borrowing capacity with banks or other financial institutions, exposes it to the risk of default by or failure of counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of the Company’s counterparties were to become insolvent or file for bankruptcy, the Company’s ability to recover losses incurred as a result of default or to retrieve assets that are deposited or held in accounts with such counterparty may be limited by the counterparty’s liquidity or the applicable laws governing the insolvency or bankruptcy proceedings and the Company’s access to capital may be diminished. Any such event of default or failure could negatively impact the Company’s results of operations and financial condition.

 

Changes in the Company’s top customer relationships and marketing strategies could impact sales volume and revenues.

 

The Company faces concentration risks related to a few customers comprising a large portion of the Company’s annual sales volume and net revenue. The Company’s results of operations could be adversely affected if revenue from one or more of these significant customers is materially reduced or if the cost of complying with the customers’ demands is significant. Additionally, if receivables from one or more of these significant customers become uncollectible, the Company’s results of operations may be adversely impacted.

 

The Company’s largest customers, Wal-Mart Stores, Inc., The Kroger Company and Food Lion, LLC, accounted for approximately 35% of the Company’s 2017 bottle/can sales volume to retail customers and approximately 24% of the Company’s 2017 total net sales. These customers typically make purchase decisions based on a combination of price, product quality, consumer demand and customer service performance and generally do not enter into long-term contracts. The Company faces risks related to maintaining the volume demanded on a short-term basis from these customers, which can also divert resources away from other customers. The loss of Wal-Mart Stores, Inc., The Kroger Company or Food Lion, LLC as a customer could have a material adverse effect on the operating and financial results of the Company.

 

Further, the Company’s revenue is affected by promotion of the Company’s products by significant customers, such as in-store displays created by customers or the promotion of the Company’s products in customers’ periodic advertising. If the Company’s significant customers change the manner in which they market or promote the Company’s products, or if the marketing efforts by significant customers become ineffective, the Company’s sales volume and revenue could be adversely impacted.

 

The Company may not be able to respond successfully to changes in the marketplace.

 

The Company operates in the highly competitive nonalcoholic beverage industry and faces strong competition from other general and specialty beverage companies. The Company’s response to continued and increased customer and competitor consolidations and marketplace competition may result in lower than expected net pricing of the Company’s products. The Company’s ability to gain or maintain the Company’s share of sales or gross margins may be limited by the actions of the Company’s competitors, which may have advantages in setting prices due to lower raw material costs.

 

Competitive pressures in the markets in which the Company operates may cause channel and product mix to shift away from more profitable channels and packages. If the Company is unable to maintain or increase volume in higher-margin products and in packages sold through higher-margin channels such as immediate consumption, pricing and gross margins could be adversely affected. Any related efforts by the Company to improve pricing may result in lower than expected sales volume.

 

In addition, the Company’s sales of finished goods to CCNA and other U.S. Coca‑Cola bottlers are governed by the RMA, pursuant to which the prices, or certain elements of the formulas used to determine the prices, for such finished goods are unilaterally established by CCNA from time to time, which could have an adverse impact on the Company’s profitability.

 

The reliance on purchased finished goods from external sources could have an adverse impact on the Company’s profitability.

 

The Company does not, and does not plan to, manufacture all products it distributes and, therefore, remains reliant on purchased finished goods from external sources to meet customer demand. As a result, the Company is subject to incremental risk including, but

18


 

not limited to, product quality and availability, price variability and production capacity shortfalls for externally purchased finished goods, which could have an impact on the Company’s profitability and customer relationships. In most instances, the Company’s ability to negotiate the prices at which it purchases finished goods from other U.S. Coca‑Cola bottlers is limited pursuant to CCNA’s right to unilaterally establish the prices, or certain elements of the formulas used to determine the prices, for such finished goods under the RMA, which could have an adverse impact on the Company’s profitability.

 

The decisions made by the NPSG regarding product sourcing, product and packaging infrastructure and strategic investment and divestment may be different than decisions that would have been made by the Company individually. Any failure of the NPSG to function efficiently could adversely affect our business and results of operations.

 

The Company is a member of the NPSG, which consists of The Coca‑Cola Company, the Company and other RPBs in The Coca‑Cola Company’s national product supply system, each of which has a representative on the NPSG Board. Pursuant to the NPSG Governance Agreement, the Company has agreed to abide by decisions made by the NPSG Board, which include decisions regarding strategic investment and divestment, optimal national product supply sourcing and new product or packaging infrastructure planning. Although the Company has a representative on the NPSG Board, the Company cannot exercise sole decision-making authority relating to the decisions of the NPSG Board, and the interests of other members of the NPSG Board may diverge from those of the Company. For example, the NPSG Board may require the Company to make investments in its manufacturing assets, subject to certain limitations and consistent with the NPSG Governance Agreement, which the Company would not have chosen to make on its own.

 

Decreases from historic levels of marketing funding provided to the Company from The Coca‑Cola Company and other Beverage Companies could reduce the Company’s profitability.

 

The Coca‑Cola Company and other Beverage Companies have historically provided financial support to the Company through marketing funding. In 2017, the Company received $120.1 million in marketing funding. While the Company does not believe there will be significant changes to the amount of marketing funding support by the Beverage Companies, there can be no assurance the historic levels will continue. Decreases in the level of marketing funding provided, material changes in the marketing funding programs’ performance requirements or the Company’s inability to meet the performance requirements for marketing funding could adversely affect the Company’s profitability.

 

Changes in The Coca‑Cola Company’s and other Beverage Companies’ levels of external advertising, marketing spending and product innovation could reduce the Company’s sales volume.

 

The Coca‑Cola Company and other Beverage Companies have their own external advertising campaigns, marketing spending and product innovation programs, which directly impact the Company’s operations. Decreases in marketing, advertising and product innovation spending by the Beverage Companies, or advertising campaigns that are negatively perceived by the public, could adversely impact the sales volume growth and profitability of the Company. While the Company does not believe there will be significant changes in the level of external advertising and marketing spending by the Beverage Companies, there can be no assurance historic levels will continue in the future. The Company’s volume growth is also dependent on product innovation by the Beverage Companies, especially The Coca‑Cola Company, and their ability to develop and introduce products that meet consumer preferences.

 

The Company’s inability to meet requirements under its beverage agreements could result in the loss of distribution and manufacture rights.

 

Approximately 93% of the Company’s bottle/can sales volume to retail customers in 2017 consisted of products of The Coca‑Cola Company, which is the sole supplier of these products or the concentrates and syrups required to manufacture these products. Under the CBA and the RMA, which authorize the Company to distribute and/or manufacture products of The Coca‑Cola Company, and pursuant to the Company’s distribution agreements with other Beverage Companies, the Company must satisfy various requirements, such as making minimum capital expenditures or maintaining certain performance rates. Failure to satisfy these requirements could result in the loss of distribution and manufacture rights for the respective products under one or more of these beverage agreements. The occurrence of other events defined in these agreements could also result in the termination of one or more beverage agreements.

 

The RMA also requires the Company to provide and sell covered beverages to other U.S. Coca‑Cola bottlers at prices established pursuant to the RMA. As the timing and quantity of such requests by other U.S. Coca‑Cola bottlers can be unpredictable, any failure by the Company to adequately plan for such demand could also constrain the Company’s supply chain network.

 

19


 

Changes in the Company’s level of debt, borrowing costs and credit ratings could impact access to capital and credit markets, restrict the Company’s operating flexibility and limit the Company’s ability to obtain additional financing to fund future needs.

 

As of December 31, 2017, the Company had $1.13 billion of debt and capital lease obligations. The Company’s level of debt requires a substantial portion of future cash flows from operations to be dedicated to the payment of principal and interest, which reduces funds available for other purposes. The Company’s debt level can negatively impact its operations by:

 

 

limiting the Company’s ability to, and/or increasing its cost to, access credit markets for working capital, capital expenditures and other general corporate purposes;

 

increasing the Company’s vulnerability to economic downturns and adverse industry conditions by limiting the Company’s ability to react to changing economic and business conditions; and

 

exposing the Company to increased risk that a significant decrease in cash flows from operations could make it difficult for the Company to meet its debt service requirements and to comply with financial covenants in its debt agreements.

 

The Company’s revolving credit facility, term loan facility and pension and postretirement medical benefits are subject to changes in interest rates. If interest rates increase in the future, the Company’s borrowing costs could increase, which could result in a reduction of the Company’s overall profitability and limit the Company’s ability to spend in other areas. Further, a decline in the interest rates used to discount the Company’s pension and postretirement medical liabilities could increase the cost of these benefits and increase the total liabilities.

 

The Company’s credit ratings could be significantly impacted by the Company’s operating performance, changes in the methodologies used by rating agencies to assess the Company’s credit ratings and by changes in The Coca‑Cola Company’s credit ratings. Lower credit ratings could significantly increase the Company’s interest costs or adversely affect the Company’s ability to obtain additional financing at acceptable interest rates or refinance existing debt.

 

Failure to attract, train and retain qualified employees while controlling labor costs, as well as other labor issues, including a failure to renegotiate collective bargaining agreements, could have an adverse effect on the Company’s profitability.

 

The Company’s future growth and performance depends on its ability to attract, hire, train, develop, motivate and retain a highly skilled, diverse and properly credentialed workforce. The Company’s ability to meet its labor needs while controlling labor costs is subject to many external factors, including competition for and availability of qualified personnel in a given market, unemployment levels within those markets, prevailing wage rates, minimum wage laws, health and other insurance costs and changes in employment and labor laws or other workplace regulations. Any unplanned turnover or unsuccessful implementation of the Company’s succession plans could deplete the Company’s institutional knowledge base and erode its competitive advantage or result in increased costs due to increased competition for employees, higher employee turnover or increased employee benefit costs. Any of the foregoing could adversely affect the Company’s reputation, business, financial condition or results of operations.

 

The Company uses various insurance structures to manage costs related to workers’ compensation, auto liability, medical and other insurable risks. These structures consist of retentions, deductibles, limits and a diverse group of insurers that serve to strategically transfer and mitigate the financial impact of losses. The Company uses commercial insurance as a risk reduction strategy to minimize catastrophic losses from claims. Losses are accrued using assumptions and procedures followed in the insurance industry, then adjusted for company-specific history and expectations. Although the Company has actively sought to control increases in these costs, there can be no assurance the Company will succeed in limiting future cost increases, which could reduce the profitability of the Company’s operations.

 

In addition, the Company’s profitability is substantially affected by the cost of pension retirement benefits, postretirement medical benefits and current employees’ medical benefits. Macro-economic factors beyond the Company’s control, including increases in health care costs, declines in investment returns on pension assets and changes in discount rates used to calculate pension and related liabilities could result in significant increases in these costs for the Company. Although the Company has actively sought to control increases in these costs, there can be no assurance the Company will succeed in limiting future cost increases, which could reduce the profitability of the Company’s operations.

 

Approximately 14% of the Company’s employees are covered by collective bargaining agreements. Any inability by the Company to renegotiate subsequent agreements with labor unions on satisfactory terms and conditions could result in work interruptions or stoppages, which could have a material impact on the Company’s profitability. In addition, the terms and conditions of existing or renegotiated agreements could increase costs or otherwise affect the Company’s ability to fully implement operational changes to improve overall efficiency.

 

20


 

Changes in the inputs used to calculate the Company’s acquisition related contingent consideration liability could have a material adverse impact on the Company’s financial results.

 

The Company’s acquisition related contingent consideration liability, which was $381.3 million as of December 31, 2017, consists of the estimated amounts due to The Coca‑Cola Company under the CBA over the remaining useful life of the related distribution rights. Changes in business conditions or other events could materially change both the projection of future cash flows and the discount rate used in the calculation of the fair value of contingent consideration under the CBA. These changes could materially impact the fair value of the related contingent consideration and could materially impact the amount of noncash expense (or income) recorded each reporting period.

 

Changes in tax laws, disagreements with tax authorities or additional tax liabilities could have a material impact on the Company’s financial results.

 

The Company is subject to income taxes within the United States. The Company’s annual income tax rate is based upon the Company’s income, federal tax laws and various state and local tax laws within the jurisdictions in which the Company operates. Changes in federal, state or local income tax rates and changes in federal, state or local tax laws could have a material adverse impact on the Company’s financial results.

 

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law and significantly reformed the Internal Revenue Code of 1986, as amended. Shortly after the Tax Act was enacted, the Securities and Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) to address the application of GAAP and direct taxpayers to consider the impact of the Act as “provisional” when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for the change in tax law. In accordance with SAB 118, the Company has recognized the provisional tax impacts, outlined above, related to the re-measurement of its net deferred tax liability. The ultimate impact may differ from the provisional amounts, possibly materially, due to, among other things, the significant complexity of the Tax Act, anticipated additional regulatory guidance or related interpretations that may be issued by the Internal Revenue Service (the “IRS”), changes in accounting standards, legislative actions, future actions by states within the U.S. and changes in estimate, analysis, interpretations and assumptions the Company has made.

 

Excise or other taxes imposed on the sale of certain of the Company’s products by the federal government and certain state and local governments, particularly if the taxes were incorporated into shelf prices and passed along to consumers, could cause consumers to shift away from purchasing products of the Company, which could materially affect the Company’s business and financial results.

 

In addition, an assessment of additional taxes resulting from audits of the Company’s tax filings could have an adverse impact on the Company’s profitability, cash flows and financial condition.

 

Litigation or legal proceedings could expose the Company to significant liabilities and damage the Company’s reputation.

 

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, including, but not limited to, litigation claims and legal proceedings arising out of its advertising and marketing practices, product claims and labels, intellectual property and commercial disputes, and environmental and employment matters. 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. Although the Company does not believe a material amount of loss in excess of recorded amounts is reasonably possible as a result of these claims, the Company faces risk of an adverse effect on its results of operations, financial position or cash flows, depending on the outcome of the legal proceedings.

 

Natural disasters, changing weather patterns and unfavorable weather could negatively impact the Company’s future profitability.

 

Natural disasters or unfavorable weather conditions in the geographic regions in which the Company or its suppliers operate could have an adverse impact on the Company’s revenue and profitability. For instance, unusually cold or rainy weather during the summer months may have a temporary effect on the demand for the Company’s products and contribute to lower sales, which could adversely affect the Company’s profitability for such periods. Prolonged drought conditions could lead to restrictions on water use, which could adversely affect the Company’s cost and ability to manufacture and distribute products. Hurricanes or similar storms may have a negative sourcing impact or cause shifts in product mix to lower-margin products and packages.

 

Changing weather patterns, along with the increased frequency or duration of extreme weather and climate events, could impact some of the Company’s facilities or the availability and cost of key raw materials used by the Company in production. In addition, legislative and regulatory initiatives proposed by the U.S. Environmental Protection Agency could directly or indirectly affect the

21


 

Company’s production, distribution and packaging, and the cost of raw materials, fuel, ingredients and water, which could adversely impact the Company’s profitability.

 

Provisions in the CBA and the RMA with The Coca‑Cola Company could delay or prevent a change in control of the Company and a sale of the Company’s Coca‑Cola distribution or manufacturing businesses.

 

Provisions in the CBA and the RMA require the Company to obtain The Coca‑Cola Company’s prior approval of a potential buyer of the Company’s Coca‑Cola distribution or manufacturing businesses, which could delay or prevent a change in control of the Company or the Company’s ability to sell such businesses. The Company can obtain a list of approved third-party buyers from The Coca‑Cola Company annually. In addition, the Company can seek buyer-specific approval from The Coca‑Cola Company upon receipt of a third party offer to purchase the Company or its Coca‑Cola related businesses.

 

The concentration of the Company’s capital stock ownership with the Harrison family limits other stockholders’ ability to influence corporate matters.

 

Members of the Harrison family, including the Company’s Chairman and Chief Executive Officer, J. Frank Harrison, III, beneficially own shares of Common Stock and Class B Common Stock representing approximately 86% of the total voting power of the Company’s outstanding capital stock. In addition, three members of the Harrison family, including Mr. Harrison, serve on the Company’s Board of Directors.

 

As a result, members of the Harrison family have the ability to exert substantial influence or actual control over the Company’s management and affairs and over substantially all matters requiring action by the Company’s stockholders. This concentration of ownership may have the effect of delaying or preventing a change in control otherwise favored by the Company’s other stockholders and could depress the stock price or limit other stockholders’ ability to influence corporate matters, which could result in the Company making decisions that stockholders outside the Harrison family may not view as beneficial.

 

Item 1B.

Unresolved Staff Comments

 

None.

 

Item 2.

Properties

 

As of February 16, 2018, the principal properties of the Company include its corporate headquarters, 12 production facilities and 78 distribution centers. The Company owns 10 production facilities, 64 distribution centers and one additional storage warehouse, and leases its corporate headquarters, subsidiary headquarters, two production facilities, 14 distribution centers and eight additional storage warehouses. Following is a summary of the Company’s production facilities and certain of its distribution facilities.

 

Owned Facilities

 

Facility Type

 

Location

 

Square Feet

 

Distribution Facility

 

Alexandria, VA

 

 

157,000

 

Distribution Facility

 

Columbus, OH

 

 

124,000

 

Distribution Facility

 

Dayton, OH

 

 

114,000

 

Distribution Facility

 

Knoxville, TN

 

 

153,000

 

Distribution Facility

 

Lexington, KY

 

 

171,000

 

Distribution Facility

 

Norfolk, VA

 

 

158,000

 

Production Facility

 

Baltimore, MD

 

 

158,000

 

Production Facility

 

Memphis, TN

 

 

271,000

 

Production Facility

 

Portland, IN

 

 

119,000

 

Production Facility

 

Roanoke, VA

 

 

316,000

 

Production Facility

 

Silver Spring, MD

 

 

104,000

 

Production Facility

 

Twinsburg, OH

 

 

287,000

 

Production Facility

 

West Memphis, AR

 

 

126,000

 

Production/ Distribution Combination Facility

 

Cincinnati, OH

 

 

368,000

 

Production/ Distribution Combination Facility

 

Indianapolis, IN

 

 

380,000

 

Production/ Distribution Combination Facility

 

Sandston, VA

 

 

319,000

 

 

22


 

Leased Facilities

 

Facility Type

 

Location

 

Square

Feet

 

 

Lease

Expiration

 

 

2017 Rent

(in millions)

 

Corporate headquarters(1)(3)

 

Charlotte, NC

 

 

175,000

 

 

 

2021

 

 

$

4.4

 

Customer Center

 

Charlotte, NC

 

 

71,000

 

 

 

2030

 

 

 

0.3

 

Distribution Facility

 

Baltimore, MD

 

 

290,000

 

 

 

2025

 

 

 

2.0

 

Distribution Facility

 

Charleston, SC

 

 

50,000

 

 

 

2027

 

 

 

0.3

 

Distribution Facility

 

Clayton, NC

 

 

233,000

 

 

 

2026

 

 

 

1.1

 

Distribution Facility

 

Cleveland, TN

 

 

75,000

 

 

 

2030

 

 

 

0.2

 

Distribution Facility

 

Greenville, SC

 

 

57,000

 

 

 

2018

 

 

 

0.8

 

Distribution Facility

 

La Vergne, TN

 

 

220,000

 

 

 

2026

 

 

 

0.8

 

Distribution Facility

 

Louisville, KY

 

 

300,000

 

 

 

2029

 

 

 

1.4

 

Production/ Distribution Combination Facility(2)(3)

 

Charlotte, NC

 

 

647,000

 

 

 

2020

 

 

 

4.1

 

Production/ Distribution Combination Facility

 

Nashville, TN

 

 

330,000

 

 

 

2024

 

 

 

0.5

 

Subsidiary headquarters

 

Charlotte, NC

 

 

57,000

 

 

 

2022

 

 

 

0.5

 

Warehouse

 

Bishopville, SC

 

 

100,000

 

 

 

2026

 

 

 

0.3

 

Warehouse

 

Charlotte, NC

 

 

367,000

 

 

 

2022

 

 

 

1.0

 

Warehouse

 

Roanoke, VA

 

 

111,000

 

 

 

2025

 

 

 

0.8

 

 

(1)

Includes two adjacent buildings totaling 175,000 square feet.

(2)

Includes a 542,000 square foot production center and adjacent 105,000 square foot distribution center.

(3)

The leases for these facilities are with a related party.

 

The Company currently has sufficient production capacity to meet its operational requirements. The approximate percentage utilization of the Company's production facilities, which fluctuates with the seasonality of the business, as of December 31, 2017, is indicated below:

 

Location

 

Utilization(1)

 

Portland, Indiana

 

 

90

%

Roanoke, Virginia

 

 

78

%

Nashville, Tennessee

 

 

76

%

Charlotte, North Carolina

 

 

74

%

Silver Spring, Maryland

 

 

70

%

Cincinnati, Ohio

 

 

67

%

Sandston, Virginia

 

 

59

%

Baltimore, Maryland

 

 

51

%

Twinsburg, Ohio

 

 

48

%

Memphis, Tennessee

 

 

48

%

Indianapolis, Indiana

 

 

46

%

West Memphis, Arkansas

 

 

43

%

 

(1) Estimated 2018 production divided by capacity, based on operations of 6 days per week and 20 hours per day.

 

In addition to the production facilities noted above, the Company utilizes a portion of the production capacity at SAC, a cooperative located in Bishopville, South Carolina, that owns a 261,000 square foot production facility.

 

23


 

The Company’s products are generally transported to sales distribution facilities for storage pending sale. The number of sales distribution facilities by market area as of February 16, 2018, was as follows:

 

Location

 

Number of

Facilities

 

Arkansas / Northwestern Mississippi

 

 

3

 

Indiana / Southeastern Illinois

 

 

8

 

Kentucky / West Virginia

 

 

12

 

Maryland / Delaware / District of Columbia / South-Central Pennsylvania

 

 

7

 

North Carolina

 

 

11

 

Ohio

 

 

11

 

South Carolina

 

 

8

 

Tennessee

 

 

7

 

Virginia

 

 

11

 

Total number of sales distribution facilities

 

 

78

 

 

The Company believes its facilities are all in good condition and are adequate for the Company’s operations as presently conducted.

 

As of January 28, 2018, the Company owned and operated approximately 4,300 vehicles in the sale and distribution of the Company’s beverage products, of which approximately 2,800 were route delivery trucks. In addition, the Company owned approximately 500,000 beverage dispensing and vending machines for the sale of the Company’s products in the Company’s bottling territories as of January 28, 2018.

 

Item 3.

Legal Proceedings

 

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.

 

Item 4.

Mine Safety Disclosures

 

Not applicable.

24


 

Executive Officers of the Registrant

 

The following information is provided with respect to each of the executive officers of the Company as of February 16, 2018.

 

Name

 

Position and Office

 

Age

 

J. Frank Harrison, III

 

Chairman of the Board of Directors and Chief Executive Officer

 

 

63

 

Henry W. Flint

 

President and Chief Operating Officer

 

 

63

 

William J. Billiard

 

Senior Vice President and Chief Accounting Officer

 

 

51

 

Robert G. Chambless

 

Executive Vice President, Franchise Beverage Operations

 

 

52

 

Morgan H. Everett

 

Vice President

 

 

36

 

E. Beauregarde Fisher III

 

Executive Vice President, General Counsel and Secretary

 

 

49

 

James E. Harris

 

Executive Vice President, Business Transformation and Business Services

 

 

55

 

Umesh M. Kasbekar

 

Vice Chairman of the Board of Directors

 

 

60

 

David M. Katz

 

Executive Vice President and Chief Financial Officer

 

 

49

 

Kimberly A. Kuo

 

Senior Vice President, Public Affairs, Communications and Communities

 

 

47

 

James L. Matte

 

Senior Vice President, Human Resources

 

 

58

 

 

Mr. J. Frank Harrison, III was appointed Chairman of the Board of Directors in December 1996. Mr. Harrison, III served as Vice Chairman from November 1987 through December 1996 and was appointed as the Company's Chief Executive Officer in May 1994. He was first employed by the Company in 1977 and has also served as a Division Sales Manager and as a Vice President.

 

Mr. Henry W. Flint was appointed President and Chief Operating Officer in August 2012. He has served as a Director of the Company since April 2007. Previously, he was Vice Chairman of the Board of Directors, a position he held from April 2007 to August 2012. Prior to that, he was Executive Vice President and Assistant to the Chairman of the Company, a position to which he was appointed in July 2004. Prior to that, he was a Managing Partner at the law firm of Kennedy Covington Lobdell & Hickman, L.L.P., with which he was associated from 1980 to 2004.

 

Mr. William J. Billiard was appointed Chief Accounting Officer in February 2006 and Senior Vice President in April 2017. In addition to these roles, he has also served as Vice President, Controller from February 2006 to November 2010, Vice President, Operations Finance from November 2010 to June 2013 and Vice President, Corporate Controller from June 2013 to November 2014. Before joining the Company, he served in various senior financial roles including Chief Financial Officer, Treasurer, Corporate Controller and Vice President of Finance for companies in the Charlotte, North Carolina and Atlanta, Georgia areas and was an accountant with Deloitte.

 

Mr. Robert G. Chambless was appointed Executive Vice President, Franchise Beverage Operations in January 2018. Prior to this, he served in various positions within the Company, including Executive Vice President, Franchise Strategy and Operations from April 2016 to January 2018, Senior Vice President, Sales, Field Operations and Marketing from August 2010 to March 2016, Senior Vice President, Sales from June 2008 to July 2010, Vice President - Franchise Sales from 2003 to 2008, Region Sales Manager for the Company’s Southern Division from 2000 to 2003 and Sales Manager in the Company’s Columbia, South Carolina branch from 1997 to 2000. He has served the Company in several other positions prior to 1997 and was first employed by the Company in 1986.

 

Ms. Morgan H. Everett was appointed Vice President in January 2016. Prior to that, she was the Community Relations Director of the Company, a position she held from January 2009 to December 2015. She has been an employee of the Company since October 2004.

 

Mr. E. Beauregarde Fisher III was appointed Executive Vice President, General Counsel in February 2017 and Secretary of the Company in May 2017. Before joining the Company, he was a partner with the law firm of Moore & Van Allen, PLLC where he served on the firm’s management committee and chaired its business law practice group. He was associated with the firm from 1998 to 2017 and concentrated his practice on mergers and acquisitions, corporate governance and general corporate matters. From 2011 to 2017, he served as the Company’s outside corporate counsel.

 

Mr. James E. Harris was appointed Executive Vice President, Business Transformation and Business Services in January 2018 after serving as Executive Vice President, Business Transformation from April 2016 to January 2018 and Senior Vice President, Shared Services and Chief Financial Officer from January 2008 to March 2016. He served as a Director of the Company from August 2003 until January 2008 and was a member of the Audit Committee and the Finance Committee. He served as Executive Vice President and Chief Financial Officer of MedCath Corporation, an operator of cardiovascular hospitals, from December 1999 to January 2008. From 1998 to 1999, he was Chief Financial Officer of Fresh Foods, Inc., a manufacturer of fully cooked food products. From 1987 to 1998,

25


 

he served in several different officer positions with The Shelton Companies, Inc., a private investment firm. He also served two years with Ernst & Young LLP as a senior accountant.

 

Mr. Umesh M. Kasbekar was appointed Vice Chairman of the Board of Directors in January 2016. Previously he served as the Secretary of the Company from August 2012 to May 2017 and as Senior Vice President, Planning and Administration from June 2005 to December 2015. Prior to that, he was Vice President, Planning, a position he was appointed to in December 1988.

 

Mr. David M. Katz was appointed Executive Vice President and Chief Financial Officer in January 2018. Previously, he served as Executive Vice President, Product Supply and Culture & Stewardship from April 2016 to January 2018, Executive Vice President, Human Resources from April 2016 to April 2017 and Senior Vice President from January 2013 to March 2016. He held the position of Senior Vice President, Midwest Region for CCR from November 2010 to December 2012. Prior to the formation of CCR, he was Vice President, Sales Operations for Coca‑Cola Enterprises Inc.’s (“CCE”) East Business Unit. From 2008 to 2010, he served as President and Chief Executive Officer of Coca‑Cola Bottlers’ Sales and Services Company, LLC. He began his Coca‑Cola career in 1993 with CCE as a Logistics Consultant.

 

Ms. Kimberly A. Kuo was appointed Senior Vice President, Public Affairs, Communications and Communities in January 2016. Before joining the Company, she operated her own communications and marketing consulting firm, Sterling Strategies, from January 2014 to December 2015. Prior to that, she served as Chief Marketing Officer at Baker and Taylor, a book and entertainment distributor from February 2009 to July 2013. Prior to her experience at Baker and Taylor, she served in various communications and government affairs roles on Capitol Hill, in political campaigns, trade associations, and corporations.

 

Mr. James L. Matte was appointed Senior Vice President, Human Resources in April 2017 after joining the Company as Vice President of Human Resources in September 2015. Before joining the Company, Mr. Matte served as a labor and employee relations consultant to several private equity groups from January 2014 to August 2015. Prior to that, he was employed by Coca-Cola Enterprises in North America and in Europe, holding a variety of human resources leadership positions related to human resource strategy, talent management, employee and labor relations, organizational development and employment practices from August 2004 to December 2013. Prior to his career at Coca-Cola Enterprises, he held the positions of Attorney and Equity Partner at McGuireWoods, LLP.

 

26


 

PART II

 

Item 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Company has two classes of common stock outstanding, Common Stock and Class B Common Stock. The Common Stock is traded on the NASDAQ Global Select Market under the symbol COKE. The table below sets forth for the periods indicated the high and low reported sales prices per share of Common Stock. There is no established public trading market for the Class B Common Stock. Shares of Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock.

 

 

 

2017

 

 

2016

 

 

 

High

 

 

Low

 

 

High

 

 

Low

 

First quarter

 

$

207.40

 

 

$

162.31

 

 

$

184.20

 

 

$

150.26

 

Second quarter

 

 

240.45

 

 

 

195.95

 

 

 

167.94

 

 

 

119.80

 

Third quarter

 

 

249.54

 

 

 

200.10

 

 

 

161.44

 

 

 

138.81

 

Fourth quarter

 

 

230.00

 

 

 

182.26

 

 

 

182.26

 

 

 

125.00

 

 

A quarterly dividend rate of $0.25 per share on both Common Stock and Class B Common Stock was maintained throughout 2017 and 2016. Pursuant to the Company's certificate of incorporation, no cash dividend or dividend of property or stock other than stock of the Company, as specifically described in the certificate of incorporation, may be declared and paid on the Class B Common Stock unless an equal or greater dividend is declared and paid on the Common Stock. Shares of Common Stock and Class B Common Stock have participated equally in dividends since 1994.

 

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.

 

As of February 16, 2018, the number of stockholders of record of the Common Stock and Class B Common Stock was 2,701 and 10, respectively.

 

On March 7, 2017, the Compensation Committee determined that 40,000 shares of restricted Class B Common Stock, $1.00 par value, should be issued (pursuant to a Performance Unit Award Agreement approved in 2008) to J. Frank Harrison, III, in connection with his services in 2016 as Chairman of the Board of Directors and Chief Executive Officer of the Company. As permitted under the terms of the Performance Unit Award Agreement, 18,980 of such shares were settled in cash to satisfy tax withholding obligations in connection with the vesting of the performance units. The shares issued to Mr. Harrison were issued without registration under the Securities Act of 1933, as amended, in reliance on Section 4(a)(2) therein.

 

Stock Performance Graph

 

Presented below is a line graph comparing the yearly percentage change in the cumulative total return on the Company’s Common Stock to the cumulative total return of the Standard & Poor’s 500 Index and a peer group for the period commencing December 30, 2012 and ending December 31, 2017. The peer group is comprised of Dr Pepper Snapple, National Beverage Corp., The Coca‑Cola Company, Cott Corporation and PepsiCo, Inc.

 

The graph assumes $100 was invested in the Company’s Common Stock, the Standard & Poor’s 500 Index and the peer group on December 30, 2012 and all dividends were reinvested on a quarterly basis. Returns for the companies included in the peer group have been weighted on the basis of the total market capitalization for each company.

 

27


 

 

*

$100 invested on 12/30/12 in stock or 12/31/12 in index, including reinvestment of dividends. Index calculated on month-end basis.

 

 

28


 

Item 6.

Selected Financial Data

 

The following table sets forth certain selected financial data concerning the Company for the five fiscal years ended December 31, 2017. The data is derived from audited consolidated financial statements of the Company. See Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying notes to consolidated financial statements for additional information.

 

 

 

Fiscal Year

 

(in thousands, except per share data and number of facilities)

 

2017(1)

 

 

2016(1)

 

 

2015(1)(2)

 

 

2014(1)

 

 

2013

 

Net sales

 

$

4,323,668

 

 

$

3,156,428

 

 

$

2,306,458

 

 

$

1,746,369

 

 

$

1,641,331

 

Cost of sales

 

 

2,782,721

 

 

 

1,940,706

 

 

 

1,405,426

 

 

 

1,041,130

 

 

 

982,691

 

Gross profit

 

 

1,540,947

 

 

 

1,215,722

 

 

 

901,032

 

 

 

705,239

 

 

 

658,640

 

Selling, delivery and administrative expenses

 

 

1,444,768

 

 

 

1,087,863

 

 

 

802,888

 

 

 

619,272

 

 

 

584,993

 

Income from operations

 

 

96,179

 

 

 

127,859

 

 

 

98,144

 

 

 

85,967

 

 

 

73,647

 

Interest expense, net

 

 

41,869

 

 

 

36,325

 

 

 

28,915

 

 

 

29,272

 

 

 

29,403

 

Other income (expense), net

 

 

(4,197

)

 

 

1,870

 

 

 

(3,576

)

 

 

(1,077

)

 

 

-

 

Gain (loss) on exchange transactions

 

 

12,893

 

 

 

(692

)

 

 

8,807

 

 

 

-

 

 

 

-

 

Gain on sale of business

 

 

-

 

 

 

-

 

 

 

22,651

 

 

 

-

 

 

 

-

 

Bargain purchase gain, net of tax of $1,265

 

 

-

 

 

 

-

 

 

 

2,011

 

 

 

-

 

 

 

-

 

Income before taxes

 

 

63,006

 

 

 

92,712

 

 

 

99,122

 

 

 

55,618

 

 

 

44,244

 

Income tax expense (benefit)

 

 

(39,841

)

 

 

36,049

 

 

 

34,078

 

 

 

19,536

 

 

 

12,142

 

Net income

 

 

102,847

 

 

 

56,663

 

 

 

65,044

 

 

 

36,082

 

 

 

32,102

 

Less: Net income attributable to noncontrolling interest

 

 

6,312

 

 

 

6,517

 

 

 

6,042

 

 

 

4,728

 

 

 

4,427

 

Net income attributable to Coca-Cola Bottling Co. Consolidated

 

$

96,535

 

 

$

50,146

 

 

$

59,002

 

 

$

31,354

 

 

$

27,675

 

Basic net income per share based on net income attributable to Coca-Cola Bottling Co. Consolidated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

$

10.35

 

 

$

5.39

 

 

$

6.35

 

 

$

3.38

 

 

$

2.99

 

Class B Common Stock

 

$

10.35

 

 

$

5.39

 

 

$

6.35

 

 

$

3.38

 

 

$

2.99

 

Diluted net income per share based on net income attributable to Coca-Cola Bottling Co. Consolidated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

$

10.30

 

 

$

5.36

 

 

$

6.33

 

 

$

3.37

 

 

$

2.98

 

Class B Common Stock

 

$

10.29

 

 

$

5.35

 

 

$

6.31

 

 

$

3.35

 

 

$

2.97

 

Cash dividends per share - Common Stock

 

$

1.00

 

 

$

1.00

 

 

$

1.00

 

 

$

1.00

 

 

$

1.00

 

Cash dividends per share - Class B Common Stock

 

$

1.00

 

 

$

1.00

 

 

$

1.00

 

 

$

1.00

 

 

$

1.00

 

Net cash provided by operating activities

 

$

307,816

 

 

$

161,995

 

 

$

108,290

 

 

$

91,903

 

 

$

96,374

 

Net cash used in investing activities

 

 

458,895

 

 

 

452,026

 

 

 

217,343

 

 

 

124,251

 

 

 

55,296

 

Net cash provided by (used in) financing activities

 

 

146,131

 

 

 

256,383

 

 

 

155,456

 

 

 

29,682

 

 

 

(39,716

)

Total assets

 

 

3,072,960

 

 

 

2,449,484

 

 

 

1,846,565

 

 

 

1,430,641

 

 

 

1,272,361

 

Working capital

 

 

155,086

 

 

 

135,904

 

 

 

108,366

 

 

 

58,177

 

 

 

28,919

 

Acquisition related contingent consideration

 

 

381,291

 

 

 

253,437

 

 

 

136,570

 

 

 

46,850

 

 

 

-

 

Current portion of obligations under capital leases

 

 

8,221

 

 

 

7,527

 

 

 

7,063

 

 

 

6,446

 

 

 

5,939

 

Obligations under capital leases

 

 

35,248

 

 

 

41,194

 

 

 

48,721

 

 

 

52,604

 

 

 

59,050

 

Current portion of debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

20,000

 

Long-term debt

 

 

1,088,018

 

 

 

907,254

 

 

 

619,628

 

 

 

442,324

 

 

 

374,771

 

Total equity of Coca-Cola Bottling Co. Consolidated

 

 

366,702

 

 

 

277,131

 

 

 

243,056

 

 

 

183,609

 

 

 

191,320

 

Equivalent unit case volume (percentage change)(3):

 

 

31.6

%

 

 

36.4

%

 

 

28.9

%

 

 

6.1

%

 

 

0.3

%

Sparkling beverages

 

 

27.8

%

 

 

32.5

%

 

 

24.1

%

 

 

3.6

%

 

 

-2.0

%

Still beverages

 

 

40.8

%

 

 

47.3

%