Edgar Filing: COCA COLA BOTTLING CO CONSOLIDATED /DE/

coke-10q_20180701.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 1, 2018

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)

(704) 557-4400

(Registrant’s telephone number, including area code)

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 (§232.405 of this chapter) 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 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 Exchange Act). Yes ☐ No ☒

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


Class	Outstanding at July 29, 2018
Common Stock, $1.00 Par Value	7,141,447
Class B Common Stock, $1.00 Par Value	2,213,018

COCA‑COLA BOTTLING CO. CONSOLIDATED

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JULY 1, 2018

INDEX

		Page

	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Condensed Statements of Operations	2

	Consolidated Condensed Statements of Comprehensive Income	3

	Consolidated Condensed Balance Sheets	4

	Consolidated Condensed Statements of Changes in Equity	5

	Consolidated Condensed Statements of Cash Flows	6

	Notes to Consolidated Condensed Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	54

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	55

Item 1A.	Risk Factors	55

Item 6.	Exhibits	56

	Signatures	57

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements.

COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Second Quarter					First Half
(in thousands, except per share data)	2018			2017		2018			2017
Net sales	$	1,227,272		$	1,169,291	$	2,299,336		$	2,034,993
Cost of sales		815,295			754,113		1,522,411			1,287,794
Gross profit		411,977			415,178		776,925			747,199
Selling, delivery and administrative expenses		392,298			366,523		776,243			683,594
Income from operations		19,679			48,655		682			63,605
Interest expense, net		12,744			10,440		24,790			19,910
Other expense, net		9,818			26,891		5,308			40,479
Income (loss) before income taxes		(2,883	)		11,324		(29,416	)		3,216
Income tax expense (benefit)		(135	)		3,743		(13,106	)		52
Net income (loss)		(2,748	)		7,581		(16,310	)		3,164
Less: Net income attributable to noncontrolling interest		1,185			1,233		1,808			1,867
Net income (loss) attributable to Coca-Cola Bottling Co. Consolidated	$	(3,933	)	$	6,348	$	(18,118	)	$	1,297

Basic net income (loss) per share based on net income (loss) attributable to Coca-Cola Bottling Co. Consolidated:
Common Stock	$	(0.42	)	$	0.68	$	(1.94	)	$	0.14
Weighted average number of Common Stock shares outstanding		7,141			7,141		7,141			7,141

Class B Common Stock	$	(0.42	)	$	0.68	$	(1.94	)	$	0.14
Weighted average number of Class B Common Stock shares outstanding		2,213			2,193		2,206			2,185

Diluted net income (loss) per share based on net income (loss) attributable to Coca-Cola Bottling Co. Consolidated:
Common Stock	$	(0.42	)	$	0.68	$	(1.94	)	$	0.14
Weighted average number of Common Stock shares outstanding – assuming dilution		9,354			9,374		9,347			9,366

Class B Common Stock	$	(0.42	)	$	0.67	$	(1.94	)	$	0.13
Weighted average number of Class B Common Stock shares outstanding – assuming dilution		2,213			2,233		2,206			2,225

Cash dividends per share:
Common Stock	$	0.25		$	0.25	$	0.50		$	0.50
Class B Common Stock	$	0.25		$	0.25	$	0.50		$	0.50

See accompanying notes to consolidated condensed financial statements.

COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Second Quarter						First Half
(in thousands)	2018			2017			2018			2017
Net income (loss)	$	(2,748	)	$	7,581		$	(16,310	)	$	3,164

Other comprehensive income, net of tax:
Defined benefit plans reclassification including pension costs:
Actuarial gains		703			495			1,406			991
Prior service benefits		5			5			9			9
Postretirement benefits reclassification included in benefits costs:
Actuarial gains		375			398			752			796
Prior service costs		(348	)		(458	)		(696	)		(916	)
Foreign currency translation adjustment		(9	)		14			(6	)		16
Other comprehensive income, net of tax		726			454			1,465			896

Comprehensive income (loss)		(2,022	)		8,035			(14,845	)		4,060
Less: Comprehensive income attributable to noncontrolling interest		1,185			1,233			1,808			1,867
Comprehensive income (loss) attributable to Coca-Cola Bottling Co. Consolidated	$	(3,207	)	$	6,802		$	(16,653	)	$	2,193

See accompanying notes to consolidated condensed financial statements.

COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)	July 1, 2018			December 31, 2017
ASSETS
Current Assets:
Cash and cash equivalents	$	19,724		$	16,902
Accounts receivable, trade		456,748			396,022
Allowance for doubtful accounts		(7,740	)		(7,606	)
Accounts receivable from The Coca-Cola Company		64,144			65,996
Accounts receivable, other		29,037			38,960
Inventories		222,073			183,618
Prepaid expenses and other current assets		88,900			100,646
Total current assets		872,886			794,538
Property, plant and equipment, net		1,012,423			1,031,388
Leased property under capital leases, net		26,692			29,837
Other assets		116,091			116,209
Goodwill		170,899			169,316
Distribution agreements, net		906,596			913,352
Customer lists and other identifiable intangible assets, net		17,401			18,320
Total assets	$	3,122,988		$	3,072,960

LIABILITIES AND EQUITY
Current Liabilities:
Current portion of obligations under capital leases	$	8,263		$	8,221
Accounts payable, trade		191,665			197,049
Accounts payable to The Coca-Cola Company		234,698			171,042
Other accrued liabilities		201,005			185,530
Accrued compensation		52,221			72,484
Accrued interest payable		5,071			5,126
Total current liabilities		692,923			639,452
Deferred income taxes		96,791			112,364
Pension and postretirement benefit obligations		118,658			118,392
Other liabilities		609,069			620,579
Obligations under capital leases		31,012			35,248
Long-term debt		1,131,313			1,088,018
Total liabilities		2,679,766			2,614,053
Commitments and Contingencies
Equity:
Common Stock, $1.00 par value: 30,000,000 shares authorized; 10,203,821 shares issued		10,204			10,204
Class B Common Stock, $1.00 par value: 10,000,000 shares authorized; 2,841,132 and 2,820,836 shares issued, respectively		2,839			2,819
Capital in excess of par value		124,228			120,417
Retained earnings		365,929			388,718
Accumulated other comprehensive loss		(92,737	)		(94,202	)
Treasury stock, at cost: Common Stock – 3,062,374 shares		(60,845	)		(60,845	)
Treasury stock, at cost: Class B Common Stock – 628,114 shares		(409	)		(409	)
Total equity of Coca-Cola Bottling Co. Consolidated		349,209			366,702
Noncontrolling interest		94,013			92,205
Total equity		443,222			458,907
Total liabilities and equity	$	3,122,988		$	3,072,960

See accompanying notes to consolidated condensed financial statements.

COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN EQUITY

(Unaudited)

(in thousands, except share data)	Common Stock		Class B Common Stock		Capital in Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock - Common Stock			Treasury Stock - Class B Common Stock			Total Equity of Coca-Cola Bottling Co. Consolidated			Non- controlling Interest		Total Equity
Balance on December 31, 2017	$	10,204	$	2,819	$	120,417	$	388,718		$	(94,202	)	$	(60,845	)	$	(409	)	$	366,702		$	92,205	$	458,907
Net income (loss)		-		-		-		(18,118	)		-			-			-			(18,118	)		1,808		(16,310	)
Other comprehensive income, net of tax		-		-		-		-			1,465			-			-			1,465			-		1,465
Cash dividends paid:
Common Stock ($0.50 per share)		-		-		-		(3,570	)		-			-			-			(3,570	)		-		(3,570	)
Class B Common Stock ($0.50 per share)		-		-		-		(1,101	)		-			-			-			(1,101	)		-		(1,101	)
Issuance of 20,296 shares of Class B Common Stock		-		20		3,811		-			-			-			-			3,831			-		3,831
Balance on July 1, 2018	$	10,204	$	2,839	$	124,228	$	365,929		$	(92,737	)	$	(60,845	)	$	(409	)	$	349,209		$	94,013	$	443,222

Balance on January 1, 2017	$	10,204	$	2,798	$	116,769	$	301,511		$	(92,897	)	$	(60,845	)	$	(409	)	$	277,131		$	85,893	$	363,024
Net income (loss)		-		-		-		1,297			-			-			-			1,297			1,867		3,164
Other comprehensive income, net of tax		-		-		-		-			896			-			-			896			-		896
Cash dividends paid:																				-
Common Stock ($0.50 per share)		-		-		-		(3,571	)		-			-			-			(3,571	)		-		(3,571	)
Class B Common Stock ($0.50 per share)		-		-		-		(1,091	)		-			-			-			(1,091	)		-		(1,091	)
Issuance of 21,020 shares of Class B Common Stock		-		21		3,648		-			-			-			-			3,669			-		3,669
Balance on July 2, 2017	$	10,204	$	2,819	$	120,417	$	298,146		$	(92,001	)	$	(60,845	)	$	(409	)	$	278,331		$	87,760	$	366,091

See accompanying notes to consolidated condensed financial statements.

COCA‑COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	First Half
(in thousands)	2018			2017
Cash Flows from Operating Activities:
Net income (loss)	$	(16,310	)	$	3,164
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation expense		82,658			70,330
Amortization of intangible assets and deferred proceeds, net		11,249			6,717
Deferred income taxes		(16,286	)		(24,918	)
Loss on sale of property, plant and equipment		4,295			1,975
Fair value adjustment of acquisition related contingent consideration		3,957			28,365
Stock compensation expense		1,728			4,577
Amortization of debt costs		730			537
Proceeds from Territory Conversion Fee		-			87,066
Change in current assets less current liabilities (exclusive of acquisitions)		(16,127	)		10,470
Change in other noncurrent assets (exclusive of acquisitions)		3,830			(9,984	)
Change in other noncurrent liabilities (exclusive of acquisitions)		(2,493	)		628
Other		11			44
Total adjustments		73,552			175,807
Net cash provided by operating activities		57,242			178,971

Cash Flows from Investing Activities:
Additions to property, plant and equipment (exclusive of acquisitions)		(85,279	)		(79,607	)
Investment in CONA Services LLC		(2,020	)		(1,001	)
Acquisition of distribution territories and regional manufacturing facilities, net of cash acquired and settlements		4,706			(227,759	)
Proceeds from cold drink equipment		3,789			8,400
Proceeds from the sale of property, plant and equipment		3,047			384
Glacéau distribution agreement consideration		-			(15,598	)
Net cash used in investing activities		(75,757	)		(315,181	)

Cash Flows from Financing Activities:
Borrowings under Revolving Credit Facility		190,000			238,000
Proceeds from issuance of Senior Notes		150,000			125,000
Payments on Revolving Credit Facility		(297,000	)		(190,000	)
Payment of acquisition related contingent consideration		(11,263	)		(6,556	)
Cash dividends paid		(4,671	)		(4,662	)
Principal payments on capital lease obligations		(4,194	)		(3,695	)
Debt issuance fees		(1,535	)		(213	)
Net cash provided by financing activities		21,337			157,874

Net increase in cash		2,822			21,664
Cash at beginning of period		16,902			21,850
Cash at end of period	$	19,724		$	43,514

Significant noncash investing and financing activities:
Issuance of Class B Common Stock in connection with stock award	$	3,831		$	3,669
Additions to property, plant and equipment accrued and recorded in accounts payable, trade		4,178			10,425

See accompanying notes to consolidated condensed financial statements.

COCA‑COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1.Significant Accounting Policies and New Accounting Pronouncements

The consolidated condensed financial statements include the accounts of Coca‑Cola Bottling Co. Consolidated and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The consolidated condensed financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented:

•

The financial position as of July 1, 2018 and December 31, 2017.

•

The results of operations and comprehensive income for the 13 week periods ended July 1, 2018 (“second quarter” of fiscal 2018 (“2018”)) and July 2, 2017 (“second quarter” of fiscal 2017 (“2017”)), and the 26 week periods ended July 1, 2018 (“first half” of 2018) and July 2, 2017 (“first half” of 2017).

•

The changes in equity and cash flows for the first half of 2018 and the first half of 2017.

The consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10‑K for 2017 filed with the Securities and Exchange Commission (the “SEC”).

The preparation of consolidated condensed financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Significant Accounting Policies

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its consolidated condensed financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10‑K for 2017 under the caption “Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements” in Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” a discussion of the Company’s most critical accounting policies, which are those the Company believes to be the most important to the portrayal of its financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Aside from the accounting standards discussed in “Recently Adopted Pronouncements” below, the Company did not make changes in significant accounting policies during the second quarter of 2018. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is contemplated and prior to making such change.

Recently Adopted Pronouncements

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers,” (the “revenue recognition standard”). Subsequent to the issuance of ASU 2014‑09, the FASB issued several additional accounting standards for revenue recognition to update the effective date of the revenue recognition guidance and to provide additional clarification on the updated standard. The new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted the revenue recognition standard in the first quarter of 2018, as discussed in Note 2.

In January 2016, the FASB issued ASU 2016-01 “Recognition and Measurement of Financial Assets and Financial Liabilities,” which revises the classification and measurement of investments in equity securities and the presentation of certain fair value changes in financial liabilities measured at fair value. The new guidance is effective for annual and interim periods beginning after December 31, 2017. The Company adopted this guidance in the first quarter of 2018 and there was no material impact to the Company’s consolidated condensed financial statements.

In January 2017, the FASB issued ASU 2017-01 “Clarifying the Definition of a Business,” which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The new guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance in the first quarter of 2018 and there was no material impact to the Company’s consolidated condensed financial statements.

In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment,” which simplifies how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Under the new guidance, entities should instead perform annual or interim goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the excess of the carrying amount over the fair value of the respective reporting unit. The new guidance is effective for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company adopted this guidance in the first quarter of 2018 and there was no material impact to the Company’s consolidated condensed financial statements.

In March 2017, the FASB issued ASU 2017‑07 “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” which requires that the service cost component of the Company’s net periodic pension cost and net periodic postretirement benefit cost be included in the same line item as other compensation costs arising from services rendered by employees, with the non-service cost components of net periodic benefit cost being classified outside of a subtotal of income from operations. Of the components of net periodic benefit cost, only the service cost component is eligible for asset capitalization. The new guidance is effective for annual periods beginning after December 31, 2017, including interim periods within those annual periods. The Company adopted this guidance in the first quarter of 2018 using the practical expedient which allows entities to use information previously disclosed in their pension and other postretirement benefit plans note as the estimation basis to apply the retrospective presentation requirements in ASU 2017-07.

With the adoption of this guidance in the first quarter of 2018, the Company recorded the non-service cost component of net periodic benefit cost, which totaled $0.7 million in the second quarter of 2018 and $1.4 million in the first half of 2018, to other expense, net in the consolidated condensed financial statements. The Company reclassified $1.3 million from the second quarter of 2017 and $2.7 million from the first half of 2017 of non-service cost components of net periodic benefit cost and other benefit plan charges from selling, delivery and administrative (“S,D&A”) expenses to other expense, net in the consolidated condensed financial statements. The non-service cost component of net periodic benefit cost is included in the Nonalcoholic Beverages segment.

Recently Issued Pronouncements

In February 2018, the FASB issued ASU 2018‑02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which provides the option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Tax Act”) from accumulated other comprehensive income to retained earnings. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and can be early adopted. The Company is currently evaluating whether it will adopt this guidance.

In February 2016, the FASB issued ASU 2016-02 “Leases,” which requires lessees to recognize a right-to-use asset and a lease liability for virtually all leases (other than leases meeting the definition of a short-term lease). The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods beginning the following fiscal year. The Company anticipates adopting the new accounting standard on December 31, 2018, the first day of fiscal 2019, using the optional transition method, which was approved by the FASB in March 2018 and allows companies the option to use the effective date as the date of initial application on transition and to not adjust comparative period financial information or make the new required disclosures for periods prior to the effective date. The Company is in the process of evaluating the impact of the new guidance on the Company’s consolidated condensed financial statements and anticipates this impact will be material to its consolidated condensed balance sheets. Additionally, the Company is evaluating the impacts of the standard beyond accounting, including system, data and process changes required to comply with the standard.

2.Revenue Recognition

The Company adopted the revenue recognition standard, including all relevant amendments and practical expedients, in the first quarter of 2018 using the modified retrospective approach for all contracts not completed at the date of initial adoption, considering materiality and applicability. Upon adoption of this guidance, there was no material impact to the Company’s consolidated condensed financial statements.

The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. The Company has defined its performance obligations for its contracts as either at a point in time or over time.

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

The Company’s products are sold and distributed through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During the first half of 2018, approximately 67% of the Company’s bottle/can sales volume to retail customers was sold for future consumption, while the remaining bottle/can sales v