UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

For the fiscal year ended December 31, 2017

or

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)

 

 

 

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:

 

 

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.

 

 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. 

 

*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.

 

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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.

 

 

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Table of Contents

 

 

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PART I

 

 

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.

 

 

⁽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 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:

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

 

 

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:

 

 

⁽¹⁾ Territory exchanged by Piedmont.

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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:

 

 

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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:

 

 

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

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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.

 

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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.

 

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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.

 

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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.

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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.

 

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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

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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.

 

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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:

 

 

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.

 

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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

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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.

 

 

None.

 

 

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

 

 

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Leased Facilities

 

 

 

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:

 

 

⁽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.

 

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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:

 

 

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.

 

 

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.

 

 

Not applicable.

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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.

 

 

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,

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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.

 

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PART II

 

 

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.

 

 

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.

 

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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.

 

 

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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“M,D&A”) of Coca‑Cola Bottling Co. Consolidated (the “Company”) should be read in conjunction with the consolidated financial statements of the Company and the accompanying notes to the consolidated financial statements.

 

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

 

 

The estimated net sales, gross profit and selling, delivery and administrative (“S,D&A”) expenses for the additional selling week in 2015 were approximately $39 million, $14 million and $10 million, respectively, and were included in reported results in 2015.

 

The consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries including Piedmont Coca-Cola Bottling Partnership (“Piedmont”). Piedmont is the Company’s only subsidiary that has a significant noncontrolling interest. Piedmont distributes and markets nonalcoholic beverages in portions of North Carolina and South Carolina. The Company provides a portion of these nonalcoholic beverage products to Piedmont at cost and receives a fee for managing the operations of Piedmont pursuant to a management agreement. Noncontrolling interest consists of The Coca‑Cola Company’s interest in Piedmont, which was 22.7% for all periods presented.

 

System Transformation Transactions

 

As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company recently concluded a series of transactions from April 2013 to October 2017 with The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, and Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to the Company, to significantly expand the Company’s distribution and manufacturing operations (the “System Transformation”). The System Transformation included the acquisition and exchange of rights to serve distribution territories (the “Expansion Territories”) and related distribution assets, as well as the acquisition and exchange of regional manufacturing facilities (the “Expansion Facilities”) and related manufacturing assets. A summary of the System Transformation transactions (the “System Transformation Transactions”) completed by the Company prior to 2017 is included in the Company’s Annual Report on Form 10-K for 2016. During 2017, the Company closed the following System Transformation Transactions:

 

System Transformation Transactions Completed with CCR in 2017

 

Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana Expansion Territories Acquisitions (the “January 2017 Transaction”)

 

On January 27, 2017, the Company acquired distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana pursuant to a distribution asset purchase agreement entered into by the Company and CCR on September 1, 2016 (the “September 2016 Distribution APA”). The Company completed the January 2017 Transaction for a cash purchase price of $32.1 million, which includes all post-closing adjustments. The cash purchase price increased $0.5 million as a result of post-closing adjustments made during 2017.

 

Acquisition of Bloomington and Indianapolis, Indiana and Columbus and Mansfield, Ohio Expansion Territories and Indianapolis and Portland, Indiana Expansion Facilities (the “March 2017 Transactions”)

 

On March 31, 2017, the Company acquired (i) distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Indianapolis and Bloomington, Indiana and Columbus and Mansfield, Ohio pursuant to the September 2016 Distribution APA and (ii) two Expansion Facilities located in Indianapolis and Portland, Indiana and related manufacturing assets pursuant to a manufacturing asset purchase agreement entered into by the Company and CCR on September 1, 2016 (the “September 2016 Manufacturing APA”). The Company completed the March 2017 Transactions for a cash purchase price of $104.6 million, which includes all post-closing adjustments. The cash purchase price decreased $4.1 million as a result of post-closing adjustments made during 2017.

 

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Acquisition of Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio Expansion Territories and Twinsburg, Ohio Expansion Facility (the “April 2017 Transactions”)

 

On April 28, 2017, the Company acquired (i) distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio pursuant to a distribution asset purchase agreement entered into by the Company and CCR on April 13, 2017 (the “April 2017 Distribution APA”) and (ii) an Expansion Facility located in Twinsburg, Ohio and related manufacturing assets pursuant to a manufacturing asset purchase agreement entered into by the Company and CCR on April 13, 2017 (the “April 2017 Manufacturing APA”). The Company completed the April 2017 Transactions for a cash purchase price of $87.9 million. During the fourth quarter of 2017, the cash purchase price for the April 2017 Transactions decreased by $4.7 million as a result of net working capital and other fair value adjustments, which remains due from The Coca‑Cola Company. The cash purchase price for the April 2017 Transactions remains subject to post-closing adjustment in accordance with the April 2017 Distribution APA and the April 2017 Manufacturing APA.

 

Acquisition of Arkansas Expansion Territories and Memphis, Tennessee and West Memphis, Arkansas Expansion Facilities in exchange for the Company’s Deep South and Somerset Distribution Territories and Mobile, Alabama Manufacturing Facility (the “CCR Exchange Transaction”)

 

On October 2, 2017, the Company (i) acquired from CCR distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in central and southern Arkansas and two Expansion Facilities located in Memphis, Tennessee and West Memphis, Arkansas and related manufacturing assets (collectively, the “CCR Exchange Business”) in exchange for which the Company (ii) transferred to CCR distribution rights and related assets in territories previously served by the Company through its facilities and equipment located in portions of southern Alabama, southeastern Mississippi, southwestern Georgia and northwestern Florida and in and around Somerset, Kentucky and a regional manufacturing facility located in Mobile, Alabama and related manufacturing assets (collectively, the “Deep South and Somerset Exchange Business”), pursuant to an asset exchange agreement entered into by the Company, certain of its wholly-owned subsidiaries and CCR on September 29, 2017 (the “CCR AEA”).

 

During 2017, the Company paid CCR $15.9 million toward the closing of the CCR Exchange Transaction, representing an estimate of the difference between the value of the CCR Exchange Business acquired by the Company and the value of the Deep South and Somerset Exchange Business acquired by CCR. During the fourth quarter of 2017, the Company recorded certain adjustments to this settlement amount as a result of changes in estimated net working capital and other fair value adjustments, which are included in accounts payable to The Coca‑Cola Company. The final closing price for the CCR Exchange Transaction remains subject to final resolution pursuant to the CCR AEA. The payment for the CCR Exchange Transaction reflected the application of $4.8 million of the Expansion Facilities Discount (as described below).

 

Acquisition of Memphis, Tennessee Expansion Territories

 

On October 2, 2017, the Company acquired distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in and around Memphis, Tennessee, including portions of northwestern Mississippi and eastern Arkansas, pursuant to an asset purchase agreement entered by the Company and CCR on September 29, 2017 (the “September 2017 APA”). The Company completed this acquisition for a cash purchase price of $39.6 million, which remains subject to post-closing adjustment in accordance with the September 2017 APA.

 

System Transformation Transactions Completed with United in 2017

 

Acquisition of Spartanburg and Bluffton, South Carolina Expansion Territories in exchange for the Company’s Florence and Laurel Territories and Piedmont’s Northeastern Georgia Territories (“United Exchange Transaction”)

 

On October 2, 2017, the Company and Piedmont completed exchange transactions in which (i) the Company acquired from Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to the Company, distribution rights and related assets in Expansion Territories previously served by United through United’s facilities and equipment located in and around Spartanburg, South Carolina and a portion of United’s territory located in and around Bluffton, South Carolina and Piedmont acquired from United similar rights, assets and liabilities, and working capital in the remainder of United’s Bluffton, South Carolina territory (collectively, the “United Distribution Business”), in exchange for which (ii) the Company transferred to United distribution rights and related assets in territories previously served by the Company through its facilities and equipment located in parts of northwestern Alabama, south-central Tennessee and southeastern Mississippi previously served by the Company’s distribution centers located in Florence, Alabama and Laurel, Mississippi (collectively, the “Florence and Laurel Distribution Business”) and Piedmont transferred to United similar rights, assets and liabilities, and working capital of Piedmont’s in territory located in parts of northeastern Georgia (the “Northeastern Georgia Distribution Business”), pursuant to an asset exchange agreement between the Company, certain of its wholly-

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owned subsidiaries and United dated September 29, 2017 (the “United AEA”) and an asset exchange agreement between Piedmont and United dated September 29, 2017 (the “Piedmont – United AEA”).

 

At closing, the Company and Piedmont paid United $3.4 million toward the closing of the United Exchange Transaction, representing an estimate of (i) the difference between the value of the portion of the United Distribution Business acquired by the Company and the value of the Florence and Laurel Distribution Business acquired by United, plus (ii) the difference between the value of the portion of the United Distribution Business acquired by Piedmont and the value of the Northeastern Georgia Distribution Business acquired by United, which such amounts remain subject to final resolution pursuant to the United AEA and the Piedmont – United AEA, respectively.

 

Expansion Facilities Discount and Legacy Facilities Credit Letter Agreement

 

In connection with the Company’s acquisitions of the Expansion Facilities and the impact on transaction value from certain adjustments made by The Coca‑Cola Company under the RMA (as discussed above in Item 1) to the authorized pricing on sales of certain beverages produced by the Company under trademarks of The Coca‑Cola Company at the Expansion Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers, the Company and The Coca‑Cola Company also entered into a letter agreement on March 31, 2017 (as amended, the “Manufacturing Facilities Letter Agreement”), pursuant to which The Coca‑Cola Company agreed to provide the Company with an aggregate valuation adjustment discount of $33.1 million (the “Expansion Facilities Discount”) on the purchase prices for the Expansion Facilities.

 

The parties agreed to apply $22.9 million of the total Expansion Facilities Discount upon the Company’s acquisition of Expansion Facilities in March 2017 and agreed to apply an additional $5.4 million of the total Expansion Facilities Discount upon the Company’s acquisition of an Expansion Facility in April 2017. The parties agreed to apply the remaining $4.8 million of the total Expansion Facilities Discount upon the Company’s acquisition of two additional Expansion Facilities as part of the CCR Exchange Transaction, after which time no amounts remain outstanding under the Manufacturing Facilities Letter Agreement.

 

The Manufacturing Facilities Letter Agreement also establishes a mechanism to compensate the Company with a payment or credit for the net economic impact to the manufacturing facilities the Company served prior to the System Transformation (the “Legacy Facilities”) of the changes made by The Coca‑Cola Company to the authorized pricing under the RMA on sales of certain Coca‑Cola products produced by the Company at the Legacy Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers versus the Company’s historical returns for products produced at the Legacy Facilities prior to the conversion on March 31, 2017 of the Company’s then-existing manufacturing agreements with The Coca‑Cola Company to the RMA (the “Legacy Facilities Credit”).

 

The Company and The Coca‑Cola Company agreed that the amount of the Legacy Facilities Credit to be paid to the Company by The Coca‑Cola Company was $43.0 million, pursuant to a letter agreement between the Company and The Coca‑Cola Company dated December 26, 2017. The Coca‑Cola Company paid the Legacy Facilities Credit, in the amount of $43.0 million, to the Company in December 2017.

 

The Company recognized $12.4 million of the Legacy Facilities Credit during 2017, representing the portion of the credit applicable to the Mobile, Alabama facility which the Company transferred to CCR as part of the CCR Exchange Transaction. The $12.4 million portion of the Legacy Facilities Credit related to the Mobile, Alabama facility was recorded to gain (loss) on exchange transactions in the Company’s consolidated financial statements. The remaining $30.6 million of the Legacy Facilities Credit was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years.

 

Gain on Exchange Transactions

 

Upon closing the CCR Exchange Transaction and the United Exchange Transaction, the fair value of net assets acquired exceeded the carrying value of net assets exchanged, which resulted in a gain of $0.5 million recorded to gain (loss) on exchange transactions in the Company’s consolidated financial statements. This amount remains subject to final resolution pursuant to the CCR AEA, the United AEA and the Piedmont – United AEA.

 

The $0.5 million gain on the CCR Exchange Transaction and the United Exchange Transaction, combined with the $12.4 million portion of the Legacy Facilities Credit related to the Mobile, Alabama facility, resulted in a total gain on exchange transactions of $12.9 million in 2017.

 

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As of December 31, 2017, the System Transformation Transactions completed and their respective net cash purchase prices were as follows:

 

 

⁽¹⁾ Cash purchase price amounts include final post-closing adjustments that were made beyond one year from the applicable transaction closing date and were therefore adjusted through the consolidated statement of operations and not reflected in the acquisitions’ opening balance sheets.

⁽²⁾ Cash purchase price amounts are subject to a final post-closing adjustment and, as a result, may either increase or decrease.

 

The financial results of the Expansion Territories and the Expansion Facilities have been included in the Company’s consolidated financial statements from their respective acquisition or exchange dates. These Expansion Territories and Expansion Facilities contributed the following amounts to the Company’s consolidated statement of operations:

 

 

 

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Net Sales by Product Category

 

The Company’s net sales in the last three fiscal years by product category were as follows:

 

 

Areas of Emphasis

 

Key priorities for the Company include integration of the Expansion Territories and the Expansion Facilities, revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity.

 

Revenue Management:  Revenue management requires a strategy that reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based decision-making. Revenue management has been and continues to be a key driver which has a significant impact on the Company’s results of operations.

 

Product Innovation and Beverage Portfolio Expansion:  Innovation of both new brands and packages has been and is expected to continue to be important to the Company’s overall revenue. Recent product introductions from the Company and The Coca‑Cola Company 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 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.

 

Distribution Cost Management:  Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs, including warehouse costs, were $550.9 million in 2017, $395.4 million in 2016 and $277.9 million in 2015. Management of these costs will continue to be a key area of emphasis for the Company.

 

The Company has three primary delivery systems: (i) bulk delivery for large supermarkets, mass merchandisers and club stores, (ii) advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premises accounts and (iii) full service delivery for its full service vending customers.

 

Productivity:  A key driver in the Company’s S,D&A expense management relates to ongoing improvements in labor productivity and asset productivity.

 

Items Impacting Operations and Financial Condition

 

The comparison of operating results for 2015 to the operating results for 2017 and 2016 are affected by the impact of one additional selling week in 2015 due to the Company’s fiscal year ending on the Sunday closest to December 31. The estimated net sales, gross profit and S,D&A expenses for the additional selling week in 2015 of approximately $39 million, $14 million and $10 million, respectively, are included in reported results in 2015.

 

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The following items also affect the comparability of the financial results presented below:

 

2017

 

 

2016

 

 

2015

 

 

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Results of Operations

 

2017 Compared to 2016

 

A summary of the Company’s financial results for 2017 and 2016:

 

 

Net Sales

 

Net sales increased $1.16 billion, or 37.0%, to $4.32 billion in 2017, as compared to $3.16 billion in 2016. The increase in net sales was principally attributable to the following (in millions):

 

 

The Company’s bottle/can sales to retail customers accounted for approximately 84% of the Company’s total net sales in both 2017 and 2016. Bottle/can net pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the volume generated in each package and the channels in which those packages are sold.

 

Product category sales volume in 2017 and 2016 as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

 

 

Bottle/can sales volume to retail customers, excluding the Expansion Territories and Expansion Facilities acquired in the System Transformation during 2017 and 2016, increased 1.6% in 2017, which represented a 0.2% increase in sparkling beverages and a 4.9% increase in still beverages as compared to 2016.

 

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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 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 the Company’s beverage sales were to customers in the United States. The Company recorded delivery fees to retail customers in net sales of $5.7 million in 2017 and $6.0 million in 2016. These fees are used to offset a portion of the Company’s delivery and handling costs.

 

The following table summarizes the percentage of the Company’s total bottle/can sales volume to its largest customers, as well as the percentage of the Company’s total net sales that such volume represents:

 

 

Cost of Sales

 

Cost of sales includes the following: raw material costs, manufacturing labor, manufacturing overhead including depreciation expense, manufacturing warehousing costs, shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers and the purchase of finished goods. Inputs representing a substantial portion of the Company’s total cost of sales include: (i) sweeteners, (ii) packaging materials, including plastic bottles and aluminum cans, and (iii) finished products purchased from other vendors.

 

Cost of sales increased $842.0 million, or 43.4%, to $2.78 billion in 2017, as compared to $1.94 billion in 2016. The increase in cost of sales was principally attributable to the following (in millions):

 

 

The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca‑Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the Company’s territories. Certain of the marketing expenditures by The Coca‑Cola Company and other beverage companies are made pursuant to annual arrangements. The Company also benefits from national advertising programs conducted by The Coca‑Cola Company and other beverage companies. Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $120.1 million in 2017, as compared to $99.4 million in 2016.

 

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

 

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S,D&A Expenses

 

S,D&A expenses include the following: sales management labor costs, distribution costs from sales distribution centers to customer locations, sales distribution center warehouse costs, depreciation expense related to sales centers, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangibles and administrative support labor and operating costs.

 

S,D&A expenses increased by $356.9 million, or 32.8%, to $1.44 billion in 2017, as compared to $1.09 billion in 2016. S,D&A expenses as a percentage of sales decreased to 33.4% in 2017 from 34.5% in 2016. The increase in S,D&A expenses was principally attributable to the following (in millions):

 

 

Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, are included in S,D&A expenses and totaled $550.9 million in 2017 and $395.4 million in 2016.

 

Interest Expense, Net

 

Interest expense, net, increased $5.6 million, or 15.3%, to $41.9 million in 2017, as compared to $36.3 million in 2016. The increase was primarily a result of additional borrowings to fund the System Transformation during 2017.

 

Other Income (Expense), Net

 

Other expense included $7.0 million for net working capital and other fair value adjustments related to System Transformation Transactions that were made beyond one year from the transaction closing date. As these adjustments were made beyond one year from the acquisition date, the Company recorded the adjustments through its consolidated statements of operations.

 

Other income included $6.0 million related to an increase in the Company’s investment in Southeastern Container following CCR’s redistribution of a portion of its investment in Southeastern Container in December 2017.

 

Other income (expense), net also included a noncash charge of $3.2 million in 2017 and noncash income of $1.9 million in 2016, each as a result of fair value adjustments of the Company’s contingent consideration liability related to the Expansion Territories. The fair value adjustment to the acquisition related contingent consideration liability during 2017 was primarily driven by final settlement of

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previously closed transactions and a decrease in the risk-free interest rate, partially offset by a benefit resulting from the Tax Act. The fair value adjustments to the acquisition related contingent consideration liability during 2016 was primarily driven by a change in the projected future operating results of the Expansion Territories which were subject to sub-bottling fees and changes in the risk-free interest rate.

 

Each reporting period, the Company adjusts its contingent consideration liability related to the Expansion Territories to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the CBA (as discussed above in Item 1) using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates; projected future operating results; and post-closing settlement of cash purchase prices for the Expansion Territories. These future expected sub-bottling payments extend through the life of the related distribution asset acquired in the System Transformation, which is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.

 

Gain (Loss) on Exchange Transactions

 

At closing, the fair value of net assets acquired in the CCR Exchange Transaction and the United Exchange Transaction exceeded the carrying value of net assets exchanged, which resulted in a gain of $0.5 million recorded to gain (loss) on exchange transactions in the Company’s consolidated financial statements. This amount remains subject to final resolution pursuant to the CCR AEA, the United AEA and the Piedmont – United AEA.

 

In December 2017, the Company also recognized a gain of $12.4 million, representing the portion of the aggregate $43.0 million Legacy Facilities Credit applicable to the Mobile, Alabama facility, which the Company transferred to CCR as part of the CCR Exchange Transaction. The Legacy Facilities Credit was provided to the Company by The Coca‑Cola Company in December 2017 to compensate for the net economic impact of changes made by The Coca‑Cola Company to the authorized pricing on sales of covered beverages produced at the Company’s Legacy Facilities prior to implementation of new pricing mechanisms included in the RMA.

 

Income Tax Expense (Benefit)

 

The Company had a $39.8 million income tax benefit in 2017, as compared to income tax expense of $36.0 million in 2016. The Company’s effective tax rate, calculated by dividing income tax expense (benefit) by income before income taxes, was (63.2)% for 2017 and 38.9% for 2016. The Company’s effective tax rate, calculated by dividing income tax expense (benefit) by income before income taxes minus net income attributable to noncontrolling interest, was (70.3)% for 2017 and 41.8% for 2016.

 

The Tax Act had a substantial impact on the Company’s income tax benefit for 2017. The Company expects to incur additional benefits from the Tax Act in 2018, primarily due to the expensing of certain capital expenditures along with the lower corporate tax rate; however, the limitations placed on the deductibility of meals, entertainment expenses, certain executive compensation and the repeal of the domestic production activities deduction will partially offset some of the Company’s benefits from the Tax Act. See Note 18 to the consolidated financial statements for further detail.

 

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.

 

Noncontrolling Interest

 

The Company recorded net income attributable to noncontrolling interest of $6.3 million in 2017 and $6.5 million in 2016 related to the portion of Piedmont owned by The Coca‑Cola Company.

 

Other Comprehensive Income (Loss), Net of Tax

 

Other comprehensive loss, net of tax, was $1.3 million in 2017 and $10.5 million in 2016. The increase was primarily a result of a $6.2 million adjustment on postretirement benefits related to the divestiture of the Deep South and Somerset Exchange Business and

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the Florence and Laurel Distribution Business, as well as nominal actuarial losses on the Company’s pension and postretirement benefit plans as compared to 2016.

 

2016 Compared to 2015

 

A summary of the Company’s financial results for 2016 and 2015 follows:

 

 

Net Sales

 

Net sales increased $850.0 million, or 36.9%, to $3.16 billion in 2016, as compared to $2.31 billion in 2015. The increase in net sales was principally attributable to the following (in millions):

 

 

The Company’s bottle/can sales to retail customers accounted for approximately 84% of the Company’s total net sales in 2016, as compared to approximately 82% in 2015. Product category sales volume in 2016 and 2015 as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

 

 

Bottle/can sales volume to retail customers, excluding Expansion Territories, increased 3.3% in 2016, as compared to 2015, which represented a 0.8% increase in sparkling beverages and a 10.3% increase in still beverages. The increase in still beverages was

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primarily due to increases in energy beverages, which was primarily due to the Company expanding the territories in which it distributes Monster products.

 

During 2016, approximately 66% 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 the Company’s beverage sales were to customers in the United States. The Company recorded delivery fees to retail customers in net sales of $6.0 million in 2016 and $6.3 million in 2015.

 

The following table summarizes the percentage of the Company’s total bottle/can sales volume to its largest customers, as well as the percentage of the Company’s total net sales that such volume represents:

 

 

Cost of Sales

 

Cost of sales increased $535.3 million, or 38.1%, to $1.94 billion in 2016, as compared to $1.41 billion in 2015. The increase in cost of sales was principally attributable to the following (in millions):

 

 

Total marketing funding support from The Coca‑Cola Company and other beverage companies was $99.4 million in 2016, as compared to $72.2 million in 2015.

 

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S,D&A Expenses

 

S,D&A expenses increased by $285.0 million, or 35.5%, to $1.09 billion in 2016, as compared to $802.9 million in 2015. S,D&A expenses as a percentage of sales decreased to 34.5% in 2016 from 34.8% in 2015. The increase in S,D&A expenses was principally attributable to the following (in millions):

 

 

Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, totaled $395.4 million in 2016 and $277.9 million in 2015.

 

Interest Expense, Net

 

Interest expense, net, increased $7.4 million, or 25.6%, to $36.3 million in 2016, as compared to $28.9 million in 2015. The increase was primarily a result of additional borrowings to finance System Transformation Transactions.

 

Other Income (Expense), Net

 

Other income (expense), net, included noncash income of $1.9 million in 2016 and a noncash expense of $3.6 million in 2015 as a result of fair value adjustments of the Company’s contingent consideration liability related to the Expansion Territories. The adjustment was primarily a result of a change in the risk-free interest rates.

 

Gain (Loss) on Exchange Transaction

 

During 2015, the Company and CCR completed a like-kind exchange transaction where CCR agreed to exchange certain assets of CCR relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory served by CCR’s facilities and equipment located in Lexington, Kentucky in exchange for certain assets of the Company relating to the marketing, promotion, distribution and sale of Coca-Cola and other beverage products in the territory served by the Company’s facilities and equipment located in Jackson, Tennessee. The fair value in 2015 of the Lexington net assets acquired totaled $36.8 million and the Company paid cash of approximately $10.5 million. The carrying value of the Jackson, Tennessee net assets was $17.5 million, resulting in a net gain of $8.8 million. The balances of net assets acquired and cash paid were subsequently adjusted in 2016 as a result of final post-closing adjustments.

 

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Gain on Sale of Business

 

During 2015, the Company sold BYB, then a wholly-owned subsidiary of the Company, to The Coca‑Cola Company. The Company received cash proceeds of $26.4 million. The net assets of BYB at closing totaled $3.7 million, which resulted in a gain of $22.7 million in 2015.

 

Bargain Purchase Gain, Net of Tax

 

In addition to the Expansion Territories acquired in the System Transformation, the Company also acquired a “make-ready center” in Annapolis, Maryland from CCR for approximately $5.3 million in 2015. The cash paid was subsequently adjusted in 2016 as a result of final post-closing adjustments. The fair value of the net assets acquired totaled $7.3 million, which resulted in a bargain purchase gain of approximately $2.0 million, net of tax of approximately $1.3 million, recorded in 2015.

 

Income Tax Expense

 

The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes, was 38.9% for 2016 and 34.4% for 2015. The increase in the effective tax rate was driven primarily by a decrease to the favorable manufacturing deduction, as a percentage of pre-tax income, less of a decrease to the valuation allowance in 2016 as compared to 2015, and an increase in non-deductible travel expense. The Company’s effective tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 41.8% for 2016 and 36.6% for 2015.

 

Noncontrolling Interest

 

The Company recorded net income attributable to noncontrolling interest of $6.5 million in 2016 and $6.0 million in 2015 related to the portion of Piedmont owned by The Coca‑Cola Company.

 

Other Comprehensive Income, Net of Tax

 

Other comprehensive income, net of tax, was $10.5 million in 2016 and $7.5 million in 2015. The increase was primarily a result of actuarial losses on the Company’s pension and postretirement benefit plans.

 

Segment Operating Results

 

The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operation Decision Maker (“CODM”). The Company has concluded the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as a group, represent the CODM.

 

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

 

The Company’s segment results are as follows:

 

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Comparable Results

 

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (“GAAP”). However, management believes that certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance. Further, given the signing of the Tax Act in December 2017 and the transformation of the Company’s business through System Transformation Transactions with The Coca‑Cola Company, the Company believes these non-GAAP financial measures allow users to better appreciate the impact of these transactions on the Company’s performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting.

 

The following tables reconcile reported GAAP results to comparable results (non-GAAP) for 2017 and 2016:

 

 

 

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Following is an explanation of non-GAAP adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Condition

 

Total assets increased $623.5 million to $3.07 billion on December 31, 2017, as compared to $2.45 billion on January 1, 2017. The increase in total assets is primarily attributable to the System Transformation, contributing to a net increase in total assets of $446.7 million from January 1, 2017.

 

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Net working capital, defined as current assets less current liabilities, was $155.1 million on December 31, 2017, which was an increase of $19.2 million from January 1, 2017.

 

Significant changes in net working capital on December 31, 2017 from January 1, 2017 were as follows:

 

 

Liquidity and Capital Resources

 

Capital Resources

 

The Company’s sources of capital include cash flows from operations, available credit facilities and the issuance of debt and equity securities. The Company has obtained the majority of its long-term debt, other than capital leases, from public markets and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of these consolidated financial statements. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future.

 

On February 27, 2017, the Company sold $125 million aggregate principal amount of senior unsecured notes due 2023 to PGIM, Inc. (“Prudential”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated June 10, 2016 between the Company, Prudential and the other parties thereto (the “Private Shelf Facility”). These notes bear interest at 3.28%, payable semi-annually in arrears on February 27 and August 27 of each year, and will mature on February 27, 2023 unless earlier redeemed by the Company. The Company used the proceeds toward repayment of outstanding indebtedness under the Revolving Credit Facility (as defined below) and for other general corporate purposes. The Company may request that Prudential consider the purchase of additional senior unsecured notes of the Company under the Private Shelf Facility in an aggregate principal amount of up to $175 million.

 

In October 2014, the Company entered into a five-year unsecured revolving credit facility (the “Revolving Credit Facility”), and in April 2015, the Company exercised an accordion feature which established a $450 million aggregate maximum borrowing capacity on the Revolving Credit Facility. The $450 million borrowing capacity includes up to $50 million available for the issuance of letters of credit. Borrowings under the Revolving Credit Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit ratings at the time of borrowing. At the Company’s current credit ratings, the Company must pay an annual facility fee of 0.15% of the lenders’ aggregate commitments under the Revolving Credit Facility. The Revolving Credit Facility has a scheduled maturity date of October 16, 2019.

 

The Company currently believes all banks participating in the Revolving Credit Facility have the ability to and will meet any funding requests from the Company. The Company had outstanding borrowings on the Revolving Credit Facility of $207.0 million on December 31, 2017 and $152.0 million on January 1, 2017.

 

In June 2016, the Company entered into a five-year term loan agreement for a senior unsecured term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $300 million, maturing June 7, 2021. The Company may request additional term loans under the agreement, provided the Company’s aggregate borrowings under the Term Loan Facility do not exceed $500 million. Borrowings under the Term Loan Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit ratings. The Company used $210 million of the proceeds from the Term Loan Facility to repay outstanding indebtedness under the Revolving Credit Facility. The Company then used the remaining proceeds, as well as borrowings under the Revolving Credit Facility, to repay the $164.8 million of Senior Notes that matured on June 15, 2016.

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Under the Company’s Term Loan Facility, $15 million will become due in fiscal 2018. The Company intends to repay this amount through use of its Revolving Credit Facility, which is classified as long-term debt. As such, the $15 million has been classified as non-current as of December 31, 2017.

 

The Revolving Credit Facility, the Term Loan Facility and the Private Shelf Facility include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreements. The Company was in compliance with these covenants as of December 31, 2017. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

 

The indentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts.

 

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

 

The Company’s credit ratings are reviewed periodically by the respective rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material impact on the Company’s financial position or results of operations. There were no changes in these credit ratings during 2017 from the prior year and the credit ratings are currently stable. As of December 31, 2017, the Company’s credit ratings were as follows:

 

 

Net debt and capital lease obligations as of December 31, 2017 and January 1, 2017 were as follows:

 

 

 

The Company is subject to interest rate risk on its floating rate debt, including the Revolving Credit Facility and the Term Loan Facility. Assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of December 31, 2017, interest expense for the next twelve months would increase by approximately $5.1 million. Refer to Item 7A for additional information.

 

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

 

 

⁽¹⁾ Increase due to System Transformation Transactions acquisitions includes an increase in the acquisition related contingent consideration of $62.5 million in 2017 from the opening balance sheets for the Expansion Territories and Expansion Facilities acquired in the System Transformation during 2017, as disclosed in the financial statements in the Company’s filed periodic reports. These adjustments are for post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

⁽²⁾ Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

 

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Cash Sources and Uses

 

The primary sources of cash for the Company in 2017 were debt financings, operating activities and certain one-time payments received from The Coca‑Cola Company, including a $91.5 million Territory Conversion Fee (as defined below) and the $43.0 million Legacy Facilities Credit. The primary uses of cash in 2017 were acquisitions of Expansion Territories and Expansion Facilities and additions to property, plant and equipment. The primary sources of cash for the Company in 2016 were debt financings and operating activities. The primary uses of cash in 2016 were acquisitions of Expansion Territories and Expansion Facilities, debt repayments and additions to property, plant and equipment. A summary of cash-based activity is as follows: 

 

 

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Based on current projections, which include a number of assumptions such as the Company’s pre-tax earnings, the Company anticipates its cash payments for income taxes will be between $5 million and $15 million in fiscal 2018.

 

Cash Flows From Operating Activities

 

During 2017, cash provided by operating activities was $307.8 million, which was an increase of $145.8 million, as compared to 2016. During 2016, cash provided by operating activities was $162.0 million, which was an increase of $53.7 million, as compared to 2015. The increase in 2017 was primarily driven by a $91.5 million, one-time Territory Conversion Fee paid to the Company by CCR pursuant to the Territory Conversion Agreement and $30.6 million of the total $43.0 million, one-time Legacy Facilities Credit paid to the Company by The Coca‑Cola Company pursuant to the Manufacturing Facilities Letter Agreement. The increase in both periods was also driven by cash generated from Expansion Territories.

 

Cash Flows From Investing Activities

 

During 2017, cash used in investing activities was $458.9 million, which was an increase of $6.9 million as compared to 2016. The increase was driven primarily by $284.5 million in net cash used to finance the System Transformation Transactions and a $15.6 million payment to The Coca‑Cola Company in order to acquire rights to market, promote, distribute and sell glacéau products in certain geographic territories and for The Coca‑Cola Company to terminate a distribution arrangement with the prior distributor in these territories.

 

Additions to property, plant and equipment during 2017 were $176.6 million, of which $22.3 million were accrued in accounts payable, trade. These additions were funded with cash flows from operations and available credit facilities and exclude $230.3 million in property, plant and equipment acquired in the 2017 System Transformation Transactions and $8.4 million in proceeds from cold drink equipment. In addition, the Company recognized $12.4 million of the total $43.0 million, one-time Legacy Facilities Credit, pursuant to the Manufacturing Facilities Letter Agreement, for a facility in Mobile, Alabama, which the Company transferred to CCR as part of the CCR Exchange Transaction.

 

During 2016, cash used in investing activities was $452.0 million, which was an increase of $234.7 million, as compared to 2015. The increase was driven primarily by $272.6 million in cash used to acquire Expansion Territories and Expansion Facilities.

 

Additions to property, plant and equipment during 2016 were $172.6 million, of which $15.7 million were accrued in accounts payable, trade. The 2016 additions exclude $227.1 million in property, plant and equipment acquired in the System Transformation Transactions completed in 2016.

 

The Company expects additions to property, plant and equipment in 2018 to be in the range of $200 million to $230 million.

 

Cash Flows From Financing Activities

 

During 2017, cash provided by financing activities was $146.1 million, which was a decrease of $110.3 million as compared to 2016. The decrease was primarily driven by a net reduction in borrowings as the Company completed its multi-year System Transformation.

 

During 2016, cash provided by financing activities was $256.4 million, which was an increase of $100.9 million compared to 2015. The increase was driven primarily a result of providing funding for the acquisitions of Expansion Territories and associated capital expenditures. During 2016, the Company entered into a term loan agreement for a senior unsecured term loan facility in the aggregate principal amount of $300 million and had net borrowings on revolving credit facilities of $152.0 million. These increases in debt were partially offset by the repayment of $164.8 million of Senior Notes due 2016. In addition, during 2016 the Company had cash payments of $13.6 million for acquisition related contingent consideration.

 

The amount the Company could pay annually under the acquisition related contingent consideration arrangements for the System Transformation Transactions is expected to be in the range of $23 million to $47 million.

 

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Off-Balance Sheet Arrangements

 

The Company is a member of, and has equity ownership in, South Atlantic Canners, Inc., (“SAC”), a manufacturing cooperative comprised of Coca‑Cola bottlers, and has guaranteed $23.9 million of SAC’s debt as of December 31, 2017. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee.

 

In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. As of December 31, 2017, the Company’s maximum exposure under the guarantee, if SAC borrowed up to its aggregate borrowing capacity, would have been $31.3 million, including the Company’s equity interests. See Note 17 to the consolidated financial statements for additional information.

 

Aggregate Contractual Obligations

 

The following table summarizes the Company’s contractual obligations and commercial commitments as of December 31, 2017:

 

 

 

The Company had uncertain tax positions, including accrued interest, of $2.4 million on December 31, 2017, all of which would affect the Company’s effective tax rate if recognized. While it is expected the amount of uncertain tax positions may change in the next 12 months, the Company does not expect such change would have a significant impact on the consolidated financial statements. See Note 18 to the consolidated financial statements for additional information.

 

The Company is a shareholder of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative from which the Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. This obligation is not included in the Company’s table of contractual obligations and commercial commitments as there are no minimum purchase requirements. See Note 17 to the consolidated financial statements for additional information related to Southeastern.

 

The Company has standby letters of credit, primarily related to its property and casualty insurance programs. These letters of credit totaled $35.6 million on December 31, 2017. See Note 17 to the consolidated financial statements for additional information related to commercial commitments, guarantees, legal and tax matters.

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The Company contributed $10.0 million to the Primary Plan (as defined below) and $1.6 million to the Bargaining Plan (as defined below) during 2017. Based on information currently available, the Company estimates it will be required to make cash contributions in the range of $10 million to $20 million to these two plans in 2018.

 

Postretirement medical care payments are expected to be approximately $3.7 million in 2018. See Note 21 to the consolidated financial statements for additional information related to pension and postretirement obligations.

 

Hedging Activities

 

The Company uses derivative financial instruments to manage its exposure to movements in certain commodity prices. Fees paid by the Company for derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment to cost of sales or S,D&A expenses.

 

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

 

 

Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements

 

Critical Accounting Policies and Estimates

 

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 financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion addresses the Company’s most critical accounting policies, which are those most important to the portrayal of the Company’s 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 inherently uncertain matters.

 

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.

 

Allowance for Doubtful Accounts

 

The Company evaluates the collectability of its trade accounts receivable based on a number of factors. When the Company becomes aware of a customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded to reduce the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, an allowance for doubtful accounts is recorded based on the Company’s recent past loss history and an overall assessment of past due trade accounts receivable outstanding.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements on operating leases are depreciated over the shorter of the estimated useful lives or the term of the lease, including renewal options the Company determines are reasonably assured. Additions and major replacements or betterments are added to the assets at cost. Maintenance and repair costs and minor replacements are charged to expense when incurred. When assets are replaced or otherwise disposed, the cost and accumulated depreciation are removed from the accounts and the gains or losses, if any, are reflected in the statement of operations. Gains or losses on the disposal of manufacturing equipment and manufacturing facilities are included in cost of sales. Gains or losses on the disposal of all other property, plant and equipment are included in S,D&A expenses.

 

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The Company evaluates the recoverability of the carrying amount of its property, plant and equipment when events or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. These evaluations are performed at a level where independent cash flows may be attributed to either an asset or an asset group. If the Company determines the carrying amount of an asset or asset group is not recoverable based upon the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair value of the long-lived assets.

 

During 2017, 2016 and 2015, the Company performed periodic reviews of property, plant and equipment and determined no material impairment existed.

 

Impairment Testing of Goodwill

 

GAAP requires testing of goodwill for impairment at least annually. The Company conducts its annual impairment test, which includes a qualitative assessment to determine whether it is more likely than not the fair value of goodwill is below its carrying value, as of the first day of the fourth quarter of each fiscal year, and more often if there are significant changes in business conditions that could result in impairment.

 

In all periods presented, the Company completed its qualitative assessment and determined a quantitative assessment was not necessary.

 

The Company has determined it has one reporting unit, within the Nonalcoholic Beverages reportable segment, for the purpose of assessing goodwill for potential impairment. The Company uses its overall market capitalization as part of its estimate of fair value of the reporting unit and in assessing the reasonableness of the Company’s internal estimates of fair value.

 

When a quantitative analysis is considered necessary for the annual impairment analysis of goodwill, the Company develops an estimated fair value for the reporting unit considering three different approaches:

 

 

The estimated fair value of the reporting unit is then compared to its carrying amount, including goodwill. If the estimated fair value exceeds the carrying amount, goodwill is not considered impaired, and the second step of the impairment test is not necessary. If the carrying amount, including goodwill, exceeds its estimated fair value, the second step of the impairment test is performed to measure the amount of the impairment, if any. In the second step, a comparison is made between the book value of goodwill and the implied fair value of goodwill. Implied fair value of goodwill is determined by comparing the fair value of the reporting unit to the book value of its net identifiable assets, excluding goodwill. To estimate the implied fair value of goodwill for a reporting unit, the Company assigns the fair value of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of goodwill of the reporting unit over its implied fair value is recorded as an impairment.

 

To the extent actual and projected cash flows decline in the future, or if market conditions deteriorate significantly, the Company may be required to perform an interim impairment analysis that could result in an impairment of goodwill. The Company has determined there has not been an interim impairment trigger since the first day of the fourth quarter of 2017 annual test date.

 

Income Tax Estimates

 

The Company records a valuation allowance to reduce the carrying value of its deferred tax assets if, based on the weight of available evidence, it is determined that it is more likely than not that such assets will not ultimately be realized. The Company considers future taxable income and prudent and feasible tax planning strategies in assessing the need for a valuation allowance. However, in the event the Company determines it will not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the valuation allowance is charged to income in the period in which such a determination is made. A reduction in the valuation allowance and corresponding adjustment to income may be required if the likelihood of realizing existing deferred tax assets increases to a more likely than not level. The Company evaluates the realizability of deferred tax assets annually and when significant changes occur in the Company’s business that could impact the realizability assessment.

 

In addition to a valuation allowance related to loss carryforwards and certain deferred compensation, the Company records liabilities for uncertain tax positions related to certain state and federal income tax positions. These liabilities reflect the Company’s best estimate of the ultimate income tax liability based on currently known facts and information. Material changes in facts or information,

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as well as the expiration of the statute of limitations and/or settlements with individual tax jurisdictions, may result in material adjustments to these estimates in the future.

 

Acquisition Related Contingent Consideration Liability

 

The Company’s acquisition related contingent consideration liability is subject to risk resulting from changes in the Company’s probability weighted discounted cash flow model, which is based on internal forecasts and changes in the Company’s weighted average cost of capital derived from market data.

 

At each reporting period, the Company evaluates future cash flows associated with its acquired territories as well as the associated discount rate used to calculate the fair value of its contingent consideration. These cash flows represent the Company’s best estimate of the future projections of the relevant territories over the same period as the related intangible asset, which is typically 40 years. The discount rate represents the Company’s weighted average cost of capital at the reporting date for which the fair value calculation is being performed. Changes in business conditions or other events could materially change both the projections of future cash flows and the discount rate used in the calculation of the fair value of contingent consideration. These changes could materially impact the fair value of the related contingent consideration. Changes in the fair value of the acquisition related contingent consideration are included in other income (expense), net on the consolidated statements of operations. The Company will adjust the fair value of the acquisition related contingent consideration over a period of time consistent with the life of the related distribution rights asset subsequent to acquisition.

 

Revenue Recognition

 

Revenues are recognized when finished products are delivered to customers and both title and the risks and benefits of ownership are transferred, price is fixed and determinable, collection is reasonably assured and, in the case of full service vending, when cash is collected from the vending machines. An appropriate provision is made for uncollectible accounts.

 

The Company receives service fees from The Coca‑Cola Company related to the delivery of fountain syrup products to The Coca‑Cola Company’s fountain customers. In addition, the Company receives service fees from The Coca‑Cola Company related to the repair of fountain equipment owned by The Coca‑Cola Company. The fees received from The Coca‑Cola Company for the delivery of fountain syrup products to their customers and the repair of their fountain equipment are recognized as revenue when the respective services are completed. Service revenue represents approximately one percent of net sales.

 

The Company performs freight hauling and brokerage for third parties, in addition to delivering its own products. The freight charges are recognized as revenues when the delivery is complete. Freight revenue from third parties represents approximately two percent of net sales.

 

Revenues do not include sales or other taxes collected from customers.

 

Risk Management Programs

 

The Company uses various insurance structures to manage its 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 for claims as a risk reduction strategy to minimize catastrophic losses. Losses are accrued using assumptions and procedures followed in the insurance industry, adjusted for company-specific history and expectations. The Company has standby letters of credit, primarily related to its property and casualty insurance programs. On December 31, 2017, these letters of credit totaled $35.6 million.

 

Pension and Postretirement Benefit Obligations

 

There are two Company-sponsored pension plans. The primary Company-sponsored pension plan (the “Primary Plan”) was frozen as of June 30, 2006 and no benefits accrued to participants after this date. The second Company-sponsored pension plan (the “Bargaining Plan”) is for certain employees under collective bargaining agreements. Benefits under the Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarial determined amounts and are limited to the amounts currently deductible for income tax purposes.

 

Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets, employee turnover and age at retirement, as determined by the Company, within certain guidelines. In addition, the Company uses subjective factors such as mortality rates to estimate the projected benefit obligation. The actuarial assumptions used by the Company may differ materially

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from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net periodic pension cost recorded by the Company in future periods.

 

The discount rate used in determining the actuarial present value of the projected benefit obligation for the Primary Plan and the Bargaining Plan was 3.80% and 3.90%, respectively, in 2017 and 4.44% and 4.49%, respectively, in 2016. The discount rate assumption is generally the estimate which can have the most significant impact on net periodic pension cost and the projected benefit obligation for these pension plans. The Company determines an appropriate discount rate annually based on the annual yield on long-term corporate bonds as of the measurement date and reviews the discount rate assumption at the end of each year.

 

Pension costs were $4.3 million, $1.9 million and $1.7 million in 2017, 2016 and 2015, respectively.

 

A 0.25% increase or decrease in the discount rate assumption would have impacted the projected benefit obligation and net periodic pension cost of the Company-sponsored pension plans as follows:

 

 

The weighted average expected long-term rate of return of plan assets was 6.0% in 2017, 6.5% for 2016 and 6.5% in 2015. This rate reflects an estimate of long-term future returns for the pension plan assets. This estimate is primarily a function of the asset classes (equities versus fixed income) in which the pension plan assets are invested and the analysis of past performance of these asset classes over a long period of time. This analysis includes expected long-term inflation and the risk premiums associated with equity and fixed income investments. See Note 21 to the consolidated financial statements for the details by asset type of the Company’s pension plan assets and the weighted average expected long-term rate of return of each asset type. The actual return on pension plan assets were gains of 14.5% in 2017, 7.2% in 2016 and 0.7% in 2015.

 

The Company sponsors a postretirement health care plan for employees meeting specified qualifying criteria. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the net periodic postretirement benefit cost and postretirement benefit obligation for this plan. These factors include assumptions about the discount rate and the expected growth rate for the cost of health care benefits. In addition, the Company uses subjective factors such as withdrawal and mortality rates to estimate the projected liability under this plan. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. The Company does not pre-fund its postretirement benefits and has the right to modify or terminate certain of these benefits in the future.

 

The discount rate assumption, the annual health care cost trend and the ultimate trend rate for health care costs are key estimates which can have a significant impact on the net periodic postretirement benefit cost and postretirement obligation in future periods. The Company annually determines the health care cost trend based on recent actual medical trend experience and projected experience for subsequent years.

 

The discount rate assumptions used to determine the pension and postretirement benefit obligations are based on the annual yield on long-term corporate bonds as of each plan’s measurement date. The discount rate used in determining the postretirement benefit obligation was 3.72% in 2017, 4.36% in 2016 and 4.53% in 2015. The discount rate was derived using the Aon/Hewitt AA above median yield curve. Projected benefit payouts for each plan were matched to the Aon/Hewitt AA above median yield curve and an equivalent flat rate was derived.

 

A 0.25% increase or decrease in the discount rate assumption would have impacted the postretirement benefit obligation and service cost and interest cost of the Company’s postretirement benefit plan as follows:

 

 

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A 1% increase or decrease in the annual health care cost trend would have impacted the postretirement benefit obligation and service cost and interest cost of the Company’s postretirement benefit plan as follows:

 

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the FASB issued ASU 2016-09 “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this guidance in the first quarter of 2017 and there was no impact to the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory.” The new guidance requires an entity to measure most inventory “at lower of cost and net realizable value” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this guidance in the first quarter of 2017 and there was no material impact to the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In February 2018, the FASB issued ASU 2018‑02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”). The new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and can be early adopted. The Company is still evaluating the impacts of this standard should it choose to make this reclassification.

 

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 will be 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 will adopt the new accounting standards on January 1, 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.

 

For 2017 and 2016, the Company expects to reclassify $5.4 million and $3.3 million, respectively, related to its non-service cost components of net periodic benefit cost and other benefit plan charges from income from operations to other income (expense), net in the consolidated financial statements. The Company will record the service cost component of net periodic benefit cost in selling, delivery and administrative expenses in the consolidated financial statements. In 2018, the Company expects to record service cost of $7.7 million and $2.7 million related to its non-service cost components of net periodic benefit cost and other benefit plan charges, respectively.

 

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 and can be early adopted. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated 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

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interim periods within those periods. The impact to the Company’s consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

 

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 is in the process of evaluating the impact of the new guidance on the Company’s consolidated financial statements and anticipates this impact will be material to its consolidated 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.

 

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 will adopt the new accounting standards on January 1, 2018 and does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

 

Over the past several years, the FASB has issued several accounting standards for revenue recognition:

 

 

The Company will adopt the new accounting standards on January 1, 2018 using a modified retrospective approach. The Company is in the process of finalizing its assessment of the impact of the new guidance on the Company’s consolidated financial statements. The approach the Company took during the assessment process was identifying and performing detailed walkthroughs of key revenue streams, including high level contract review, then performing detailed contract reviews for all revenue streams in order to evaluate revenue recognition requirements and prepare an implementation work plan. Based on the Company’s current assessment, it does not expect this guidance to have a material impact on the Company’s consolidated financial statements. As the Company completes its overall assessment, the Company will identify and implement changes to its accounting policies and internal controls to support the new revenue recognition and disclosure requirements.

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Cautionary Information Regarding Forward-Looking Statements

 

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

 

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These forward-looking statements may be identified by the use of the words “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” and other similar terms and expressions. Various risks, uncertainties and other factors may cause the Company’s actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, uncertainties and risks that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in Part I, “Item 1A. Risk Factors” of this Form 10‑K, as well as other factors discussed throughout this Report, including, without limitation, the factors described under “Critical Accounting Policies and Estimates” in Part I, Item 7 of this Form 10‑K, or in other filings or statements made by the Company. All of the forward-looking statements in this Report and other documents or statements are qualified by these and other factors, risks and uncertainties.

 

Caution should be taken not to place undue reliance on the forward-looking statements included in this Report. The Company assumes no obligation to update any forward-looking statements, even if experience or future changes make it clear that projected results

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expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward-looking statements, these risks and uncertainties should be considered, together with the other risks described from time to time in the Company’s other reports and documents filed with the SEC.

 

 

The Company is exposed to certain market risks that arise in the ordinary course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for trading or speculative purposes. A discussion of the Company’s primary market risk exposure and interest rate risk is presented below.

 

Debt and Derivative Financial Instruments

 

The Company is subject to interest rate risk on its floating rate debt, including the Revolving Credit Facility and the Term Loan Facility. Assuming no changes in the Company’s financial structure, if market interest rates average 1% more over the next twelve months than the interest rates as of December 31, 2017, interest expense for the next twelve months would increase by approximately $5.1 million. This amount was determined by calculating the effect of the hypothetical interest rate on the Company’s variable rate debt. This calculated, hypothetical increase in interest expense for the following twelve months may be different from the actual increase in interest expense from a 1% increase in interest rates due to varying interest rate reset dates on the Company’s floating debt.

 

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

 

Raw Material and Commodity Prices

 

The Company is also subject to commodity price risk arising from price movements for certain commodities included as part of its raw materials. The Company manages this commodity price risk in some cases by entering into contracts with adjustable prices to hedge commodity purchases. The Company periodically uses derivative commodity instruments in the management of this risk. The Company estimates a 10% increase in the market prices of commodities included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $47.6 million assuming no change in volume.

 

Fees paid by the Company for agreements to hedge commodity purchases are amortized over the corresponding period of the instruments. The Company accounts for commodity hedges on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or S,D&A expenses.

 

Effect of Changing Prices

 

The annual rate of inflation in the United States, as measured by year-over-year changes in the consumer price index, was 2.1% in 2017, 2.1% in 2016 and 0.7% in 2015. Inflation in the prices of those commodities important to the Company’s business is reflected in changes in the consumer price index, but commodity prices are volatile and in recent years have moved at a faster rate of change than the consumer price index.

 

The principal effect of inflation in both commodity and consumer prices on the Company’s operating results is to increase costs, both of goods sold and S,D&A. Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover these increased costs and may reduce their volume of purchases of those products. In that event, selling price increases may not be sufficient to offset completely the Company’s cost increases.

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

See accompanying notes to consolidated financial statements.

 

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

See accompanying notes to consolidated financial statements.

 

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

See accompanying notes to consolidated financial statements.

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COCA-COLA BOTTLING CO. CONSOLIDATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

See accompanying notes to consolidated financial statements.

 

 

 

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COCA-COLA BOTTLING CO. CONSOLIDATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Description of Business

 

Coca‑Cola Bottling Co. Consolidated (the “Company”) produces, markets and distributes nonalcoholic beverages, primarily products of The Coca‑Cola Company, and is the largest independent Coca‑Cola bottler in the United States. Approximately 93% of the Company’s 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. The Company also distributes products for several other beverage brands including Dr Pepper and Monster Energy. The Company manages its business on the basis of four operating segments, Nonalcoholic Beverages and three additional operating segments that do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and therefore have been combined into “All Other.”

 

Piedmont Coca-Cola Bottling Partnership (“Piedmont”) is the Company’s only subsidiary that has a significant third-party noncontrolling interest. Piedmont distributes and markets nonalcoholic beverages in portions of North Carolina and South Carolina. The Company provides a portion of these nonalcoholic beverage products to Piedmont at cost and receives a fee for managing the operations of Piedmont pursuant to a management agreement. Refer to Note 2 for additional information.

 

As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company recently concluded a series of transactions from April 2013 to October 2017 with The Coca‑Cola Company, Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly-owned subsidiary of The Coca‑Cola Company, and Coca‑Cola Bottling Company United, Inc. (“United”), an independent bottler that is unrelated to the Company, to significantly expand the Company’s distribution and manufacturing operations through the acquisition and exchange of rights to serve distribution territories (the “Expansion Territories”) and related distribution assets, as well as the acquisition and exchange of regional manufacturing facilities (the “Expansion Facilities”) and related manufacturing assets. Refer to Note 3 for additional information.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Fiscal Year

 

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

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand, cash in banks and cash equivalents, which are highly liquid debt instruments with maturities of less than 90 days. The Company maintains cash deposits with major banks, which, from time to time, may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes the risk of any loss is minimal.

 

Accounts Receivable, Trade

 

The Company sells its products to mass merchandise retailers, supermarkets retailers, convenience stores and other customers and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company’s trade accounts receivable are typically collected within 30 days from the date of sale.

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Allowance for Doubtful Accounts

 

The Company evaluates the collectibility of its trade accounts receivable based on a number of factors, including the specific industry in which a particular customer operates. When the Company becomes aware of a customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded to reduce the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, an allowance for doubtful accounts is recorded based on the Company’s recent past loss history and an overall assessment of past due trade accounts receivable outstanding.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method for finished products and manufacturing materials and on the average cost method for plastic shells, plastic pallets and other inventories.

 

Property, Plant and Equipment

 

Property, plant and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements on operating leases are depreciated over the shorter of the estimated useful lives or the term of the lease, including renewal options the Company determines are reasonably assured. Additions and major replacements or betterments are added to the assets at cost. Maintenance and repair costs and minor replacements are charged to expense when incurred. When assets are replaced or otherwise disposed, the cost and accumulated depreciation are removed from the accounts and the gains or losses, if any, are reflected in the statement of operations. Gains or losses on the disposal of manufacturing equipment and manufacturing facilities are included in cost of sales. Gains or losses on the disposal of all other property, plant and equipment are included in selling, delivery and administrative (“S,D&A”) expenses.

 

The Company evaluates the recoverability of the carrying amount of its property, plant and equipment when events or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. These evaluations are performed at a level where independent cash flows may be attributed to either an asset or an asset group. If the Company determines the carrying amount of an asset or asset group is not recoverable based upon the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair value of the long-lived assets.

 

Leased Property Under Capital Leases

 

Leased property under capital leases is depreciated using the straight-line method over the lease term.

 

Internal Use Software

 

The Company capitalizes costs incurred in the development or acquisition of internal use software. The Company expenses costs incurred in the preliminary project planning stage. Costs, such as maintenance and training, are also expensed as incurred. Capitalized costs are amortized over their estimated useful lives using the straight-line method. Amortization expense, which is included in depreciation expense, for internal-use software was $11.9 million in 2017, $10.9 million in 2016 and $9.3 million in 2015.

 

Goodwill

 

All business combinations are accounted for using the acquisition method. Goodwill is tested for impairment annually, or more frequently if facts and circumstances indicate such assets may be impaired. The Company performs its annual impairment test, which includes a qualitative assessment to determine whether it is more likely than not that the fair value of the goodwill is below its carrying value, as of the first day of the fourth quarter each year, and more often if there are significant changes in business conditions that could result in impairment.

 

The Company has determined it has one reporting unit, within the Nonalcoholic Beverages reportable segment, for the purpose of assessing goodwill for potential impairment. The Company uses its overall market capitalization as part of its estimate of fair value of the reporting unit and in assessing the reasonableness of the Company’s internal estimates of fair value.

 

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When a quantitative analysis is considered necessary for the annual impairment analysis of goodwill, the Company develops an estimated fair value for the reporting unit considering three different approaches:

 

 

The estimated fair value of the reporting unit is then compared to its carrying amount, including goodwill. If the estimated fair value exceeds the carrying amount, goodwill is not considered impaired, and the second step of the impairment test is not necessary. If the carrying amount, including goodwill, exceeds its estimated fair value, the second step of the impairment test is performed to measure the amount of the impairment, if any. In the second step, a comparison is made between the book value of goodwill and the implied fair value of goodwill. Implied fair value of goodwill is determined by comparing the fair value of the reporting unit to the book value of its net identifiable assets, excluding goodwill. To estimate the implied fair value of goodwill for a reporting unit, the Company assigns the fair value of the assets and liabilities associated with the reporting unit as if the reporting unit had been acquired in a business combination. Any excess of the carrying value of goodwill of the reporting unit over its implied fair value is recorded as an impairment.

 

To the extent the actual and projected cash flows decline in the future or if market conditions significantly deteriorate, the Company may be required to perform an interim impairment analysis that could result in an impairment of goodwill.

 

Distribution Agreements, Customer Lists and Other Identifiable Intangible Assets

 

The Company’s definite-lived intangible assets primarily consist of distribution rights and customer relationships, which have estimated useful lives of 20 to 40 years and 12 to 20 years, respectively. These assets are amortized on a straight-line basis over their estimated useful lives. In the first quarter of 2017, the Company converted its franchise rights to distribution rights with an estimated useful life of 40 years.

 

Acquisition Related Contingent Consideration Liability

 

The acquisition related contingent consideration liability consists of the estimated amounts due to The Coca‑Cola Company under the Company’s comprehensive beverage agreement with The Coca‑Cola Company and CCR (the “CBA”) over the remaining useful life of the related distribution rights intangible assets. Under the CBA, the Company makes quarterly sub-bottling payments to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell certain beverages and beverage products in the Expansion Territories. This acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs.

 

Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the Expansion Territories to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC. These future expected sub-bottling payments extend through the life of the related distribution assets acquired in each Expansion Territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the amounts that will be paid in the future under the CBA, and current sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration and could materially impact the amount of noncash expense (or income) recorded each reporting period.

 

Pension and Postretirement Benefit Plans

 

There are two Company-sponsored pension plans. The primary Company-sponsored pension plan (the “Primary Plan”) was frozen as of June 30, 2006 and no benefits accrued to participants after this date. The second Company-sponsored pension plan (the “Bargaining Plan”) is for certain employees under collective bargaining agreements. Benefits under the Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarial determined amounts and are limited to the amounts currently deductible for income tax purposes.

 

Costs of the plans are charged to current operations and include several components of net periodic pension cost based on actuarial assumptions regarding future expectations of the plans. In addition, certain other union employees are covered by plans provided by their respective union organizations and the Company expenses amounts as paid in accordance with union agreements. The Company recognizes the cost of postretirement benefits, which consist primarily of medical benefits, during employees’ periods of active service.

 

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Amounts recorded for benefit plans reflect estimates related to interest rates, investment returns, employee turnover and health care costs. The discount rate assumptions used to determine the pension and postretirement benefit obligations are based on yield rates available on double-A bonds as of each plan’s measurement date.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating losses and tax credit carryforwards, as well as differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

A valuation allowance will be provided against deferred tax assets if the Company determines it is more likely than not such assets will not ultimately be realized.

 

The Company does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50 percent likely to be realized. The Company records interest and penalties related to uncertain tax positions in income tax expense.

 

Revenue Recognition

 

Revenues are recognized when finished products are delivered to customers and both the title and the risks and benefits of ownership are transferred, price is fixed and determinable, collection is reasonably assured and, in the event of full service vending, when cash is collected from the vending machines. Appropriate provisions are made for uncollectible accounts.

 

The Company receives service fees from The Coca‑Cola Company for the delivery of fountain syrup products to The Coca‑Cola Company’s fountain customers and for the repair of fountain equipment owned by The Coca‑Cola Company. These service fees are recognized as revenue when the respective services are completed. Service revenue represents approximately one percent of net sales, and is presented within the Nonalcoholic Beverages segment.

 

In addition to delivering its own products, the Company performs freight hauling and brokerage for third parties. The freight charges are recognized as revenue when the delivery is complete. Freight revenue from third parties represents approximately two percent of net sales, and is presented within the All Other segment.

 

Revenues do not include sales or other taxes collected from customers.

 

Marketing Programs and Sales Incentives

 

The Company participates in various marketing and sales programs with The Coca‑Cola Company, other beverage companies and customers to increase the sale of its products. In addition, coupon programs are deployed on a territory-specific basis. The cost of these various marketing programs and sales incentives with The Coca‑Cola Company and other beverage companies, included as deductions to net sales, totaled $137.3 million in 2017, $117.0 million in 2016 and $71.4 million in 2015. Programs negotiated with customers include arrangements under which allowances can be earned for attaining agreed-upon sales levels and/or for participating in specific marketing programs.

 

Marketing Funding Support

 

The Company receives marketing funding support payments in cash from The Coca‑Cola Company and other beverage companies. Payments to the Company for marketing programs to promote bottle/can sales volume and fountain syrup sales volume are recognized as a reduction of cost of sales, primarily on a per unit basis, as the product is sold. Payments for periodic programs are recognized in the period during which they are earned.

 

Cash consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor’s products or services. As such, the cash received is accounted for as a reduction of cost of sales unless it is a specific reimbursement of costs or payments for services. Payments the Company receives from The Coca‑Cola Company and other beverage companies for marketing funding support are classified as reductions of cost of sales.

 

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Derivative Financial Instruments

 

The Company is subject to the risk of increased costs arising from adverse changes in certain commodity prices. In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivative instruments. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recorded at fair value as either assets or liabilities in the Company’s consolidated balance sheets. These derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. Derivative instruments held are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. Settlements of derivative agreements are included in cash flows from operating activities on the Company’s consolidated statements of cash flows.

 

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company generally pays a fee for these instruments, which is amortized over the corresponding period of the instrument. The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income reflected as an adjustment of related costs which are included in either cost of sales or S,D&A expenses.

 

Risk Management Programs

 

The Company uses various insurance structures to manage its 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 for claims as a risk reduction strategy to minimize catastrophic losses. Losses are accrued using assumptions and procedures followed in the insurance industry, adjusted for company-specific history and expectations.

 

Cost of Sales

 

Cost of sales includes the following: raw material costs, manufacturing labor, manufacturing overhead including depreciation expense, manufacturing warehousing costs, shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers and the purchase of finished goods. Inputs representing a substantial portion of the Company’s total cost of sales include: (i) sweeteners, (ii) packaging materials, including plastic bottles and aluminum cans, and (iii) finished products purchased from other vendors. The Company’s cost of sales may not be comparable to other peer companies, as some peer companies include all costs related to their distribution network in cost of sales. The Company includes a portion of these costs in S,D&A expenses, as described below.

 

Selling, Delivery and Administrative Expenses

 

S,D&A expenses include the following: sales management labor costs, distribution costs from sales distribution centers to customer locations, sales distribution center warehouse costs, depreciation expense related to sales centers, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangibles and administrative support labor and operating costs.

 

Shipping and Handling Costs

 

Shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from sales distribution centers to customer locations, including warehouse costs, are included in S,D&A expenses and totaled $550.9 million in 2017, $395.4 million in 2016 and $277.9 million in 2015.

 

Delivery fees charged by the Company to retail customers are used to offset a portion of the Company’s delivery and handling costs. The fees are recorded in net sales and are presented within the Nonalcoholic Beverages segment. Delivery fees were $5.7 million in 2017, $6.0 million in 2016 and $6.3 million in 2015.

 

Stock Compensation with Contingent Vesting

 

In April 2008, the stockholders of the Company approved a Performance Unit Award Agreement for J. Frank Harrison, III, the Company’s Chairman of the Board of Directors and Chief Executive Officer, consisting of 400,000 performance units (“Units”). Each Unit represents the right to receive one share of the Company’s Class B Common Stock, subject to certain terms and conditions. The Units are subject to vesting in annual increments over a ten-year period starting in fiscal year 2009. The number of Units that vest each

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year will be equal the product of 40,000 multiplied by the overall goal achievement factor, not to exceed 100%, under the Company’s Annual Bonus Plan.

 

Each annual 40,000 unit tranche has an independent performance requirement that is not established until the Company’s Annual Bonus Plan targets are approved during the first quarter of each year by the Compensation Committee of the Board of Directors. As a result, each 40,000 unit tranche is considered to have its own service inception date, grant-date and requisite service period. The Performance Unit Award Agreement does not entitle Mr. Harrison, to participate in dividends or voting rights until each installment has vested and related shares are issued. Mr. Harrison may satisfy tax withholding requirements in whole or in part by requiring the Company to settle in cash such a number of units otherwise payable in Class B Common Stock to meet the maximum statutory tax withholding requirements. The Company recognizes compensation expense over the requisite service period (one fiscal year) based on the Company’s stock price at the end of each accounting period, unless the achievement of the performance requirement for the fiscal year is considered unlikely.

 

See Note 20 to the consolidated financial statements for additional information on Mr. Harrison’s stock compensation program.

 

Net Income Per Share

 

The Company applies the two-class method for calculating and presenting net income per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared or accumulated and participation rights in undistributed earnings. Under this method:

 

 

In applying the two-class method, the Company determined undistributed earnings should be allocated equally on a per share basis between the Common Stock and Class B Common Stock due to the aggregate participation rights of the Class B Common Stock (i.e., the voting and conversion rights) and the Company’s history of paying dividends equally on a per share basis on the Common Stock and Class B Common Stock.

 

Under the Company’s certificate of incorporation, the Board of Directors may declare dividends on Common Stock without declaring equal or any dividends on the Class B Common Stock. Notwithstanding this provision, Class B Common Stock has voting and conversion rights that allow the Class B Common Stock to participate equally on a per share basis with the Common Stock.

 

The Class B Common Stock is entitled to 20 votes per share and the Common Stock is entitled to one vote per share with respect to each matter to be voted upon by the stockholders of the Company. Except as otherwise required by law, the holders of the Class B Common Stock and Common Stock vote together as a single class on all matters submitted to the Company’s stockholders, including the election of the Board of Directors. As a result, the holders of the Class B Common Stock control approximately 86% of the total voting power of the stockholders of the Company and control the election of the Board of Directors. The Board of Directors has declared and the Company has paid dividends on the Class B Common Stock and Common Stock and each class of common stock has participated equally in all dividends declared by the Board of Directors and paid by the Company since 1994.

 

The Class B Common Stock conversion rights allow the Class B Common Stock to participate in dividends equally with the Common Stock. The Class B Common Stock is convertible into Common Stock on a one-for-one per share basis at any time at the option of the holder. Accordingly, the holders of the Class B Common Stock can participate equally in any dividends declared on the Common Stock by exercising their conversion rights.

 

Basic EPS excludes potential common shares that were dilutive and is computed by dividing net income available for common stockholders by the weighted average number of Common and Class B Common shares outstanding. Diluted EPS for Common Stock and Class B Common Stock gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. The Company does not have anti-dilutive shares.

 

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Recently Adopted Accounting Pronouncements

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09 “Improvements to Employee Share-Based Payment Accounting,” which simplifies several aspects of the accounting for employee share-based transactions including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this guidance in the first quarter of 2017 and there was no impact to the Company’s consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11 “Simplifying the Measurement of Inventory.” The new guidance requires an entity to measure most inventory “at lower of cost and net realizable value” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The new guidance is effective for annual and interim periods beginning after December 15, 2016. The Company adopted this guidance in the first quarter of 2017 and there was no material impact to the Company’s consolidated financial statements.

 

Recently Issued Accounting Pronouncements

 

In February 2018, the FASB issued ASU 2018‑02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”). The new guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years and can be early adopted. The Company is still evaluating the impacts of this standard should it choose to make this reclassification.

 

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 will be 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 will adopt the new accounting standards on January 1, 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.

 

For 2017 and 2016, the Company expects to reclassify $5.4 million and $3.3 million, respectively, related to its non-service cost components of net periodic benefit cost and other benefit plan charges from income from operations to other income (expense), net in the consolidated financial statements. The Company will record the service cost component of net periodic benefit cost in selling, delivery and administrative expenses in the consolidated financial statements. In 2018, the Company expects to record service cost of $7.7 million and $2.7 million related to its non-service cost components of net periodic benefit cost and other benefit plan charges, respectively.

 

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 and can be early adopted. The Company does not anticipate the adoption of this guidance will have a material impact on its consolidated 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 impact to the Company’s consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

 

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 is in the process of evaluating the impact of the new guidance on the Company’s consolidated financial statements and anticipates this impact will be

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material to its consolidated 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.

 

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 will adopt the new accounting standards on January 1, 2018 and does not anticipate the adoption of this guidance will have a material impact on its consolidated financial statements.

 

Over the past several years, the FASB has issued several accounting standards for revenue recognition:

 

 

The Company will adopt the new accounting standards on January 1, 2018 using a modified retrospective approach. The Company is in the process of finalizing its assessment of the impact of the new guidance on the Company’s consolidated financial statements. The approach the Company took during the assessment process was identifying and performing detailed walkthroughs of key revenue streams, including high level contract review, then performing detailed contract reviews for all revenue streams in order to evaluate revenue recognition requirements and prepare an implementation work plan. Based on the Company’s current assessment, it does not expect this guidance to have a material impact on the Company’s consolidated financial statements. As the Company completes its overall assessment, the Company will identify and implement changes to its accounting policies and internal controls to support the new revenue recognition and disclosure requirements.

 

 

The Company and The Coca‑Cola Company formed Piedmont in 1993 to distribute and market nonalcoholic beverages primarily in portions of North Carolina and South Carolina. The Company provides a portion of the nonalcoholic beverage products that Piedmont distributes and markets to Piedmont at cost and receives a fee for managing Piedmont’s operations pursuant to a management agreement. All transactions with Piedmont, including the financing arrangements described below, are intercompany transactions and are eliminated in the Company’s consolidated financial statements.

 

Noncontrolling interest represents the portion of Piedmont owned by The Coca‑Cola Company, which was 22.7% in all periods reported. Noncontrolling interest income of $6.3 million in 2017, $6.5 million in 2016 and $6.0 million in 2015 is included in net income on the Company’s consolidated statements of operations. In addition, the amount of consolidated net income attributable to both the Company and noncontrolling interest are shown on the Company’s consolidated statements of operations. Noncontrolling interest is included in the equity section of the Company’s consolidated balance sheets and totaled $92.2 million on December 31, 2017 and $85.9 million on January 1, 2017.

 

The Company has agreed to provide financing to Piedmont up to $100.0 million under an agreement that expires on December 31, 2019 with automatic one-year renewal periods unless either the Company or Piedmont provides 10 days’ prior written notice of cancellation to the other party before any such one-year renewal period begins. Piedmont pays the Company interest on its borrowings at the Company’s average monthly cost of borrowing, taking into account all indebtedness of the Company and its consolidated subsidiaries, as determined as of the last business day of each calendar month plus 0.5%. There were no amounts outstanding under this agreement at December 31, 2017.

 

Piedmont has agreed to provide financing to the Company up to $200.0 million under an agreement that expires December 31, 2022 with automatic one-year renewal periods unless a demand for payment of any amount borrowed by the Company is made by Piedmont prior to any such termination date. Borrowings under the revolving loan agreement bear interest on a monthly basis at a rate that is the

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average rate for the month on A1/P1-rated commercial paper with a 30-day maturity, which was 1.47% at December 31, 2017. There was $111.8 million outstanding under this agreement as of December 31, 2017.

 

 

As part of The Coca‑Cola Company’s plans to refranchise its North American bottling territories, the Company recently concluded a series of transactions from April 2013 to October 2017 with The Coca‑Cola Company, CCR and United to significantly expand the Company’s distribution and manufacturing operations (the “System Transformation”). The System Transformation included acquisition and exchange of rights to serve Expansion Territories and related distribution assets, as well as the acquisition and exchange of Expansion Facilities and related manufacturing assets. A summary of the System Transformation transactions (the “System Transformation Transactions”) completed by the Company prior to 2017 is included in the Company’s Annual Report on Form 10‑K for 2016. During 2017, the Company closed the following System Transformation Transactions:

 

System Transformation Transactions Completed in 2017

 

System Transformation Transactions completed with CCR in 2017

 

Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana Expansion Territories Acquisitions (“January 2017 Transaction”)

 

On January 27, 2017, the Company acquired distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Anderson, Fort Wayne, Lafayette, South Bend and Terre Haute, Indiana, pursuant to a distribution asset purchase agreement entered into by the Company and CCR on September 1, 2016 (the “September 2016 Distribution APA”). The Company completed the January 2017 Transaction for a cash purchase price of $32.1 million, which includes all post-closing adjustments. The cash purchase price increased $0.5 million as a result of post-closing adjustments made during 2017.

 

Acquisition of Bloomington and Indianapolis, Indiana and Columbus and Mansfield, Ohio Expansion Territories and Indianapolis and Portland, Indiana Expansion Facilities (“March 2017 Transactions”)

 

On March 31, 2017, the Company acquired (i) distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Indianapolis and Bloomington, Indiana and Columbus and Mansfield, Ohio pursuant to the September 2016 Distribution APA and (ii) two Expansion Facilities located in Indianapolis and Portland, Indiana and related manufacturing assets pursuant to a manufacturing asset purchase agreement entered into by the Company and CCR on September 1, 2016 (the “September 2016 Manufacturing APA”). The Company completed the March 2017 Transactions for a cash purchase price of $104.6 million, which includes all post-closing adjustments. The cash purchase price decreased $4.1 million as a result of post-closing adjustments made during 2017.

 

Acquisition of Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio Expansion Territories and Twinsburg, Ohio Expansion Facility (“April 2017 Transactions”)

 

On April 28, 2017, the Company acquired (i) distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Akron, Elyria, Toledo, Willoughby and Youngstown, Ohio pursuant to a distribution asset purchase agreement entered into by the Company and CCR on April 13, 2017 (the “April 2017 Distribution APA”) and (ii) an Expansion Facility located in Twinsburg, Ohio and related manufacturing assets pursuant to a manufacturing asset purchase agreement entered into by the Company and CCR on April 13, 2017 (the “April 2017 Manufacturing APA”). The Company completed the April 2017 Transactions for a cash purchase price of $87.9 million. During the fourth quarter of 2017, the cash purchase price for the April 2017 Transactions decreased by $4.7 million as a result of net working capital and other fair value adjustments, which remains due from The Coca‑Cola Company. The cash purchase price for the April 2017 Transactions remains subject to post-closing adjustment in accordance with the April 2017 Distribution APA and the April 2017 Manufacturing APA.

 

Acquisition of Arkansas Expansion Territories and Memphis, Tennessee and West Memphis, Arkansas Expansion Facilities in exchange for the Company’s Deep South and Somerset Distribution Territories and Mobile, Alabama Manufacturing Facility (the “CCR Exchange Transaction”)

 

On October 2, 2017, the Company (i) acquired from CCR distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in central and southern Arkansas and two Expansion Facilities located in Memphis, Tennessee and West Memphis, Arkansas and related manufacturing assets (collectively, the “CCR Exchange Business”) in exchange for which the Company (ii) transferred to CCR distribution rights and related assets in territories previously served by the Company through its facilities and equipment located in portions of southern Alabama, southeastern Mississippi, southwestern

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Georgia and northwestern Florida and in and around Somerset, Kentucky and a regional manufacturing facility located in Mobile, Alabama and related manufacturing assets (collectively, the “Deep South and Somerset Exchange Business”), pursuant to an asset exchange agreement entered into by the Company, certain of its wholly-owned subsidiaries and CCR on September 29, 2017 (the “CCR AEA”).

 

During 2017, the Company paid CCR $15.9 million toward the closing of the CCR Exchange Transaction, representing an estimate of the difference between the value of the CCR Exchange Business acquired by the Company and the value of the Deep South and Somerset Exchange Business acquired by CCR. During the fourth quarter of 2017, the Company recorded certain adjustments to this settlement amount as a result of changes in estimated net working capital and other fair value adjustments, which are included in accounts payable to The Coca‑Cola Company. The final closing price for the CCR Exchange Transaction remains subject to final resolution pursuant to the CCR AEA. The payment for the CCR Exchange Transaction reflected the application of $4.8 million of the Expansion Facilities Discount (as described below).

 

Acquisition of Memphis, Tennessee Expansion Territories (“Memphis Transaction”)

 

On October 2, 2017, the Company acquired distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in and around Memphis, Tennessee, including portions of northwestern Mississippi and eastern Arkansas, pursuant to an asset purchase agreement entered by the Company and CCR on September 29, 2017 (the “September 2017 APA”). The Company completed this acquisition for a cash purchase price of $39.6 million, which remains subject to post-closing adjustment in accordance with the September 2017 APA.

 

System Transformation Transactions completed with United in 2017

 

Acquisition of Spartanburg and Bluffton, South Carolina Expansion Territories in exchange for the Company’s Florence and Laurel Territories and Piedmont’s Northeastern Georgia Territories (“United Exchange Transaction”)

 

On October 2, 2017, the Company and Piedmont completed exchange transactions in which (i) the Company acquired from United distribution rights and related assets in Expansion Territories previously served by United through United’s facilities and equipment located in and around Spartanburg, South Carolina and a portion of United’s territory located in and around Bluffton, South Carolina and Piedmont acquired from United similar rights, assets and liabilities, and working capital in the remainder of United’s Bluffton, South Carolina territory (collectively, the “United Distribution Business”), in exchange for which (ii) the Company transferred to United distribution rights and related assets in territories previously served by the Company through its facilities and equipment located in parts of northwestern Alabama, south-central Tennessee and southeastern Mississippi previously served by the Company’s distribution centers located in Florence, Alabama and Laurel, Mississippi (collectively, the “Florence and Laurel Distribution Business”) and Piedmont transferred to United similar rights, assets and liabilities, and working capital of Piedmont’s in territory located in parts of northeastern Georgia (the “Northeastern Georgia Distribution Business”), pursuant to an asset exchange agreement between the Company, certain of its wholly-owned subsidiaries and United dated September 29, 2017 (the “United AEA”) and an asset exchange agreement between Piedmont and United dated September 29, 2017 (the “Piedmont – United AEA”).

 

At closing, the Company and Piedmont paid United $3.4 million toward the closing of the United Exchange Transaction, representing an estimate of (i) the difference between the value of the portion of the United Distribution Business acquired by the Company and the value of the Florence and Laurel Distribution Business acquired by United, plus (ii) the difference between the value of the portion of the United Distribution Business acquired by Piedmont and the value of the Northeastern Georgia Distribution Business acquired by United, which such amounts remain subject to final resolution pursuant to the United AEA and the Piedmont – United AEA, respectively.

 

Expansion Facilities Discount and Legacy Facilities Credit Letter Agreement

 

In connection with the Company’s acquisitions of the Expansion Facilities and the impact on transaction value from certain adjustments made by The Coca‑Cola Company pursuant to a regional manufacturing agreement with The Coca‑Cola Company entered into on March 31, 2017 (as amended, the “RMA”) to the authorized pricing on sales of certain beverages produced by the Company under trademarks of The Coca‑Cola Company at the Expansion Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers, the Company and The Coca‑Cola Company also entered into a letter agreement on March 31, 2017 (as amended, the “Manufacturing Facilities Letter Agreement”), pursuant to which The Coca‑Cola Company agreed to provide the Company with an aggregate valuation adjustment discount of $33.1 million (the “Expansion Facilities Discount”) on the purchase prices for the Expansion Facilities.

 

The parties agreed to apply $22.9 million of the total Expansion Facilities Discount upon the Company’s acquisition of Expansion Facilities in March 2017 and agreed to apply an additional $5.4 million of the total Expansion Facilities Discount upon the Company’s

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acquisition of an Expansion Facility in April 2017. The parties agreed to apply the remaining $4.8 million of the total Expansion Facilities Discount upon the Company’s acquisition of two additional Expansion Facilities as part of the CCR Exchange Transaction, after which time no amounts remain outstanding under the Manufacturing Facilities Letter Agreement.

 

The Manufacturing Facilities Letter Agreement also establishes a mechanism to compensate the Company with a payment or credit for the net economic impact to the manufacturing facilities the Company served prior to the System Transformation (the “Legacy Facilities”) of the changes made by The Coca‑Cola Company to the authorized pricing under the RMA on sales of certain Coca‑Cola products produced by the Company at the Legacy Facilities and sold to The Coca‑Cola Company and certain U.S. Coca‑Cola bottlers versus the Company’s historical returns for products produced at the Legacy Facilities prior to the conversion on March 31, 2017 of the Company’s then-existing manufacturing agreements with The Coca‑Cola Company to the RMA (the “Legacy Facilities Credit”).

 

The Company and The Coca‑Cola Company agreed that the amount of the Legacy Facilities Credit to be paid to the Company by The Coca‑Cola Company was $43.0 million, pursuant to a letter agreement between the Company and The Coca‑Cola Company dated December 26, 2017. The Coca‑Cola Company paid the Legacy Facilities Credit, in the amount of $43.0 million, to the Company in December 2017.

 

The Company recognized $12.4 million of the Legacy Facilities Credit during 2017, representing the portion of the credit applicable to the Mobile, Alabama facility which the Company transferred to CCR as part of the CCR Exchange Transaction. The $12.4 million portion of the Legacy Facilities Credit related to the Mobile, Alabama facility was recorded to gain (loss) on exchange transactions in the Company’s consolidated financial statements. The remaining $30.6 million of the Legacy Facilities Credit was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years.

 

Gain on Exchange Transactions

 

Upon closing the CCR Exchange Transaction and the United Exchange Transaction, the fair value of net assets acquired exceeded the carrying value of net assets exchanged, which resulted in a gain of $0.5 million recorded to gain (loss) on exchange transactions in the Company’s consolidated financial statements. This amount remains subject to final resolution pursuant to the CCR AEA, the United AEA and the Piedmont – United AEA.

 

The $0.5 million gain on the CCR Exchange Transaction and the United Exchange Transaction, combined with the $12.4 million portion of the Legacy Facilities Credit related to the Mobile, Alabama facility, resulted in a total gain on exchange transactions of $12.9 million in 2017.

 

The fair value of acquired assets and assumed liabilities in the 2017 System Transformation Transactions as of the acquisition dates is summarized as follows:

 

 

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As part of the “October 2017 Transactions Acquisitions,” which include the Expansion Territories and the Expansion Facilities acquired in the CCR Exchange Transaction (the “CCR Exchange Transaction Acquisitions”), the Memphis Transaction and the United Exchange Transaction (the “United Exchange Transaction Acquisitions”), the Company’s acquired assets and assumed liabilities as of the acquisition dates are summarized as follows:

 

 

The goodwill for the 2017 System Transformation Transactions is included in the Nonalcoholic Beverages segment and is primarily attributed to operational synergies and the workforce acquired. Goodwill of $11.6 million, $6.4 million, $6.6 million and $2.7 million is expected to be deductible for tax purposes for the April 2017 Transactions, the CCR Exchange Transaction Acquisitions, the Memphis Transaction and the United Exchange Transaction Acquisitions, respectively. No goodwill is expected to be deductible for tax purposes for the January 2017 Transaction or the March 2017 Transactions.

 

Identifiable intangible assets acquired by the Company in the 2017 System Transformation Transactions consist of distribution agreements and customer lists, which have an estimated useful life of 40 years and 12 years, respectively.

 

The Company has preliminarily allocated the purchase prices of the April 2017 Transactions, the CCR Exchange Transaction, the Memphis Transaction and the United Exchange Transaction to the individual acquired assets and assumed liabilities. The valuations are subject to adjustment as additional information is obtained. Any adjustments made beyond one year from each transaction’s acquisition date are recorded through the Company’s consolidated statements of operations.

 

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The carrying value of assets and liabilities in the Deep South and Somerset Exchange Business divested in the CCR Exchange Transaction and the Florence and Laurel Distribution Business divested in the United Exchange Transaction (together, the “October 2017 Divestitures”) are summarized as follows:

 

 

The October 2017 Divestitures were recorded in the Company’s Nonalcoholic Beverages segment prior to divestiture.

 

System Transformation Transactions Completed in 2016

 

During 2016, the Company acquired from CCR distribution rights and related assets for the following Expansion Territories: Easton, Salisbury, Capitol Heights, La Plata, Baltimore, Hagerstown and Cumberland, Maryland; Richmond, Yorktown and Alexandria, Virginia; Cincinnati, Dayton, Lima and Portsmouth, Ohio; and Louisa, Kentucky. The Company also acquired Expansion Facilities and related manufacturing assets in Sandston, Virginia; Silver Spring and Baltimore, Maryland; and Cincinnati, Ohio during 2016. Collectively, these are the “2016 System Transformation Transactions.” Details of the 2016 System Transformation Transactions are included below.

 

Easton and Salisbury, Maryland and Richmond and Yorktown, Virginia Expansion Territories Acquisitions and Sandston, Virginia Expansion Facility Acquisition (“January 2016 Transactions”)

 

An asset purchase agreement entered into by the Company and CCR in September 2015 (the “September 2015 APA”) contemplated, in part, the Company’s acquisition of distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Easton and Salisbury, Maryland and Richmond and Yorktown, Virginia. In addition, an asset purchase agreement entered into by the Company and CCR in October 2015 (the “October 2015 APA”) contemplated, in part, the Company’s acquisition of an Expansion Facility and related manufacturing assets in Sandston, Virginia. The closing of the January 2016 Transactions occurred on January 29, 2016. The cash purchase price for the January 2016 Transactions was $75.9 million, which includes all post-closing adjustments. Of the total cash purchase price, $10.2 million was settled beyond one year from the transaction closing date and was recorded as other expense on the Company’s consolidated statements of operations.

 

Alexandria, Virginia and Capitol Heights and La Plata, Maryland Territories Acquisitions (“April 1, 2016 Transaction”)

 

The September 2015 APA also contemplated the Company’s acquisition of distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Alexandria, Virginia and Capitol Heights and La Plata, Maryland. The closing of the April 1, 2016 Transaction occurred on April 1, 2016. The cash purchase price for the April 1, 2016 Transaction was $34.8 million, which includes all post-closing adjustments. Of the total cash purchase price, $0.8 million was settled beyond one year from the transaction closing date and was recorded as other income on the Company’s consolidated statements of operations.

 

Baltimore, Hagerstown and Cumberland, Maryland Expansion Territories Acquisitions and Silver Spring and Baltimore, Maryland Expansion Facilities Acquisitions (“April 29, 2016 Transactions”)

 

On April 29, 2016, the Company completed the remaining transactions contemplated by (i) the September 2015 APA, by acquiring distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Baltimore, Hagerstown and Cumberland, Maryland, and (ii) the October 2015 APA, by acquiring Expansion Facilities and related manufacturing assets in Silver Spring and Baltimore, Maryland. The cash purchase price for the April 29, 2016 Transactions

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was $68.5 million, which includes all post-closing adjustments. Of the total cash purchase price, $0.5 million was settled beyond one year from the transaction closing date and was recorded as other income on the Company’s consolidated statements of operations.

 

Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky Expansion Territories Acquisitions and Cincinnati, Ohio Expansion Facility Acquisition (“October 2016 Transactions”)

 

On October 28, 2016, the Company completed the initial transactions contemplated by (i) the September 2016 Distribution APA, by acquiring distribution rights and related assets in Expansion Territories previously served by CCR through CCR’s facilities and equipment located in Cincinnati, Dayton, Lima and Portsmouth, Ohio and Louisa, Kentucky, and (ii) the September 2016 Manufacturing APA, by acquiring an Expansion Facility and related manufacturing assets located in Cincinnati, Ohio. The closing of the October 2016 Transactions occurred for a cash purchase price of $99.7 million, which includes all post-closing adjustments. The cash purchase price increased $1.5 million as a result of post-closing adjustments made during 2017.

 

The fair value of acquired assets and assumed liabilities of the 2016 System Transformation Transactions as of the acquisition dates is summarized as follows:

 

 

The goodwill for the 2016 System Transformation Transactions is all included in the Nonalcoholic Beverages segment and is primarily attributed to operational synergies and the workforce acquired. Goodwill of $14.9 million and $15.8 million is expected to be deductible for tax purposes for the January 2016 Transactions and October 2016 Transactions, respectively. No goodwill is expected to be deductible for the April 1, 2016 Transaction or the April 29, 2016 Transactions.

 

System Transformation Transactions Completed in 2015

 

During 2015, the Company acquired from CCR distribution rights and related assets for the following Expansion Territories: Cleveland and Cookeville, Tennessee; Louisville, Kentucky and Evansville, Indiana; Paducah and Pikeville, Kentucky; Norfolk, Fredericksburg and Staunton, Virginia; and Elizabeth City, North Carolina and acquired a make-ready center in Annapolis, Maryland (the “2015 Expansion Territories”). In 2015, the Company also acquired from CCR distribution rights and related assets for distribution territory in Lexington, Kentucky in exchange for distribution territory previously served by the Company in Jackson, Tennessee (the “2015 Asset Exchange”). The aggregate cash purchase price for the 2015 Expansion Territories and the 2015 Asset Exchange was $85.6 million, which includes all post-closing adjustments.

 

The Company recognized a gain of $8.1 million as a result of the 2015 Asset Exchange, which was recorded to gain (loss) on exchange transactions in the consolidated financial statements. In addition, the Company recognized a bargain purchase gain of

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$2.0 million after applying a deferred tax liability of $1.3 million as a result of the acquisition of the make-ready center in Annapolis, Maryland, which was recorded to bargain purchase gain, net of tax in the consolidated financial statements.

 

System Transformation Transactions Completed in 2014

 

During 2014, the Company acquired from CCR distribution rights and related assets for the following Expansion Territories:  Johnson City, Knoxville and Morristown, Tennessee (the “2014 Expansion Territories”). The aggregate cash purchase price for the 2014 Expansion Territories was $43.1 million, which includes all post-closing adjustments.

 

System Transformation Transactions Financial Results

 

The financial results of the 2017 System Transformation Transactions, the 2016 System Transformation Transactions, the 2015 Expansion Territories and the 2015 Asset Exchange have been included in the Company’s consolidated financial statements from their respective acquisition dates. These System Transformation Transactions contributed the following amounts to the Company’s consolidated statement of operations:

 

 

The Company incurred transaction related expenses for these System Transformation Transactions of $6.8 million in 2017, $6.1 million in 2016 and $5.8 million in 2015. These expenses are included within selling, delivery and administrative expenses on the consolidated statements of operations.

 

2017 System Transformation Transactions and 2016 System Transformation Transactions Pro Forma Financial Information

 

The purpose of the pro forma disclosures is to present the net sales and the income from operations of the combined entity as though the 2017 System Transformation Transactions and the 2016 System Transformation Transactions had occurred as of the beginning of 2016. The pro forma combined net sales and income from operations do not necessarily reflect what the combined Company’s net sales and income from operations would have been had the acquisitions occurred at the beginning of 2016. The pro forma financial information also may not be useful in predicting the future financial results of the combined company. The actual results may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

 

The following tables represent the Company’s unaudited pro forma net sales and unaudited pro forma income from operations for the 2017 System Transformation Transactions and the 2016 System Transformation Transactions.

 

 

 

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The net sales pro forma and the income from operations pro forma reflect adjustments for (i) the inclusion of historic results of operations for the Expansion Territories and the Expansion Facilities acquired in the System Transformation Transactions for the period prior to the Company’s acquisition of the applicable territories or facility, for each year presented, (ii) the elimination of historic results of operations for the October 2017 Divestitures for the period prior to the Company’s divestiture of the associated Expansion Territories and Expansion Facility and (iii) the elimination of net sales made in the normal course of business between the Company and the selling entity (CCR or United) involved in the applicable System Transformation Transactions. In addition, the income from operations pro forma reflects adjustments for the elimination of cost of sales associated with intercompany sales and an adjustment for additional depreciation expense and amortization expense for property, plant and equipment and intangible assets, respectively, as a result of the change in fair value of the assets’ useful lives upon acquisition.

 

Sale of BYB Brands, Inc.

 

On August 24, 2015, the Company sold BYB Brands, Inc. (“BYB”), a wholly-owned subsidiary of the Company to The Coca‑Cola Company. Pursuant to the stock purchase agreement dated July 22, 2015, the Company sold all issued and outstanding shares of capital stock of BYB for a cash purchase price of $26.4 million. As a result of the sale, the Company recognized a gain of $22.7 million in 2015, which was recorded to gain on sale of business in the consolidated financial statements. BYB contributed the following amounts to the Company’s consolidated statement of operations:

 

 

 

Inventories consisted of the following:

 

 

The growth in the inventories balance at December 31, 2017, as compared to January 1, 2017, is primarily a result of inventory acquired through the completion of the 2017 System Transformation Transactions.

 

5.Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets consisted of the following:

 

 

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The principal categories and estimated useful lives of property, plant and equipment, net were as follows:

 

 

Depreciation expense, which includes amortization expense for leased property under capital leases, was $150.4 million in 2017, $111.6 million in 2016 and $78.1 million in 2015.  

 

During 2017, 2016 and 2015, the Company performed periodic reviews of property, plant and equipment and determined no material impairment existed.

 

 

Leased property under capital leases, which consisted of real estate and have an estimated useful life of 3 to 20 years, were as following:

 

 

As of December 31, 2017 $15.1 million of the leased property under capital leases was from related party transactions as discussed in Note 22 to the consolidated financial statements.

 

 

A reconciliation of the activity for franchise rights for 2017 and 2016 is as follows:

 

 

In connection with the closing of the March 2017 Transactions, the Company, The Coca-Cola Company and CCR entered into a comprehensive beverage agreement (as amended, the “CBA”) on March 31, 2017, and concurrently converted the Company’s franchise rights within the territories in which the Company distributed Coca‑Cola products prior to beginning the System Transformation (the “Legacy Territories”) to distribution agreements, net on the consolidated financial statements. Prior to this conversion, the Company’s franchise rights resided entirely within the Nonalcoholic Beverage segment.

 

During the second quarter of 2016, the Company recorded $5.5 million in franchise rights for the 2015 Asset Exchange.

 

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A reconciliation of the activity for goodwill for 2017 and 2016 is as follows:

 

 

⁽¹⁾  System Transformation Transactions acquisitions includes an increase in goodwill of $7.4 million in 2017 and a decrease in goodwill of $5.8 million in 2016 from the opening balance sheets for the Expansion Territories and Expansion Facilities acquired in the System Transformation during 2017 and 2016, respectively, as disclosed in the financial statements in the Company’s filed periodic reports. These adjustments are for post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

⁽²⁾  Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

 

The Company’s goodwill resides entirely within the Nonalcoholic Beverage segment. The Company performed its annual impairment test of goodwill as of the first day of the fourth quarter of 2017, 2016 and 2015 and determined there was no impairment of the carrying value of these assets.

 

 

Distribution agreements, net, which are amortized on a straight line basis and have an estimated useful life of 20 to 40 years, consisted of the following:

 

 

A reconciliation of the activity for distribution agreements, net for 2017 and 2016 is as follows:

 

 

⁽¹⁾  System Transformation Transactions acquisitions includes an increase of $51.5 million in 2017 from the opening balance sheets for the Expansion Territories and Expansion Facilities acquired in the System Transformation during 2017, as disclosed in the financial statements in the Company’s filed periodic reports. These adjustments are for post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction. The adjustments to amortization expense associated with these measurement period adjustments were not material to the consolidated financial statements.

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⁽²⁾  Measurement period adjustment relates to post-closing adjustments made in accordance with the terms and conditions of the September 2016 Distribution APA and the September 2016 Manufacturing APA for the October 2016 Transactions. The adjustments to amortization expense associated with this measurement period adjustment were not material to the consolidated financial statements.

 

Concurrent with its entrance into the CBA in the first quarter of 2017, the Company converted its franchise rights for the Legacy Territories to distribution rights, with an estimated useful life of 40 years.

 

Assuming no impairment of distribution agreements, net, amortization expense in future years based upon recorded amounts as of December 31, 2017 will be $23.6 million for each year 2018 through 2022.

 

 

Customer lists and other identifiable intangible assets, net, which are amortized on a straight line basis and have an estimated useful life of 12 to 20 years, consisted of the following:

 

 

A reconciliation of the activity for customer lists and other identifiable intangible assets, net for 2017 and 2016 is as follows:

 

 

⁽¹⁾ System Transformation Transactions acquisitions includes an increase of $0.5 million in 2017 from the opening balance sheets for the Expansion Territories and Expansion Facilities acquired in the System Transformation during 2017, as disclosed in the financial statements in the Company’s filed periodic reports. These adjustments are for post-closing adjustments made in accordance with the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction. The adjustments to amortization expense associated with these measurement period adjustments were not material to the consolidated financial statements.

⁽²⁾ Measurement period adjustment relates to post-closing adjustments made in accordance with the terms and conditions of the September 2016 Distribution APA and the September 2016 Manufacturing APA for the October 2016 Transactions. The adjustments to amortization expense associated with this measurement period adjustment were not material to the consolidated financial statements.

 

Assuming no impairment of customer lists and other identifiable intangible assets, net, amortization expense in future years based upon recorded amounts as of December 31, 2017 will be $1.8 million for each year 2018 through 2022.

 

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Other accrued liabilities consisted of the following:

 

 

See Note 22 to the consolidated financial statements for additional information on the proceeds from the bottling agreements conversion.

 

 

Following is a summary of the Company’s debt:

 

 

 

The principal maturities of debt outstanding on December 31, 2017 were as follows:

 

 

Under the Company’s Term Loan Facility (as defined below), $15 million will become due in fiscal 2018. The Company intends to repay this amount through use of its Revolving Credit Facility (as defined below), which is classified as long-term debt. As such, the $15 million has been classified as non-current as of December 31, 2017.

 

The Company had capital lease obligations of $43.5 million on December 31, 2017 and $48.7 million on January 1, 2017. The Company mitigates its financing risk by using multiple financial institutions and only entering into credit arrangements with institutions with investment grade credit ratings. The Company monitors counterparty credit ratings on an ongoing basis.

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On February 27, 2017, the Company sold $125 million aggregate principal amount of senior unsecured notes due 2023 to PGIM, Inc. (“Prudential”) and certain of its affiliates pursuant to the Note Purchase and Private Shelf Agreement dated June 10, 2016 between the Company, Prudential and the other parties thereto (the “Private Shelf Facility”). These notes bear interest at 3.28%, payable semi-annually in arrears on February 27 and August 27 of each year, and will mature on February 27, 2023 unless earlier redeemed by the Company. The Company may request that Prudential consider the purchase of additional senior unsecured notes of the Company under the Private Shelf Facility in an aggregate principal amount of up to $175 million.

 

In October 2014, the Company entered into a five-year unsecured revolving credit facility (the “Revolving Credit Facility”), and in April 2015, the Company exercised an accordion feature which established a $450 million aggregate maximum borrowing capacity on the Revolving Credit Facility. The $450 million borrowing capacity includes up to $50 million available for the issuance of letters of credit. Borrowings under the Revolving Credit Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit ratings at the time of borrowing. At the Company’s current credit ratings, the Company must pay an annual facility fee of 0.15% of the lenders’ aggregate commitments under the Revolving Credit Facility. The Revolving Credit Facility has a scheduled maturity date of October 16, 2019.

 

In June 2016, the Company entered into a five-year term loan agreement for a senior unsecured term loan facility (the “Term Loan Facility”) in the aggregate principal amount of $300 million, maturing June 7, 2021. The Company may request additional term loans under the agreement, provided the Company’s aggregate borrowings under the Term Loan Facility do not exceed $500 million. Borrowings under the Term Loan Facility bear interest at a floating base rate or a floating Eurodollar rate plus an applicable margin, at the Company’s option, dependent on the Company’s credit ratings.

 

The Revolving Credit Facility, the Term Loan Facility and the Private Shelf Facility include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreements. The Company was in compliance with these covenants as of December 31, 2017. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

 

The indentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts.

 

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

 

 

The Company is subject to the risk of increased costs arising from adverse changes in certain commodity prices. In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivative instruments. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recorded at fair value as either assets or liabilities in the Company’s consolidated balance sheets. These derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. Derivative instruments held are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. Settlements of derivative agreements are included in cash flows from operating activities on the Company’s consolidated statements of cash flows.

 

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company would be exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these parties.

 

The following table summarizes pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification of such changes in the consolidated statements of operations.

 

 

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The following table summarizes the fair values and classification in the consolidated balance sheets of derivative instruments held by the Company:

 

 

The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. Accordingly, the net amounts of derivative assets are recognized in either prepaid expenses and other current assets or other assets in the Company’s consolidated balance sheets and the net amounts of derivative liabilities are recognized in other accrued liabilities or other liabilities in the consolidated balance sheets. The following table summarizes the Company’s gross derivative assets and gross derivative liabilities in the consolidated balance sheets:

 

 

The following table summarizes the Company’s outstanding commodity derivative agreements:

 

 

Subsequent to December 31, 2017, the Company entered into additional agreements to hedge certain commodity costs for 2018. The notional amount of these agreements was $91.7 million. Concurrently, the Company terminated certain hedge agreements for commodity costs for 2018. The notional amount of the terminated agreements was $22.6 million.

 

 

GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:

 

 

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The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were no transfers of assets or liabilities between levels in any period presented.

 

 

The following tables summarize, by assets and liabilities, the carrying amounts and fair values by level of the Company’s deferred compensation plan, commodity hedging agreements, debt and acquisition related contingent consideration:

 

 

 

Under the CBA, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell specified covered beverages and beverage products in the Expansion Territories. This acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts

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its acquisition related contingent consideration liability related to the Expansion Territories to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC. These future expected sub-bottling payments extend through the life of the related distribution assets acquired in each Expansion Territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the amounts that will be paid in the future under the CBA, and current sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration and could materially impact the amount of noncash expense (or income) recorded each reporting period.

 

The acquisition related contingent consideration is the Company’s only Level 3 asset or liability. A reconciliation of the Level 3 activity is as follows:

 

 

⁽¹⁾ Increase due to System Transformation Transactions acquisitions includes an increase in the acquisition related contingent consideration of $62.5 million in 2017 from the opening balance sheets for the Expansion Territories and Expansion Facilities acquired in the System Transformation during 2017, as disclosed in the financial statements in the Company’s filed periodic reports. These adjustments are for post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

⁽²⁾ Measurement period adjustments relate to post-closing adjustments made in accordance with the terms and conditions of the applicable asset purchase agreement or asset exchange agreement for each System Transformation Transaction.

 

The fair value adjustment to the acquisition related contingent consideration liability during 2017 was primarily driven by final settlement of previously closed System Transformation Transactions and a decrease in the risk-free interest rate, partially offset by a benefit resulting from the Tax Act. The fair value adjustments to the acquisition related contingent consideration liability during 2016 were primarily driven by a change in the projected future operating results of the Expansion Territories subject to sub-bottling fees and changes in the risk-free interest rate. These adjustments were recorded in other income (expense), net on the Company’s consolidated statements of operations.

 

The amount the Company could pay annually under the acquisition related contingent consideration arrangements for the System Transformation Transactions is expected to be in the range of $23 million to $47 million.

 

 

Other liabilities consisted of the following:

 

 

See Note 15 and Note 21 to the consolidated financial statements for additional information on acquisition related contingent consideration and benefit plans, respectively. See Note 22 to the consolidated financial statements for additional information on the proceeds from the bottling agreements conversion and the Legacy Facilities Discount.

 

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Leases

 

The Company leases office and warehouse space, machinery and other equipment under noncancellable operating lease agreements which expire at various dates through 2033. These leases generally contain scheduled rent increases or escalation clauses, renewal options, or in some cases, purchase options. The Company also leases certain warehouse space and other equipment under capital lease agreements which expire at various dates through 2030. These leases contain scheduled rent increases or escalation clauses. Amortization of assets recorded under capital leases is included in depreciation expense.

 

Rental expense incurred for noncancellable operating leases was $18.7 million in 2017, $13.6 million in 2016 and $8.9 million in 2015. See Note 7 and Note 13 to the consolidated financial statements for additional information on leased property under capital leases.

 

The following is a summary of future minimum lease payments, including renewal options the Company has determined to be reasonably assured, for all noncancellable operating leases and capital leases as of December 31, 2017:

 

 

Manufacturing Cooperatives

 

The Company is a shareholder of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative in Bishopville, South Carolina, managed by the Company. All eight shareholders of SAC are Coca‑Cola bottlers and each has equal voting rights. The Company accounts for SAC as an equity method investment.

 

The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Proceeds from management fees received from SAC were $9.1 million in 2017, $9.0 million in 2016 and $8.5 million in 2015.

 

The Company is obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. The Company purchased 29.9 million cases, 29.9 million cases and 28.3 million cases of finished product from SAC in 2017, 2016 and 2015, respectively.

 

The Company is also a shareholder of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative from which the Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. The Company accounts for Southeastern as an equity method investment.

 

The following table summarizes the Company’s purchases from these manufacturing cooperatives:

 

 

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The Company guarantees a portion of SAC’s debt, which expires at various dates through 2021. The amounts guaranteed were $23.9 million as of December 31, 2017 and $23.3 million as of January 1, 2017. Effective November 17, 2017, the Company’s guarantees for a portion of Southeastern’s debt were eliminated.

 

The Company does not anticipate SAC will fail to fulfill its commitment related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee.

 

In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payments to the lenders up to the level of the guarantee. The following table summarizes the Company’s maximum exposure under this guarantee if SAC had borrowed up to its aggregate borrowing capacity:

 

 

 

The Company holds no assets as collateral against the SAC guarantee, the fair value of which is immaterial to the Company’s consolidated financial statements. The Company monitors its investments in SAC and would be required to write down its investment if an impairment was identified and the Company determined it to be other than temporary. No impairment of the Company’s investments in SAC has been identified as of December 31, 2017, and there was no impairment in 2016 or 2015.

 

Other Commitments and Contingencies

 

The Company has standby letters of credit, primarily related to its property and casualty insurance programs. These letters of credit totaled $35.6 million on December 31, 2017 and $29.7 million on January 1, 2017.

 

The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of December 31, 2017, the future payments related to these contractual arrangements, which expire at various dates through 2030, amounted to $132.8 million.

 

The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes that the ultimate disposition of these matters will not have a material adverse effect on the financial condition, cash flows or results of operations of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.

 

The Company is subject to audits by tax authorities in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolved with the authorities or potentially through the courts. Management believes the Company has adequately provided for any assessments likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the consolidated financial statements.

 

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The current income tax provision represents the estimated amount of income taxes paid or payable for the year, as well as changes in estimates from prior years. The deferred income tax provision represents the change in deferred tax liabilities and assets. The following table presents the significant components of the provision for income taxes:

 

 

The Company’s effective income tax rate, as calculated by dividing income tax expense (benefit) by income before income taxes, was (63.2)% for 2017, 38.9% for 2016 and 34.4% for 2015. The following table provides a reconciliation of income tax expense (benefit) at the statutory federal rate to actual income tax expense (benefit).

 

 

The Company’s effective tax rate, as calculated by dividing income tax expense (benefit) by income before income taxes minus net income attributable to noncontrolling interest, was (70.3)% for 2017, 41.8% for 2016 and 36.6% for 2015.

 

On December 22, 2017, the Tax Act was signed into law and significantly reformed the Internal Revenue Code of 1986, as amended. The Tax Act will significantly impact the Company by reducing the federal corporate tax rate from 35% to 21%, effective January 1, 2018, and by allowing expensing of certain capital expenditures. However, the Tax Act limits the deductibility of meals, entertainment expenses and certain executive compensation, imposes limitations on the deductibility of interest expense and eliminates the domestic production activities deduction.

 

As of December 31, 2017, the Company completed its estimate for the tax effects of the enactment of the Tax Act, and as a result, the Company revalued and reduced its net deferred tax liability to the newly enacted corporate tax rate of 21%. The Company recognized an estimated benefit of $69.0 million, primarily as a result of revaluing its net deferred tax liability. This benefit was partially offset by a $2.4 million increase to the valuation allowance as a result of the deductibility of certain deferred compensation based on the current interpretation of the Tax Act. The net benefit of $66.6 million was recorded to income tax expense (benefit) in the 2017 consolidated financial statements.

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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.

 

The amounts recorded to gain (loss) on exchange transactions, gain on sale of business and bargain purchase gain, net of tax on the consolidated statements of operations did not have a significant impact on the effective income tax rate for any periods presented.

 

The Company records liabilities for uncertain tax positions related to certain income tax positions. These liabilities reflect the Company’s best estimate of the ultimate income tax liability based on currently known facts and information. Material changes in facts or information, as well as the expiration of statute and/or settlements with individual tax jurisdictions, may result in material adjustments to these estimates in the future.

 

The Company recognizes potential interest and penalties related to uncertain tax positions in income tax expense (benefit). During 2017, 2016 and 2015, the interest and penalties related to uncertain tax positions recognized in income tax expense (benefit) were not material. In addition, the amount of interest and penalties accrued at December 31, 2017 and January 1, 2017 were not material.

 

The Company had uncertain tax positions, including accrued interest of $2.4 million on December 31, 2017 and $2.9 million on January 1, 2017, all of which would affect the Company’s effective tax rate if recognized. While it is expected the amount of uncertain tax positions may change in the next 12 months, the Company does not expect such change would have a significant impact on the consolidated financial statements.

 

The Company reduced its liability for uncertain tax positions in 2017, 2016 and 2015, primarily as a result of the expiration of applicable statutes of limitation. These reductions resulted in corresponding decreases to income tax expense (benefit). A reconciliation of uncertain tax positions, excluding accrued interest, is as follows:

 

 

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Deferred income taxes are recorded based upon temporary differences between the financial statement and tax bases of assets and liabilities and available net operating loss and tax credit carryforwards. Temporary differences and carryforwards that comprised deferred income tax assets and liabilities were as follows:

 

 

The Company’s deferred income tax assets and liabilities are subject to adjustment in future periods based on the Company’s ongoing evaluations of such deferred assets and liabilities and new information available to the Company.

 

Valuation allowances are recognized on deferred tax assets if the Company believes it is more likely than not that some or all of the deferred tax assets will not be realized. The Company believes the majority of the deferred tax assets will be realized due to the reversal of certain significant temporary differences and anticipated future taxable income from operations.

 

The valuation allowance of $4.3 million on December 31, 2017 and $1.6 million on January 1, 2017 was established primarily for certain loss carryforwards and deferred compensation. The increase in the valuation allowance as of December 31, 2017, was a result of the Company’s assessment of its ability to use certain loss carryforwards and the deductibility of certain deferred compensation as a result of the current interpretation of the Tax Act. The reduction in the valuation allowance as of January 1, 2017, was a result of the Company’s assessment of its ability to use certain loss carryforwards.

 

As of December 31, 2017, the Company had $38.8 million of state net operating losses available to reduce future income taxes, which would expire in varying amounts through 2036. The Company utilized all of its federal net operating losses during 2017.

 

Prior tax years beginning in year 2002 remain open to examination by the IRS, and various tax years beginning in year 1998 remain open to examination by certain state tax jurisdictions due to loss carryforwards.

 

 

Accumulated other comprehensive income (loss) (“AOCI(L)”) is comprised of adjustments relative to the Company’s pension and postretirement medical benefit plans and foreign currency translation adjustments required for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.

 

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A summary of AOCI(L) for 2017, 2016 and 2015 is as follows:

 

 

 

 

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A summary of the impact on the income statement line items is as follows:

 

 

 

During the first quarter of each year, the Compensation Committee of the Company’s Board of Directors determines whether any shares of the Company’s Class B Common Stock should be issued to J. Frank Harrison, III, in connection with his services for the prior year as Chairman of the Board of Directors and Chief Executive Officer of the Company, pursuant to a performance unit award agreement approved in 2008 (the “Performance Unit Award Agreement”). As permitted under the terms of the Performance Unit Award Agreement, a number of shares were settled in cash in 2017, 2016 and 2015 to satisfy tax withholding obligations in connection with the vesting of the performance units. The remaining number of shares increased the total shares of Class B Common Stock outstanding. A summary of the awards issued in 2017, 2016 and 2015 is as follows:

 

 

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^sm under the symbol COKE. There is no established public trading market for the Class B Common Stock. Shares of the Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock at any time at the option of the holders of Class B Common Stock.

 

No cash dividend or dividend of property or stock other than stock of the Company, as specifically described in the Company’s 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. During 2017, 2016 and 2015, dividends of $1.00 per share were declared and paid on both Common Stock and Class B Common Stock. Total cash dividends paid were $9.3 million per year in 2017, 2016 and 2015.

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Each share of Common Stock is entitled to one vote per share and each share of Class B Common Stock is entitled to 20 votes per share at all meetings of shareholders. Except as otherwise required by law, holders of the Common Stock and Class B Common Stock vote together as a single class on all matters brought before the Company’s stockholders. In the event of liquidation, there is no preference between the two classes of common stock.

 

Compensation expense for the Performance Unit Award Agreement, recognized on the share price of the last trading day prior to the end of the fiscal year, was as follows:

 

 

 

Executive Benefit Plans

 

The Company has four executive benefit plans:  the Supplemental Savings Incentive Plan (“Supplemental Savings Plan”), the Long-Term Retention Plan (“LTRP”), the Officer Retention Plan (“Retention Plan”) and the Long-Term Performance Plan (“Performance Plan”).

 

Pursuant to the Supplemental Savings Plan, as amended, eligible participants may elect to defer a portion of their annual salary and bonus. Participants are immediately vested in all deferred contributions they make and become fully vested in Company contributions upon completion of five years of service, termination of employment due to death or retirement or a change in control. Participant deferrals and Company contributions made in years prior to 2006 are invested in either a fixed benefit option or certain investment funds specified by the Company. Beginning in 2010, the Company may elect at its discretion to match up to 50% of the first 6% of salary, excluding bonuses, deferred by the participant. During 2017, 2016 and 2015, the Company matched up to 50% of the first 6% of salary, excluding bonus, deferred by the participant. The Company may also make discretionary contributions to participants’ accounts. The liability under this plan was as follows:

 

 

Under the LTRP, the Company accrues a defined amount each year for an eligible participant based upon an award schedule. Amounts awarded may earn an investment return based on certain investment funds specified by the Company. Benefits under the LTRP are 50% vested until age 50. After age 50, the vesting percentage increases by 5% each year until the benefits are fully vested at age 60. Participants receive payments from the plan upon retirement or in certain instances upon termination of employment. Payments are made in the form of monthly installments over a period of ten, fifteen or twenty years. The liability under this plan was as follows:

 

 

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Under the Retention Plan, as amended effective January 1, 2007, eligible participants may elect to receive an annuity payable in equal monthly installments over a 10, 15 or 20-year period commencing at retirement or, in certain instances, upon termination of employment. The benefits under the Retention Plan increase with each year of participation as set forth in an agreement between the participant and the Company. Benefits under the Retention Plan are 50% vested until age 50. After age 50, the vesting percentage increases by an additional 5% each year until the benefits are fully vested at age 60. The liability under this plan was as follows:  

 

 

Under the Performance Plan, adopted as of January 1, 2007, the Compensation Committee of the Company’s Board of Directors establishes dollar amounts to which a participant shall be entitled upon attainment of the applicable performance measures. Bonus awards under the Performance Plan are made based on the relative achievement of performance measures in terms of the Company-sponsored objectives or objectives related to the performance of the individual participants or of the subsidiary, division, department, region or function in which the participant is employed. The liability under this plan was as follows:

 

 

Pension Plans

 

There are two Company-sponsored pension plans. The primary Company-sponsored pension plan (the “Primary Plan”) was frozen as of June 30, 2006 and no benefits accrued to participants after this date. The second Company-sponsored pension plan (the “Bargaining Plan”) is for certain employees under collective bargaining agreements. Benefits under the Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes.

 

Each year, the Company updates its mortality assumptions used in the calculation of its pension liability using The Society of Actuaries’ latest mortality tables. In 2017, 2016 and 2015, the mortality table reflected a lower increase in longevity.

 

The following tables set forth pertinent information for the two Company-sponsored pension plans:

 

Changes in Projected Benefit Obligation

 

 

The discount rate for the Primary Plan and the Bargaining Plan decreased to 3.80% and 3.90%, respectively, in 2017 from 4.44% and 4.49%, respectively, in 2016, which was the primary driver of the actuarial loss in 2017. The discount rate decreased to 4.44% and 4.49% for the Primary Plan and the Bargaining Plan, respectively, in 2016, from 4.72% for both Company-sponsored pension plans in 2015, which was the primary driver in the actuarial loss in 2016. The actuarial gain and losses, net of tax, were recorded in other comprehensive loss.

 

The projected benefit obligations and accumulated benefit obligations for both the Company’s pension plans were in excess of plan assets at December 31, 2017 and January 1, 2017. The accumulated benefit obligation was $303.9 million on December 31, 2017 and $273.1 million on January 1, 2017.

 

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Change in Plan Assets

 

 

Funded Status

 

 

Amounts Recognized in the Consolidated Balance Sheets

 

 

Net Periodic Pension Cost (Benefit)

 

 

Significant Assumptions

 

 

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Cash Flows

 

 

Contributions to the two Company-sponsored pension plans are expected to be in the range of $10 million to $20 million in 2018.

 

Plan Assets

 

The Company’s pension plans target asset allocation for 2018, actual asset allocation at December 31, 2017 and January 1, 2017, and the expected weighted average long-term rate of return by asset category were as follows:

 

 

All assets in the Company’s pension plans are invested in institutional investment funds managed by professional investment advisors which hold U.S. equities, international equities and debt securities. The objective of the Company’s investment philosophy is to earn the plans’ targeted rate of return over longer periods without assuming excess investment risk. The general guidelines for plan investments include 30% - 45% in large capitalization equity securities, 0% - 20% in U.S. small and mid-capitalization equity securities, 0% - 10% in international equity securities and 10% - 50% in debt securities. The Company currently has 61% of its plan investments in equity securities and 39% in debt securities.

 

U.S. large capitalization equity securities include domestic based companies that are generally included in common market indices such as the S&P 500™ and the Russell 1000™. U.S. small and mid-capitalization equity securities include small domestic equities as represented by the Russell 2000™ index. International equity securities include companies from developed markets outside the United States. Debt securities as of December 31, 2017 are comprised of investments in two institutional bond funds with a weighted average duration of approximately three years.

 

A weighted average expected long-term rate of return of plan assets of 6.0% in 2017 and 6.5% in 2016 was used to determine net periodic pension cost. The rate reflects an estimate of long-term future returns for the pension plan assets net of expenses. The estimate is primarily a function of the asset classes, equities versus fixed income, in which the pension plan assets are invested and the analysis of past performance of these asset classes over a long period of time. The analysis includes expected long-term inflation and the risk premiums associated with equity investments and fixed income investments.

 

The following table summarizes the Company’s common/collective trust fund pension plan assets. The underlying investments held in common/collective trust funds are actively managed equity securities and fixed income investment vehicles that are valued at the net asset value per share multiplied by the number of shares held as of the measurement date.

 

 

In addition, the Company had other level 1 pension plan assets related to its equity securities of $0.7 million in both 2017 and 2016. The level 1 assets had quoted market prices in active markets for identical assets available for fair value measurement.

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The Company does not have any unobservable inputs (Level 3) pension plan assets.

 

401(k) Savings Plan

 

The Company provides a 401(k) Savings Plan for substantially all its employees who are not part of collective bargaining agreements and for certain employees under collective bargaining agreements. The Company’s matching contribution for employees who are not part of collective bargaining agreements is discretionary, with the option to match contributions for eligible participants up to 5% based on the Company’s financial results. For all years presented, the Company matched the maximum 5% of participants’ contributions. The Company’s matching contributions for employees who are part of collective bargaining agreements are determined in accordance with negotiated formulas for the respective employees. The total expense for the Company’s matching contributions to the 401(k) Savings Plan was $18.4 million in 2017, $14.9 million in 2016 and $10.7 million in 2015.

 

Postretirement Benefits

 

The Company provides postretirement benefits for a portion of its current employees. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service. The Company does not pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.

 

The following tables set forth pertinent information for the Company’s postretirement benefit plan:

 

Reconciliation of Activity

 

 

Reconciliation of Plan Assets Fair Value

 

 

Funded Status

 

 

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Net Periodic Postretirement Benefit Cost

 

 

Significant Assumptions

 

 

A 1% increase or decrease in the annual health care cost trend would have impacted the postretirement benefit obligation and service cost and interest cost of the Company’s postretirement benefit plan as follows:

 

 

Cash Flows

 

 

Anticipated future postretirement benefit payments are shown net of Medicare Part D subsidy reimbursements, which are not material.

 

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A reconciliation of the amounts in accumulated other comprehensive loss not yet recognized as components of net periodic benefit cost is as follows:

 

 

The amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic cost during 2018 are as follows:

 

 

Multi-Employer Pension Plans

 

Certain employees of the Company whose employment is covered under collective bargaining agreements participate in a multi-employer pension plan, the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund (the “Teamsters Plan”). The Company makes monthly contributions to the Teamsters Plan on behalf of such employees. Certain collective bargaining agreements covering the Teamsters Plan expired on April 29, 2017. These agreements were renewed and will now expire in April 2020. The remainder of these agreements will expire on July 26, 2018.

 

The risks of participating in the Teamsters Plan are different from single-employer plans as contributed assets are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the Teamsters Plan, the unfunded obligations of the Teamsters Plan may be borne by the remaining participating employers. If the Company chooses to stop participating in the Teamsters Plan, the Company could be required to pay the Teamsters Plan a withdrawal liability based on the underfunded status of the Teamsters Plan. The Company does not anticipate withdrawing from the Teamsters Plan.

 

In 2015, the Company increased its contribution rates to the Teamsters Plan, with additional increases occurring annually, as part of a rehabilitation plan, which was incorporated into the renewal of collective bargaining agreements with the unions effective April 28, 2014 and adopted by the Company as a rehabilitation plan effective January 1, 2015. This is a result of the Teamsters Plan being certified by its actuary as being in “critical” status for the plan year beginning January 1, 2013.

 

The Company’s participation in the Teamsters Plan is outlined in the table below. A red zone represents less than 80% funding and requires a financial improvement plan (“FIP”) or rehabilitation plan (“RP”).

 

 

According to the Teamsters Plan’s Forms 5500, the Company was not listed as providing more than 5% of the total contributions for the plan years ending December 31, 2016 or December 31, 2015. At the date these financial statements were issued, Forms 5500 were not available for the plan year ending December 31, 2017.

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The Company has a liability recorded for exiting a multi-employer pension plan in 2008 and is required to make payments of approximately $1 million to this multi-employer pension plan each year through 2028. As of December 31, 2017 the Company has $7.7 million remaining on this liability.

 

 

The Coca‑Cola Company

 

The Company’s business consists primarily of the production, marketing and distribution of nonalcoholic beverages of The Coca‑Cola Company, which is the sole owner of the secret formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.

 

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.

 

The following table and the subsequent descriptions summarize the significant transactions between the Company and The Coca‑Cola Company:

 

 

Coca‑Cola Refreshments USA, Inc.

 

The Company has a production arrangement with CCR to buy and sell finished products at cost. In addition, the Company transports product for CCR to the Company’s and other Coca-Cola bottlers’ locations. The following table summarizes purchases and sales under these arrangements between the Company and CCR:

 

 

Prior to the sale of BYB to The Coca‑Cola Company, CCR distributed one of the Company’s brands, Tum-E Yummies. During the third quarter of 2015, the Company sold BYB, the subsidiary that owned and distributed Tum-E Yummies to

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The Coca‑Cola Company and recorded a gain of $22.7 million on the sale. The Company continues to distribute Tum-E Yummies following the sale. Total sales to CCR for Tum-E Yummies were $14.8 million in 2015.

 

As discussed in Note 3 to the consolidated financial statements, the Company and CCR recently concluded a series of System Transformation Transactions involving several asset purchase and asset exchange transactions for the acquisition and exchange of the following Expansion Territories and Expansion Facilities:

 

 

 

As part of the transactions for the Expansion Territories, the Company entered into the CBA, as described above in Note 8. Under the CBA, the Company makes a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in the Expansion Territories. The quarterly sub-bottling payment is based on gross profit derived from sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, beverage product or certain cross-licensed brands. The liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future sub-bottling payments was $381.3 million on December 31, 2017 and $253.4 million on January 1, 2017. Sub-bottling payments to CCR were $16.7 million in 2017, $13.5 million in 2016 and $4.0 million in 2015.

 

Glacéau Distribution Termination Agreement

 

On January 1, 2017, the Company obtained the rights to market, promote, distribute and sell glacéau vitaminwater, glacéau smartwater and glacéau vitaminwater zero drops in certain geographic territories including the District of Columbia and portions of Delaware, Maryland and Virginia, pursuant to an agreement entered into by the Company, The Coca‑Cola Company and CCR in June 2016. Pursuant to the agreement, the Company made a payment of $15.6 million during the first quarter of 2017 to

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The Coca‑Cola Company, which represented a portion of the total payment made by The Coca‑Cola Company to terminate a distribution arrangement with a prior distributor in this territory.

 

Bottling Agreements Conversion

 

Pursuant to a territory conversion agreement entered into by the Company, The Coca‑Cola Company and CCR in September 2015 (as amended), upon the conversion of the Company’s then-existing bottling agreements to the CBA on March 31, 2017, the Company received a one-time fee from CCR, which, after final adjustments made during the second quarter of 2017, totaled $91.5 million. This one-time fee was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years. As of December 31, 2017, $2.3 million of this fee was recorded in other accrued liabilities, $87.4 million of this fee was recorded to other liabilities and $1.8 million was amortized during 2017 on the consolidated financial statements.

 

Legacy Facilities Credit

 

In December 2017, The Coca‑Cola Company agreed to provide the Company the Legacy Facilities Credit, a one-time fee of $43.0 million to compensate for the net economic impact of changes made by The Coca‑Cola Company to the authorized pricing on sales of covered beverages produced at the Company’s Legacy Facilities prior to implementation of new pricing mechanisms included in the RMA. The Company immediately recognized $12.4 million of this fee, representing the portion applicable to a facility in Mobile, Alabama which the Company transferred to CCR as part of the CCR Exchange Transaction. The remaining $30.6 million of the Legacy Facilities Credit, of which $0.7 million was classified as current, was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years.

 

Investment in Southeastern Container

 

In December 2017, CCR redistributed a portion of its investment in Southeastern Container. As a result of this redistribution, the Company increased its investment in Southeastern Container by $6.0 million, which was recorded as other income in the consolidated financial statements.

 

Coca‑Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”)

 

Along with all other Coca‑Cola bottlers in the United States, including CCR, the Company is a member of CCBSS, a company formed in 2003 for the purpose of facilitating various procurement functions and distributing certain specified beverage products of The Coca‑Cola Company with the intention of enhancing the efficiency and competitiveness of the Coca‑Cola bottling system in the United States.

 

CCBSS negotiates the procurement for the majority of the Company’s raw materials, excluding concentrate, and the Company receives a rebate from CCBSS for the purchase of these raw materials. The Company had rebates due from CCBSS of $11.2 million on December 31, 2017 and $7.4 million on January 1, 2017.

 

In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $2.3 million in 2017, $1.3 million in 2016 and $0.7 million in 2015, which were classified as accounts receivable, other in the consolidated financial statements.

 

National Product Supply Group

 

The Company is 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

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Governance Agreement. The Company is also obligated to pay a certain portion of the costs of operating the NPSG. The Company incurred NPSG operating costs of $1.1 million in 2017 and $0.4 million in 2016, which were classified as S,D&A expense in the consolidated financial statements.

 

CONA Services LLC

 

The Company is 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. 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%. 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. The Company made capital contributions to CONA of $3.6 million in 2017 and $7.9 million in 2016, which were classified as other assets in the consolidated financial statements. 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.

 

The Company is also party to an amended and restated master services agreement with CONA (the “CONA MSA”), pursuant to which CONA agreed to make available, and the Company 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, CONA provides the Company 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”). The Company is also authorized under the CONA MSA to use the CONA System in connection with its distribution, promotion, marketing, sale and manufacture of beverages it is authorized to distribute or manufacture under the CBA, the RMA or any other agreement with The Coca‑Cola Company, subject to the 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 the Company’s rights to use the CONA System and receive the CONA Services under the CONA MSA, it is charged service fees by CONA based on the number of physical cases of beverages the Company distributed or manufactured during the applicable period in the portion of its 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 the Company’s 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. The Company is obligated to pay the 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. The Company incurred CONA Services Fees of $12.6 million in 2017 and $7.5 million in 2016.

 

Snyder Production Center (“SPC”)

 

The Company leases the SPC and an adjacent sales facility, which are located in Charlotte, North Carolina, from Harrison Limited Partnership One (“HLP”). HLP is directly and indirectly owned by trusts of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, Sue Anne H. Wells, a director of the Company, and Deborah H. Everhart, a former director of the Company, are trustees and beneficiaries. Morgan H. Everett, Vice President and a director of the Company, is a permissible, discretionary beneficiary of the trusts that directly or indirectly own HLP. The SPC lease expires on December 31, 2020.

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The principal balance outstanding under this capital lease was $11.6 million on December 31, 2017 and $14.7 million on January 1, 2017. The annual base rent the Company is obligated to pay under the lease is subject to an adjustment for an inflation factor. Rental payments related to this lease were $4.1 million in 2017, $4.0 million in 2016 and $3.8 million in 2015.

 

Company Headquarters

 

The Company leases its headquarters office facility and an adjacent office facility from Beacon Investment Corporation (“Beacon”). The lease expires on December 31, 2021. J. Frank Harrison, III is Beacon’s majority shareholder and Morgan H. Everett is a minority shareholder. The principal balance outstanding under this capital lease was $12.8 million on December 31, 2017 and $15.5 million on January 1, 2017. The annual base rent the Company is obligated to pay under the lease is subject to adjustment for increases in the Consumer Price Index. The minimum rentals and contingent rental payments related to this lease were as follows:

 

 

The contingent rentals in 2017, 2016 and 2015 are a result of changes in the Consumer Price Index. Increases or decreases in lease payments that result from changes in the Consumer Price Index were recorded as adjustments to interest expense.

 

 

The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method. See Note 1 to the consolidated financial statements for additional information related to net income per share.

 

 

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NOTES TO TABLE

 

 

 

Approximately 93% of the Company’s total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which is the sole supplier of these products or of the concentrates or syrups required to manufacture these products. The remaining bottle/can sales volume to retail customers consists of products of other beverage companies or those owned by the Company. The Company has beverage agreements with The Coca‑Cola Company and other beverage companies under which it has various requirements. Failure to meet the requirements of these beverage agreements could result in the loss of distribution rights for the respective products.

 

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 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.

 

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The following table summarizes the percentage of the Company’s total bottle/can sales volume to its largest customers, as well as the percentage of the Company’s total net sales, which are included in the Nonalcoholic Beverages operating segment, that such volume represents. No other customer represented greater than 10% of the Company’s total net sales for any years presented.

 

 

The NPSG Governance Agreement was executed in October 2015 by The Coca‑Cola Company, the Company and other RPBs. The Coca‑Cola Company and each member RPB has a representative on the NPSG Board. As of December 31, 2017, the NPSG Board consisted of The Coca‑Cola‑Company, the Company and seven other RPBs. 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. Even though the Company has a representative on the NPSG Board, the Company will not 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.

 

The Company purchases all its aluminum cans from two domestic suppliers and all of its plastic bottles from two manufacturing cooperatives. See Note 17 and Note 22 of the consolidated financial statements for additional information.

 

The Company is exposed to price risk on commodities such as aluminum, corn and resin which affects the cost of raw materials used in the production of finished products. The Company both produces and procures these finished products. Examples of the raw materials affected are aluminum cans and plastic bottles used for packaging and high fructose corn syrup used as a product ingredient. Further, the Company is exposed to commodity price risk on crude oil which impacts the Company’s cost of fuel used in the movement and delivery of the Company’s products. The Company participates in commodity hedging and risk mitigation programs administered both by CCBSS and by the Company. In addition, there is no limit on the price The Coca‑Cola Company and other beverage companies can charge for concentrate.

 

Certain liabilities of the Company, including floating rate debt, retirement benefit obligations and the Company’s pension liability, are subject to risk of changes in both long-term and short-term interest rates.

 

The Company’s contingent consideration liability resulting from the acquisition of the Expansion Territories is subject to risk as a result of changes in the Company’s probability weighted discounted cash flow model, which is based on internal forecasts, and changes in the Company’s WACC, which is derived from market data.

 

Approximately 14% of the Company’s labor force is covered by collective bargaining agreements. The Company’s collective bargaining agreements, which generally have 3- to 5-year terms, expire at various dates through 2022. Terms and conditions of the new labor union agreements could increase the Company’s exposure to work interruptions or stoppages, as an increased percentage of its workforce is covered by collective bargaining agreements.

 

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Changes in current assets and current liabilities affecting cash were as follows:

 

 

The Company had the following cash payments (refunds) during the period for interest and income taxes:

 

 

The Company had the following significant noncash investing and financing activities:

 

 

 

The Company evaluates segment reporting in accordance with FASB ASC 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operation Decision Maker (“CODM”). The Company has concluded the Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as a group, represent the CODM.

 

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

 

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The Company’s segment results are as follows:

 

 

 

 

Net sales by product category were as follows:

 

 

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The unaudited quarterly financial data for the fiscal years ended December 31, 2017 and January 1, 2017 is included in the tables shown below. Excluding the impact of System Transformation Transactions completed during the fiscal year, sales volume has historically been the highest in the second and third quarter of each fiscal year. Additional meaningful financial information is included in the table following each presented period.

 

 

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114

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115

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Management’s Report on Internal Control over Financial Reporting

 

Management of Coca-Cola Bottling Co. Consolidated (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s chief executive and chief financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with the U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes policies and procedures that:

 

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As of December 31, 2017, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that the Company’s internal control over financial reporting as of December 31, 2017 was effective.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, which is included in Item 8 of this report.

 

 

 

February 28, 2018

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Report of Independent Registered Public Accounting Firm

 

To Board of Directors and Stockholders of Coca-Cola Bottling Co. Consolidated

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Coca‑Cola Bottling Co. Consolidated and its subsidiaries as of December 31, 2017 and January 1, 2017, and the related consolidated statements of operations, comprehensive income, cash flows, and changes in stockholders’ equity for each of the three years in the period ended December 31, 2017, including the related notes and financial statement schedule listed in the index appearing under Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31. 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and January 1, 2017, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Basis for Opinions

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

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Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Charlotte, North Carolina

February 28, 2018

 

We have served as the Company’s auditor since at least 1972. We have not determined the specific year we began serving as auditor of the Company.

 

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The financial statement schedule required by Regulation S-X is set forth in response to Item 15 below.

 

The supplementary data required by Item 302 of Regulation S-K is set forth in Note 27 to the consolidated financial statements.

 

 

Not applicable.

 

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.

 

Management’s report on internal control over financial reporting required by Section 404 of the Sarbanes-Oxley Act of 2002 and the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, on the financial statements, and its opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 are included in Item 8 of this report.

 

There has been no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Not applicable.

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PART III

 

 

For information with respect to the executive officers of the Company, see “Executive Officers of the Registrant” included as a separate item at the end of Part I of this Report. For information with respect to the Directors of the Company, see “Proposal 1: Election of Directors” in the Proxy Statement for the Company’s 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”), which is incorporated herein by reference. For information with respect to compliance with Section 16(a) of the Exchange Act, see the “Section 16(a) Beneficial Ownership Reporting Compliance” section of the 2018 Proxy Statement, which is incorporated herein by reference. For information with respect to the Audit Committee of the Board of Directors, see the “Corporate Governance – Board Committees” section of the 2018 Proxy Statement, which is incorporated herein by reference.

 

The Company has adopted a Code of Ethics for Senior Financial Officers, which is intended to qualify as a “code of ethics” within the meaning of Item 406 of Regulation S-K of the Exchange Act (the “Code of Ethics”). The Code of Ethics applies to the Company’s principal executive officer, principal financial officer, principal accounting officer and persons performing similar functions. The Code of Ethics is available on the Company’s website at www.cokeconsolidated.com. The Company intends to disclose any substantive amendments to, or waivers from, the Code of Ethics on its website.

 

 

For information with respect to executive and director compensation, see the “Compensation Discussion and Analysis,” “Executive Compensation Tables,” “Consideration of Risk Related to Compensation Programs,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Director Compensation” sections of the 2018 Proxy Statement, which are incorporated herein by reference.

 

 

For information with respect to security ownership of certain beneficial owners and management, see the “Principal Stockholders” and “Security Ownership of Directors and Executive Officers” sections of the 2018 Proxy Statement, which are incorporated herein by reference. For information with respect to securities authorized for issuance under the Company’s equity compensation plans, see the “Equity Compensation Plan Information” section of the 2018 Proxy Statement, which is incorporated herein by reference.

 

 

For information with respect to certain relationships and related transactions, see the “Corporate Governance – Related Person Transactions” and “Corporate Governance – Policy for Review of Related Person Transactions” sections of the 2018 Proxy Statement, which are incorporated herein by reference. For information with respect to director independence, see the “Corporate Governance – Director Independence” section of the 2018 Proxy Statement, which is incorporated herein by reference.

 

 

For information with respect to principal accountant fees and services, see “Proposal 2: Ratification of the Appointment of Independent Registered Public Accounting Firm” of the 2018 Proxy Statement, which is incorporated herein by reference.

 

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PART IV

 

 

 

 

 

 

 

 

All other financial statements and schedules not listed have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.

 

 

The agreements included in the following exhibits to this report are included to provide information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. Some of the agreements contain representations and warranties by each of the parties to the applicable agreements. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreements and:

 

 

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.

 

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EXHIBIT INDEX

 

Exhibits incorporated by reference:

 

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Exhibits filed herewith:

 

 

 

 

See Item 15(a)(3) above.

 

 

See Item 15(a)(2) above.

 

 

None.

 

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Schedule II

 

COCA-COLA BOTTLING CO. CONSOLIDATED

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

 

Allowance for Doubtful Accounts

 

 

Deferred Income Tax Valuation Allowance

 

 

⁽¹⁾ The recorded impact of the Tax Act is estimated and any final amount may differ, possibly materially, due to changes in estimates, interpretations and assumptions, changes in IRS interpretations, issuance of new guidance, legislative actions, changes in accounting standards or related interpretation in response to the Tax Act and future actions by states within the U.S.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

130

Exhibit 4.10

NCU SHARES COMMON STOCK PAR VALUE $1.00 CUSIP 191098 10 2 SEE REVERSE FOR CERTAIN DEFINITIONS Coca Cola Bottling Co. Consolidated INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT Specimen is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF Coca-Cola Bottling Co. CONSOLIDATED transferable in person or by duly authorized attorney on the books of the Corporation upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are subject to all the terms, conditions and limitations of the Certificate of Incorporation and all Amendments thereto. This certificate is not valid unless countersigned by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: Secretary Chairman of the Board of Directors and Chief Executive Officer Countersigned and Registered: American Stock Transfer & Trust Company, LLC (Brooklyn, NY) Transfer Agent and Registrar Authorized Signature Corporate Seal

 

 

 

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COCA-COLA BOTTLING CO. CONSOLIDATED THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM – as tenants in common UNIF GIFT MIN ACT–  Custodian  TEN ENT JT TEN– as tenants by the entireties– as joint tenants with right of survivorship and not as tenants in common (Cust)(Minor) under Uniform Gifts to Minors Act (State) Additional abbreviations may also be used though not in the above list. For value received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE Please print or typewrite name and address including postal zip code of assignee Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated, Notice THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE.

 

 

Exhibit 10.71

 

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETED ASTERISKS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

 

CONA SERVICES LLC

MASTER SERVICES AGREEMENT

(Amended and Restated as of October 2017)

This MASTER SERVICES AGREEMENT (this “Master Agreement”) is made effective as of October 2, 2017 (the “Effective Date”) by and between Coca-Cola Bottling Co. Consolidated, a Delaware corporation (“Bottler”); and CONA Services LLC, a Delaware limited liability company (“CONA”).

BACKGROUND:

The Coca-Cola Company (“TCCC”) and Coca-Cola Refreshments USA, Inc. (“CCR”) have developed a uniform information technology system called the Coke One North America system (the “CONA System”) to promote efficiency in the operations of participating North American bottlers and long-term uniformity and efficiency among North American bottlers of Coca-Cola.

CONA has licensed and acquired certain assets relating to the CONA System.

CONA has acquired or entered into, or intends to enter into, certain agreements with third-party subcontractors, vendors and licensors (each, a “Vendor”) relevant to the CONA System, and Bottler and CONA desire for CONA to assume responsibility for managing the relationship with Vendors and to pass the cost of software licenses and services described in these agreements through to Bottler (or allow Bottler to use the Vendor’s software licenses and services), and Bottler desires to receive or use those software licenses and services.

Bottler is a member of CONA and has entered into the Limited Liability Company Agreement of CONA, dated as of January 27, 2016 (as amended from time to time), which governs the operations of CONA (the “CONA LLC Agreement”).

Pursuant to the CONA LLC Agreement, CONA and each of its members has entered into a Master Services Agreement (DSD Functionality).

Since its formation, CONA has expanded the scope of the CONA System to include manufacturing functionality, and the parties hereto anticipate that the CONA System may continue to evolve to include additional functionalities in the future.

The parties hereto wish to enter into this Master Agreement, as amended and restated hereby, to reflect the expanded scope of the CONA System and to anticipate possible future changes in the scope and nature of CONA’s services.

On the terms and subject to the conditions of this Master Agreement and the Services Exhibits (as defined below), the parties mutually desire that Bottler implement and use the CONA System in connection with Bottler’s operation of its business in Bottler’s Territories.

Certain terms used in this Master Agreement have the definitions set forth in Appendix 1.

Based upon these premises, Bottler and CONA hereby agree as follows:

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ARTICLE 1.BOTTLER USE OF THE CONA SYSTEM AND RECEIPT OF SERVICES

1.01Bottler Use of CONA System.  Bottler is authorized to use the CONA System in the Territories in connection with its manufacturing, distribution, sale, marketing and promotion of Beverages, subject to the provisions of the CONA LLC Agreement.  If Bottler does not use the CONA System in all of its Territories, Bottler shall remain obligated to pay the Service Fees for all cases in its Territories as set forth in Appendix 5.  Use of the CONA System that is beyond the scope of this Master Agreement will be documented separately by the parties.  Bottler’s use of the CONA System will be subject to any limitations set forth in any third-party licenses or other agreements relating to third-party components of the CONA System.  Notwithstanding any provision of this Master Agreement to the contrary, Bottler’s Affiliates that support, in whole or in part, any aspect of Bottler’s manufacturing, distribution, sale, marketing and/or promotion of Beverages shall be entitled to use the CONA System in North America pursuant to this Master Agreement at no additional cost and otherwise on the same general terms and conditions applicable to Bottler, so long as the use thereof by such Affiliates of Bottler (a) does not have a material negative impact on the use of the CONA System by other bottlers; or (b) does not result in a material increase in CONA’s costs that is not covered by the Service Fees and other fees and charges otherwise payable by Bottler hereunder.  In all other cases, use of the CONA System by Bottler’s Affiliates shall be subject to the approval of the CONA Board of Directors (which approval shall not be unreasonably withheld) to the extent contemplated by the CONA LLC Agreement.

1.02CONA System Functionalities.  The CONA System is an integrated, flexible IT platform that adapts to members’ changing business needs via the development and implementation of various functionalities.  As of the Effective Date, the CONA System’s existing functionalities support various distribution, manufacturing and other business activities of Bottler and other CONA members.  A high-level description of these functionalities is set forth in Exhibit A.  As additional CONA System functionalities are developed in the future, it is the parties’ intent that such additional functionalities will be reflected in revised exhibits or other amendments to this Master Agreement, and CONA’s delivery of services related thereto (including the costs and fees applicable to such services) will be subject to the terms and conditions of this Master Agreement, as so amended.

1.03Services.  The services provided by CONA to Bottler pursuant to this Master Agreement (the “Services”) reflect three primary work streams, as set forth in Exhibit B (Build), Exhibit C (Deploy) and Exhibit D (Operate) (each of Exhibits B, C and D, a “Services Exhibit”).

(a)Build. CONA will provide certain of the Services described in Exhibit B directly, and will coordinate and manage the provision of all Services described in Exhibit B that are performed by Vendors.

Build phase Services include governance, business process management, and standards for the build process; planning, design, development and testing of the CONA System; building required infrastructure; acquiring necessary licenses; and integration and performance testing.  Build phase Services do not include business support.  The respective roles and responsibilities of CONA and Bottler with respect to Build phase Services are set forth in Exhibit B.

(b)Deploy. CONA will provide certain of the Services described in Exhibit C directly, and will coordinate and manage the provision of all Services described in Exhibit C that are performed by Vendors.

Deploy phase Services include program management, change management, deployment infrastructure, data loading and cutover.  The roles and responsibilities of CONA and Bottler with respect to Deploy phase Services are set forth in detail in Exhibit C.

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(c)Operate. CONA will provide certain of the Services described in Exhibit D directly, and will coordinate and manage the provision of all Services described in Exhibit D that are performed by Vendors.

Operate phase Services include CONA System access, operations infrastructure, network operations, job monitoring, system maintenance, basic user access, helpdesk/application support and data management.  The respective roles and responsibilities of CONA and Bottler with respect to Operate phase Services are set forth in detail on Exhibit D.

(d)As condition to the provision of the Services, Bottler will reasonably (i) cooperate with CONA and the Vendors providing such Services, including by promptly providing all Bottler Data reasonably necessary for the provision of such Services; (ii) provide appropriate training on such processes and functions to its users; (iii) ensure the data quality necessary to operate the CONA System for data supplied by or on behalf of Bottler; (iv) follow the uniform application support process; (v) run the necessary business controls and reconciliation tasks; and (vi) manage system access and user roles.  Bottler will use the uniform business processes and functions of the CONA System to operate its business.  In addition, Bottler will comply with its obligations under the CONA LLC Agreement.

(e)CONA (and not Bottler) has the sole authority to define and establish the specifications for the CONA System, including the list of Equipment, the Data Centers, the features and functionality of the CONA Software, and the list of Vendor Software (collectively, the “CONA System Specifications”) and may revise those specifications from time to time, subject to Section 4.01 below.  The Vendor Software that is in the scope of the CONA System Specifications as of the Effective Date is further described in Appendix 4 (and CONA may revise the list of Vendor Software from time to time).  Bottler will retain responsibility to obtain and maintain at its cost and expense any equipment, software or service that is either outside the scope of the CONA System Specifications or in the scope of the CONA System Specifications but assigned to Bottler.

1.04Vendors. Bottler acknowledges that third party Vendors will perform certain of the Services under CONA’s direction. Bottler further acknowledges that certain Vendors may require Bottler to enter into a separate agreement directly with the Vendor to enable Bottler to use Vendor’s services and participate in the CONA System.  Bottler agrees to enter into such separate agreement, on terms that are reasonably acceptable to Bottler, if requested by CONA.  Each Services Exhibit includes an overview of the relevant Services to be provided by Vendors and the Services to be provided by CONA directly.  CONA may revise any such overview upon written notice to Bottler.  CONA is solely responsible for the management of all Vendors in connection with the provision of Services.  Where this Master Agreement or an applicable Services Exhibit specifies that CONA’s obligation is to “require” a Vendor to take a specified action, CONA’s obligation is fulfilled if CONA has used commercially reasonable efforts to have the Vendor take the action, which may include using commercially reasonable efforts to include a provision requiring the action in its relevant agreement with such Vendor.

1.05Additional Services.  Bottler may from time to time, subject to Section 5.02, request that CONA perform localized or special services to augment or supplement the Services (collectively, the “Additional Services”).  Upon receipt of such a request, CONA will evaluate the feasibility and cost of performing such Additional Services and, with respect to any Additional Services approved by the CONA Board of Directors, will provide Bottler and the other bottlers using the CONA System with (a) a written description of the work CONA anticipates performing in connection with such Additional Services, (b) a schedule for commencing and completing the Additional Services, and (c) any applicable Service Levels or KPIs.  All Additional Services must be approved by the CONA Board of Directors pursuant to the CONA LLC Agreement.  Bottler (and any other bottlers who desire to use or access the Additional Services) will compensate CONA for such Additional Services based on an agreed price (the “Additional Service Fees”).  

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If CONA and Bottler mutually agree that CONA will perform the Additional Services, the parties will execute a written amendment to the applicable Services Exhibit.

ARTICLE 2.DATA CENTERS.

2.01Data Center. The Services that are required to be provided from a data center will be provided from (1) the data centers described in the applicable Services Exhibit, or (2) any data center operated by CONA or on behalf of CONA or an applicable Vendor (any of the foregoing, a “Data Center”).

2.02Facility Requirements. CONA will provide, or require the applicable Vendors to provide, to Bottler, at no charge to Bottler, such access to such Data Centers as may be reasonably necessary for Bottler’s receipt of the Services, in accordance with CONA’s security policies, including as documented in Appendix 2. Bottler acknowledges that any access to any Data Center operated by or on behalf of a Vendor may be subject to the Vendor’s or its own contractor’s security policies and procedures.

ARTICLE 3.OPERATE PHASE PERFORMANCE STANDARDS

3.01Service Levels. Schedule 1 to Exhibit D sets forth the key performance indicators (the “KPIs”) and service levels (“Service Levels”) that will be used to measure the performance of the applicable Services during the Operate phase.  The service level credits earned by CONA will be either (a) retained by CONA for working capital purposes and/or refunded pro-rata to all CONA System users (e.g., a pro-rata reduction of the Service Fees charged to bottlers)  in the case of service credits that are generally applicable to the CONA Services and/or the CONA System; or (b) passed through to individual bottlers, in the case of service credits that are applicable to a specific, separately identifiable or localized bottler activity and reflected on the invoice for monthly services described in Section 10.04.

3.02Root-Cause Analysis. After receipt of notice from Bottler in respect of any failure to provide the Services in accordance with the Service Levels or KPIs, CONA will provide and, where applicable, require the Vendors to provide a root-cause report detailing the cause of, and, if such failure was caused by CONA and/or the Vendors, a procedure for correcting such failure, which report will address how the procedure for correcting the failure will prevent or minimize the risk of recurrences.

3.03Adjustment of Service Levels and KPIs. The Service Levels or KPIs may be adjusted higher periodically in recognition of the anticipated improvement in service quality as identified from time to time by CONA. CONA will work in good faith with Vendors to improve the quality of the Services to meet or exceed Service Levels or KPIs.

3.04Measurement and Monitoring. CONA will implement and, where applicable, require the Vendors to implement measurement and monitoring tools and metrics as well as standard reporting procedures within the timeframe set forth in the applicable Services Exhibit, to measure and report the performance of the Services against the applicable Service Levels and KPIs.  To the extent available from Vendors, Bottler will be provided with access to on‑line databases containing up‑to‑date information regarding the status of Service problems, Service requests and user inquiries.

ARTICLE 4.GOVERNANCE; PERSONNEL

4.01CONA Board of Directors. CONA’s Board of Directors has the right to direct and oversee CONA’s business and affairs pursuant to the CONA LLC Agreement. Decisions to be made by CONA under this Master Agreement are to be made by or under the direction of CONA’s Board of Directors.  The

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day-to-day operations of CONA hereunder will be managed by the CEO and management team of CONA under the direction of the CONA Board of Directors.  Participation on CONA’s Board of Directors is governed by the CONA LLC Agreement, and nothing in this Master Agreement amends or supersedes any rights or obligations of any party to the CONA LLC Agreement.

4.02Conduct of Personnel. While at Bottler’s premises, CONA will require that its and Vendors’ personnel (1) comply with reasonable requests, rules and regulations of Bottler made known to CONA or the applicable Vendor regarding their conduct generally applicable to such premise, and (2) otherwise conduct themselves in a businesslike manner.

ARTICLE 5.OTHER RESPONSIBILITIES

5.01Security; Privacy. CONA will, in cooperation with the Vendors, establish and update the network security and privacy policies contained in Appendix 2 and Appendix 3 with respect to the CONA System. CONA will provide reasonable advance notice to Bottler of any changes that CONA makes to such network security policies. Bottler will comply, and will use commercially reasonable efforts to ensure that its users comply, with CONA’s network security and privacy policies documented in Appendix 2 and Appendix 3, as applicable to Bottler, and as updated by CONA from time to time with reasonable advance notice to Bottler. For the provision of the Services, CONA will comply, and will use commercially reasonable efforts to require all Vendors to comply, with all network security and privacy policies with respect to the CONA System, including the Security Practices documented in Appendix 2 and the CONA Hosting Security Guidelines documented in Appendix 3.

5.02Change Control Procedures. Any request by Bottler for features, upgrades or other changes to the CONA System Specifications including the CONA Software, Equipment or any other item in the CONA System (each, a “Change”; collectively, “Changes”), together with the desired timetable for implementing those Changes, must be presented to CONA, and their execution will be subject to the review and approval of the CONA Board of Directors. All such requests must be made in writing by Bottler to CONA.  Following receipt of a request from Bottler, each proposed Change will be analyzed by CONA’s management and, if appropriate, a detailed description of any changes to be made to the CONA System Specifications, this Master Agreement and/or the Services Exhibits, including rates, budget, schedule, services and any deliverables,  will be prepared for consideration by the CONA Board of Directors (each, a “Change Order”). CONA is not required to make any change in the Services until a Change Order has been approved by the CONA Board of Directors.  All approved Change Orders will be incorporated into the applicable Services Exhibit as a written amendment.  The procedures described in this Section 5.02 are referred to herein as the “Change Control Procedures.”  Notwithstanding the foregoing, CONA may make temporary Changes required by an emergency if CONA, in its reasonable opinion, believes that complying with the Change Control Procedures would be detrimental to CONA, Bottler or other users of the CONA System.

5.03Reports. CONA or the Vendors will provide to Bottler the operational reports as agreed between CONA and Bottler (the “Reports”).

5.04Records. CONA will use commercially reasonable efforts to maintain, and shall use commercially reasonable efforts to require Vendors to maintain, complete and accurate records of, and supporting documentation sufficient to document, the Services and the Service Fees paid or payable by Bottler under the applicable Services Exhibit (“Records”).  With respect to the amounts chargeable to and payments made by Bottler under any Services Exhibit, Records will be kept in accordance with generally accepted accounting principles applied on a consistent basis.  Bottler will be entitled to review the Records

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applicable to Bottler’s Services upon reasonable notice to CONA; provided, however, that Bottler will have no right to access or review any data relating to any other recipient of services from CONA.

5.05Disaster Recovery Plan. Exhibit D (Operate) includes the procedures to be followed with respect to the continued provision of the Services if a Data Center is unavailable for use by any applicable party because it has been destroyed, damaged or is otherwise not available for use (the “Disaster Recovery Plan”) to such an extent that CONA is unable to provide any or all of the Services.  CONA may modify or change the Disaster Recovery Plan for CONA’s Data Center at any time; provided, however, that CONA must provide Bottler with written notice as to any change or modification that is material, and no such change or modification will materially adversely affect CONA’s ability to restore the Services. Changes to the Disaster Recovery Plan will be subject to approval of the CONA Board of Directors.

ARTICLE 6.EQUIPMENT, SOFTWARE AND INTELLECTUAL PROPERTY RIGHTS

6.01Equipment. “Equipment” means, unless otherwise provided in this Master Agreement or any Services Exhibit, the particular computer equipment and peripherals, telecommunications products and other equipment, together with any and all associated documentation, useful or necessary for the performance of the Services at the Data Centers.  Unless expressly specified otherwise in a Services Exhibit, CONA will own/lease/license, operate  and maintain the Equipment (including managing the Vendors who are to provide maintenance to the Equipment).  Unless expressly specified otherwise in a Services Exhibit, all amounts due under an Equipment lease that are attributable to the period during which CONA has operational responsibility for the corresponding Equipment will be included in the costs to be shared in accordance with Article 10, although these shared costs will not in any way be considered a sublease, a transfer, or a sale of the corresponding Equipment from CONA to Bottler.  For clarity, Bottler will retain the responsibility to obtain and maintain all other equipment, not considered to be Equipment, necessary for its receipt and use of the Services, at its cost and expense, including delivery, installation and connectivity for such equipment.

6.02Bottler Software. Bottler hereby grants to CONA, at no cost to CONA, a non-exclusive, royalty-free, non-transferable right to use, copy, execute, reproduce, operate, maintain and adapt, display, perform, modify, improve, and make derivative works of any software owned or licensed by Bottler (the “Bottler Software”), solely as useful or necessary to provide the Services, subject to any and all applicable license restrictions of Bottler’s third-party licensors.  CONA may sublicense to Vendors the right to have access to, operate, maintain, and use the Bottler Software to the extent contemplated by this Master Agreement and any Services Exhibit, subject to any and all applicable license restrictions of Bottler’s third-party licensors.  Upon expiration or termination of this Master Agreement for any reason, the applicable rights granted to CONA (and/or any Vendors) in this Section 6.02 immediately will, except as necessary for CONA (and any Vendors) to carry out its obligations under the Master Agreements for Bottler (including under Section 15.04(a) and Article 16), revert to Bottler.

6.03Developed Software.  As between Bottler and CONA, ownership of any (1) software or materials developed by CONA (the “Developed Software”), other than modifications to Bottler Software,  and (2) any related documentation, will be governed by Section 6.10.

6.04CONA Software. Subject to applicable license agreements in the case of Vendor Software, CONA hereby grants to Bottler a non-transferable (except as transferability is permitted in this Master Agreement, the applicable Services Exhibit or the CONA LLC Agreement), royalty-free, non-exclusive license to use, copy, execute, reproduce, operate, display, and perform, all software and other materials (including all modifications and enhancements thereto) owned or licensed by CONA and used to provide

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the Services, together with any and all associated documentation (the “CONA Software”), for use by Bottler during the Master Agreement Term and any Termination Assistance Period solely in connection with the provision of the Services to Bottler and the receipt and use by Bottler of the Services, in each case for Bottler’s internal operations and in compliance with the CONA LLC Agreement. Subject to Section 1.01, Bottler may sublicense its rights under this Section 6.04 to any Affiliate of Bottler for use by such Affiliate solely in connection with the provision of Services to such Affiliate and the receipt and use by such Affiliate of the Services for such Affiliate’s internal operations. Notwithstanding the foregoing, the license provided for in this Section 6.04 will not apply to the extent it would contravene any license restrictions and/or limitations applicable to the Vendor Software; provided, however, that CONA shall use commercially reasonable efforts to obtain from all Vendors all rights necessary to grant the rights set forth in this Section 6.04.

6.05Frequency of Vendor Software Releases. As part of the Services, CONA will   require the applicable Vendors to make available new releases and versions of Vendor Software to be used under each Services Exhibit with commercially reasonable frequency, unless otherwise determined by CONA pursuant to Section 4.01.

6.06Changes and Upgrades to CONA Software. Except for modifications resulting from new releases and versions of Vendor Software (e.g., as set forth in Section 6.05) and Changes and/or modifications as may be approved by the CONA Board of Directors with reasonable advance notice to members, CONA will not make any Changes or modifications to the CONA Software that would materially impair its functionality or materially degrade its performance.  CONA will require that the applicable Vendors make available and install in connection with, and as part of, the Services any generally available modifications or enhancements to the Vendor Software on the same basis that such modifications or enhancements are made available to CONA.

6.07Back‑Up. CONA will, and/or will require the applicable Vendors to, take commercially appropriate measures to back up all Bottler Data then residing on the CONA System.

6.08Vendor Agreements.  CONA will obtain and maintain in effect with each Vendor a written agreement with terms that permit CONA to provide the Services to Bottler, its Affiliates and the other members of CONA (and pass through the benefits of the Vendor agreement to Bottler, its Affiliates and the other members of CONA) consistent with the provisions of this Master Agreement, including without limitation Section 1.01.

6.09Notice of Defaults. Bottler will promptly inform CONA of any breach of, or misuse or fraud in connection with, any Third-Party Services Contract, Equipment lease or Vendor Software license of which it becomes aware, and will cooperate with CONA to prevent or stay any such breach, misuse or fraud.

6.10Intellectual Property.

(a)“Intellectual Property” means all works, including literary works, pictorial, graphic and sculptural works, architectural works, works of visual art, and any other work that may be the subject matter of copyright protection; advertising and marketing concepts; information; data and databases; formulas; designs; models; drawings; computer programs, and software and all related source code, object code, documentation, listings, design specifications, and flowcharts; trade secrets; and any ideas, methods, processes, and inventions, including all processes, machines, manufactures and compositions of matter and

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any other invention that may be the subject matter of patent protection; and all statutory protection obtained or obtainable thereon.

(b)As between CONA and Bottler and subject to Section 8.02, CONA retains ownership of all Intellectual Property made or owned by CONA (or TCCC, CCR or its other licensors) (including the CONA System) and any modifications or enhancements thereto or other derivative works thereof (excluding modifications to the Bottler Software). As between CONA and Bottler and subject to Section 8.02, CONA will have and retain all worldwide right, title and interest in and to (1) the CONA Software; and (2) Intellectual Property that is created, made, conceived, reduced to practice or authored by or on behalf of CONA or the Vendors, in connection with the performance of the Services or any Additional Services (excluding modifications to the Bottler Software); and (3) any modifications, improvements or other derivative works of any of the foregoing. CONA retains all rights to its general knowledge, experience and know-how (including processes, ideas, concepts, and techniques) acquired in the course of performing the Services excluding any Bottler Confidential Information and Bottler Data (provided that this provision does not impair Bottler’s rights to any of its own knowledge, experience, and know-how that Bottler may share with CONA).  For clarity, as between CONA and Bottler, the CONA System and any improvements or modifications to or derivatives of the CONA System are and remain the exclusive property of CONA, subject to the rights granted to Bottler under this Master Agreement and the rights granted to TCCC and/or CONA’s members under the license agreement between TCCC and CCR that has been assigned to CONA and under the CONA LLC Agreement.  Bottler will execute, or use commercially reasonable efforts to cause to be executed, any documents to document or perfect CONA’s ownership rights in any Intellectual Property that CONA is entitled to own pursuant to this Section 6.10(b).

(c)CONA warrants that the CONA System does not use any open source or freeware code in a manner that, if the CONA System and Services are used in accordance with this Master  Agreement, would require Bottler to distribute or disclose any source code that was included in the CONA System and Services.  Furthermore, CONA represents that it will use all open source or freeware code in accordance with the applicable licensing terms of such open source or freeware code.

ARTICLE 7.THIRD PARTIES

7.01Cooperation with Bottler Third-Party Contractors.

(a)Bottler may hire contractors, subcontractors, consultants, and/or other third parties (“Bottler Third-Party Contractors”) to perform services that complement the Services. CONA will require the Vendors to cooperate with and work in good faith with Bottler Third-Party Contractors as reasonably requested by Bottler. Such cooperation may require that Bottler execute a separate agreement with Vendors on commercially reasonable terms and conditions, which may include the Vendors: (i) providing reasonable remote access to the Equipment and Vendor Software to the extent necessary and permitted under any underlying agreements between CONA and the applicable Vendors; (ii) facilitating requests for assistance and support services to such Bottler Third-Party Contractors on the part of Vendors at rates to be agreed between them; and (iii) providing existing written requirements, standards and policies for systems operations so that the enhancements or developments of Bottler Third-Party Contractors may be operated by CONA in connection with the Services; provided, however, that if such enhancements or developments of Bottler Third-Party Contractors require excess resources or other costs or fees to be incurred by CONA, Bottler will be responsible for the payment of such extra fees or costs. CONA will notify Bottler in writing of any additional costs or fees incurred by CONA. Bottler will require its Bottler Third-Party Contractors to comply with the security and confidentiality requirements of CONA and its Vendors, including those set forth in Appendix 2, and will, to the extent performing work on CONA Software or Equipment for which

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CONA has operational responsibility, comply with CONA’s and the applicable Vendors’ standards, methodologies, and procedures, including those set forth in Appendix 2.

(b)CONA will promptly notify Bottler if it has reason to believe that an act or omission of its Bottler Third-Party Contractor will cause, or has caused, a problem or delay in providing the Services, and will work with Bottler to prevent or circumvent such problem or delay. CONA will cooperate with Bottler and Bottler Third-Party Contractors to resolve differences and conflicts arising between the Services and other activities undertaken by Bottler or any of its Bottler Third-Party Contractors. Bottler will be responsible for any failure of its Bottler Third-Party Contractors to comply with Bottler’s obligations under this Master Agreement or any applicable Services Exhibit.

ARTICLE 8.BOTTLER DATA

8.01Provision of Data. Bottler will supply to CONA and/or the applicable Vendor, in connection with Services required, data in the form and on such schedules as agreed upon by Bottler and CONA in the applicable Services Exhibit and as may otherwise be agreed upon from time to time as necessary to permit CONA to perform the Services.

8.02Ownership of Bottler Data. All data and information submitted to CONA and/or the applicable Vendor by or on behalf of Bottler or as such data and information is processed, developed, amended, modified or enhanced by CONA and/or the applicable Vendor on Bottler’s behalf in connection with the Services (the “Bottler Data”) is and will remain the property of Bottler, except to the extent that the ownership of such data is determined in a different way by other agreements between the parties or between other parties concerning that data (e.g. cross-license brands, GPI etc.).  Except as permitted by this Master Agreement, an applicable Services Exhibit or an ancillary agreement executed by CONA and Bottler, CONA will not, and will require that the Vendors will not, (1) use Bottler Data other than in connection with providing the Services, (2) disclose, sell, assign, lease or otherwise provide Bottler Data to third parties, or (3) commercially exploit Bottler Data.

8.03Correction of Errors. CONA will correct promptly and/or  will require the applicable Vendor to correct promptly any known errors or inaccuracies in Bottler Data and Reports (1) caused by CONA or such Vendor, respectively, or (2) as otherwise provided in a Services Exhibit. Bottler is responsible for (a) the accuracy and completeness of its Bottler Data, and (b) any errors in or with respect to data obtained from CONA and/or the applicable Vendor caused by materially inaccurate or incomplete Bottler Data, except in either case to the extent that CONA and/or the applicable Vendor caused the Bottler Data to be inaccurate or incomplete.

8.04Inspection and Ownership of Reports. Bottler will inspect and review the Reports and provide CONA with a notice of errors or inaccuracies. Bottler will own all Reports generated by or on behalf of CONA specifically for Bottler.

8.05Ownership of Media. Unless furnished or paid for by Bottler or otherwise provided in a Services Exhibit, all media upon which Bottler Data is stored is and will remain the property of CONA and/or the applicable Vendor.

8.06Data Privacy.

(a)Roles. In relation to the Bottler Data that constitute personal data under the relevant laws relating to data protection, trans-border data flow and data privacy (collectively, “Privacy Laws”),

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(i) Bottler will at all times act as and maintain the role of the owner and/or controller of such data; and (ii) CONA will at all times act as and maintain the role of the processor, and, subject to Section 8.06(e), will only process or transfer (both terms as defined in the relevant Privacy Laws) Bottler Data as instructed in writing by Bottler and in accordance with the terms of this Section 8.06. Nothing in this Master Agreement or any Services Exhibit will restrict or limit in any way Bottler’s rights or obligations as owner and/or controller of its Bottler Data or be deemed as an assignment of such rights and obligations to CONA or any Vendor; nor will anything in this Master Agreement or any Services Exhibit restrict or limit in any way CONA’s rights or obligations as processor or its obligations to comply with all of Bottler’s instructions as to the processing of its Bottler Data.

(b)Written Agreement. For purposes of the relevant Privacy Laws, this Master Agreement and its applicable Services Exhibits are the written agreements relating to the processing by CONA of Bottler Data.

(c)Instructions. This Master Agreement and any Services Exhibit (including the exhibits and attachments hereto and thereto) constitute the written instructions by Bottler as of the Master Agreement Effective Date for CONA’s processing of its Bottler Data. Such instructions may be modified and/or supplemented from time to time by written agreement of Bottler and CONA.

(d)Compliance. Bottler and CONA as controller and processor, respectively, of any personal data (as defined in the relevant Privacy Laws) contained in the Bottler Data will duly observe all of their respective obligations under the relevant Privacy Laws. Bottler will make or obtain and maintain throughout the Master Agreement Term all necessary registrations or filings and notifications which Bottler is obliged to obtain and maintain pursuant to the relevant Privacy Laws in respect of the Services or other activities contemplated to be undertaken under or in connection with a Services Exhibit. CONA will during the Master Agreement Term, as part of the Services, comply with Bottler’s written instructions regarding the processing of its Bottler Data and, in so processing such Bottler Data, engage in activities and operations and maintain safeguarding and confidentiality measures (collectively, the “Actions”) which comply with Privacy Laws.

(e)Changes. The requirements relating to any changes of the written processing instructions or the Actions will be subject to the Change Control Procedures. If such a Change is generated by a modification in the Privacy Laws and is required for ongoing compliance with such Privacy Laws, then CONA shall promptly implement the requested Change.  The allocation of costs associated with such Change will be mutually agreed by CONA and Bottler.

(f)Lawful Use. Bottler shall ensure that Bottler is entitled to transfer the relevant Personal Information to CONA so that CONA may lawfully use, process and transfer the Personal Information in accordance with this Master Agreement on Bottler’s behalf.

(g)Vendors and Subcontractors. CONA may use Vendors and Subcontractors to provide Services on its behalf in accordance with the terms of this Master Agreement. Any such Vendor or Subcontractor will be permitted to process Personal Information solely pursuant to the terms of this Article 8 and only as necessary to deliver the services CONA has retained them to provide. These Vendors and Subcontractors may be located outside of the United States.  CONA warrants that the agreements it has in place with any and all Vendors and Subcontractors contain similar or greater data privacy and security obligations than are contained in this Master Agreement.

(h)If CONA receives any order, demand, warrant, or any other document requesting or purporting to compel the production of Personal Information under applicable law (including, for example, by oral

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questions, interrogatories, requests for information or documents in legal proceedings, subpoenas, civil investigative demands or other similar processes), CONA shall immediately notify Bottler (except to the extent otherwise required by Applicable Law) and shall not disclose the Personal Information to the third party without providing Bottler at least forty-eight (48) hours, following such notice, so that Bottler may, at its own expense, exercise such rights as it may have under law to prevent or limit such disclosure.  Notwithstanding the foregoing, CONA shall exercise commercially reasonable efforts to prevent and limit any such disclosure and to otherwise preserve the confidentiality of the Personal Information and shall cooperate with Bottler with respect to any action taken with respect to such request, complaint, order or other document, including to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded to the Personal Information.

(i)CONA shall, as appropriate and as directed by Bottler, regularly dispose of Personal Information that is maintained by CONA, but that is no longer necessary to provide the Services.  Upon termination or expiration of this Master Agreement or any Vendor agreement for any reason or upon Bottler’s request, CONA (and any Vendor, as applicable) shall immediately cease handling Personal Information and shall return in a manner and format reasonably requested by Bottler, or, if specifically directed by Bottler, shall destroy, any or all Personal Information in CONA’s (or such Vendor’s) possession, power or control. If CONA disposes of any paper, electronic or other record containing Personal Information, CONA shall do so by taking all reasonable steps (based on the sensitivity of the information) to destroy the Personal Information by:  (a) shredding; (b) permanently erasing and deleting; (c) degaussing; or (d) otherwise modifying the Personal Information in such records to make it unreadable, unreconstructable and indecipherable. Upon request, CONA will provide a written certification that Personal Information has been returned or securely destroyed in accordance with this Section 8.06(i).

ARTICLE 9.INSURANCE AND RISK OF LOSS

9.01Insurance Requirements. CONA shall, at its own cost and expense, acquire and maintain during the term of this Master Agreement, with insurance carriers having an AM Best Rating of A-VII or better, sufficient insurance to adequately protect the respective interests of the parties.  Specifically, CONA must carry the following minimum types and amounts of insurance on an occurrence basis:

Commercial General Liability including premises-operations, broad form property damage, products /completed operations, contractual liability, independent contractors, personal injury and advertising injury and liability assumed under an insured contract with limits of at least $ 1,000,000 per occurrence and $ 2,000,000 general aggregate and $ 2,000,000 Products / Completed Operations Aggregate; and

Statutory Workers’ Compensation Insurance and Employer’s Liability Insurance in the minimum amount of $ 2,000,000 each employee by accident, $ 2,000,000 each employee by disease and $ 2,000,000 aggregate by disease; and

Property Insurance for tangible personal property owned by CONA in a minimum amount, to the extent commercially reasonable, equal to the full replacement cost of such property; and

Commercial Automobile Liability for any owned, non-owned, hired, or borrowed automobile is required in the minimum amount of $ 1,000,000 combined single limit; and

Cyber Liability Insurance in the minimum amount of $ 5,000,000.

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In addition, CONA shall maintain umbrella coverage in the minimum amount of $ 10,000,000. CONA shall include the Bottler as an “Additional Insured” on its Commercial General Liability and Commercial Auto Liability policies listed above.

9.02Insurance Renewals. Upon the execution of this Master Agreement and annually upon the anniversary date(s) of the insurance policy’s renewal date(s), CONA will provide Bottler with a Certificate of Insurance evidencing the required coverages and terms set forth above.

9.03Insurance Notifications. CONA shall provide Bottler with thirty (30) days written notice of any cancellation, non-renewal, termination, material change or reduction in coverage.

9.04Waiver of Recovery. CONA will cause its insurance companies to waive their right of recovery against Bottler.

9.05Non-Limitation. The stipulated limits of coverage above shall not be construed as a limitation of any potential liability to Bottler, and failure to request evidence of this insurance shall not be construed as a waiver of CONA’s obligation to provide the insurance coverage specified.

9.06Deductibles. CONA will be solely responsible for any deductible or self-insured retention maintained under its policies.

9.07Primary and Excess Coverage. The above insurance limits may be achieved by a combination of primary and umbrella/excess policies.

ARTICLE 10.PAYMENTS TO CONA

10.01Service Fees. The charges and fees payable to CONA with respect to the services hereunder are described in the attached Appendix 5.  These charges and fees may be adjusted from time to time by the Board as provided in the LLC Agreement.

10.02Additional Service Fees. If CONA provides Additional Services, Bottler will pay the agreed Additional Service Fees pursuant to Section 1.05 above.

10.03Proration. All periodic Service Fees or any other fees and charges under this Master Agreement and any Services Exhibit are to be computed on a calendar month basis and will be prorated on a daily basis for any partial month.

10.04Payment Schedule. Unless otherwise set forth in any Services Exhibit or an applicable amendment to a Services Exhibit, the Service Fees and any other fees or charges owed by Bottler will be due and payable no later than thirty (30) days after Bottler’s receipt of an applicable invoice from CONA. CONA will invoice Bottler on a regular basis for Service Fees (and on an annual basis for any sales and use taxes to be collected by CONA pursuant to Section 10.05) as calculated above within thirty (30) days following the applicable service period (or annual period for such sales and use taxes). Payment terms hereunder, including the frequency of billing, payment and any discounts for early payment, will be as determined by vote of the  Board of Directors of CONA from time to time.  Each invoice will contain the information as detailed in the applicable Services Exhibit. Any amount not paid when due will bear interest until paid at a rate of interest equal to the lesser of (a) the prime rate established from time to time by Citibank of New York plus two percentage points or (b) the maximum rate of interest allowed by applicable law, provided that CONA will notify Bottler in writing prior to accruing any interest under this Section 10.04.

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10.05Taxes. Bottler is responsible for all sales and use taxes and similar taxes imposed on the Service Fees and for any other fees and charges under this Master Agreement and any Services Exhibit.  CONA will collect from Bottler and remit such taxes where legally required to do so.  Bottler will be responsible for remitting such taxes, if applicable, in states where CONA does not have a legal obligation to collect and remit such taxes.

ARTICLE 11.AUDITS

11.01Audit. Subject to the approval and direction of the CONA Board, CONA shall conduct, and when necessary in the reasonable judgment of CONA management shall require its key Vendors to conduct, at least annually an SSAE-16 audit of the CONA Services and supporting systems. The audit scope for CONA audits shall include Data Centers and the CONA Systems, and, unless otherwise agreed by the CONA Board, the audits will each cover a full twelve month period ending no earlier than September 30th of each year.  Final audit reports will be issued to Bottler no later than November 15th of each year.

11.02General Procedures. Following any audit or examination, CONA will conduct (in the case of an internal audit), or request its external auditors or examiners to conduct, an exit conference with the applicable Vendors to obtain factual concurrence with issues identified in the review. Bottler and CONA will develop mutually acceptable operating procedures for the sharing of audit and regulatory findings and reports related to operating practices and procedures produced by auditors or regulators of either party.

11.03Response. CONA will review each audit report promptly after the issuance thereof. CONA will respond (or cause the applicable Vendor to respond) to each audit report in writing within thirty (30) days from receipt of such report. CONA will develop and adopt (pursuant to Section 4.01) an action plan to promptly address and resolve any deficiencies, concerns and/or recommendations in such audit report. CONA will, and will require each applicable Vendor to, undertake remedial action in accordance with such action plan and the dates specified therein.

ARTICLE 12.CONFIDENTIALITY

12.01Confidential Information. It is anticipated that during the performance of this Master Agreement and any Services Exhibit, CONA or Bottler may disclose to the other or the receiving party may come in contact with or observe certain confidential business, technical or financial information which is the property of the disclosing party. With respect to the terms and conditions of this Master Agreement, as well as the terms and conditions of the Services Exhibits and the Appendices attached hereto from time to time, and any other information that the disclosing party identifies in writing at the time of disclosure as confidential or within thirty (30) days from an oral disclosure, or is reasonably identifiable as confidential (“Confidential Information”), the receiving party will exercise the same degree of care and control to maintain such information in confidence and prevent disclosure thereof to third parties as the receiving party normally uses to preserve and protect its own Confidential Information of a similar nature during the Master Agreement Term and, except as required under Section 12.03, for a period of five (5) years thereafter, but in no event will such care and control be less than reasonable industry standards. No party will be obligated to maintain in confidence: (i) information which is, or subsequently becomes, within the knowledge of the public generally through no fault of the receiving party; (ii) information which the receiving party can show was previously known to it as a matter of record at the time of receipt; (iii) information which is obtained lawfully from a third party who is not under an obligation of confidentiality to the disclosing party; (iv) information which is developed as a matter of record by the receiving party without the use of the disclosing party’s Confidential Information; (v) information which is disclosed to a third party by the disclosing party without a corresponding obligation of confidence; or

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(vi) information which is required to be disclosed pursuant to the requirement of a government or regulatory agency or national securities exchange or by operation of law subject to prior consultation with the disclosing party’s legal counsel.

12.02Bottler Confidential Information. The Bottler Data and any other information describing or evaluating any proposed Changes or Additional Services requested by Bottler will be considered Bottler’s Confidential Information, and Bottler may impose reasonable access limitations on CONA’s access to commercially sensitive Bottler Data in order to limit such access to those of CONA’s personnel who have a need to know in order to carry out CONA’s obligations pursuant to this Master Agreement or any Services Exhibit. These restrictions do not supersede any subsequent agreement that might be entered into between the parties and that governs the use and access of such Bottler Data and Bottler’s Confidential Information. Nothing in this Master Agreement shall be construed to change or modify the use and access of Bottler Data, if that use and access is already subject to other agreements between the parties or third parties.  Notwithstanding the foregoing, to the extent CONA implements any Changes into the CONA System and/or provides any Additional Services, then all confidential information and materials provided by Bottler that relate to such Changes and Additional Services shall automatically become CONA’s Confidential Information.

12.03Trade Secrets. No receiving party, nor their respective employees, agents, contractors or subcontractors, will disclose, or use for their own benefit any Confidential Information which is identified as a trade secret without the disclosing party’s prior written consent for as long as the Confidential Information remains a trade secret.

12.04Use During Performance of Agreement. Each party will each only be entitled to use Confidential Information and trade secrets of the other solely to the extent required to exercise its rights and meet its obligations under this Master Agreement and any Services Exhibit. CONA may provide Confidential Information of Bottler to Vendors on an as-needed basis, and will contract with such Vendors for confidentiality obligations consistent with this Article 12.  Bottler is permitted to disclose Confidential Information of CONA to (i) any of its employees, agents, or contractors; (ii) any Affiliate of Bottler that utilizes any Services; and (iii) any Bottler Third-Party Contractor, but only to the extent necessary to utilize the Services (in the case of an employee, agent, contractor or Affiliate of Bottler) or to perform services as contemplated by Section 7.01 (in the case of a Bottler Third-Party Contractor), and provided that any such employee, agent, contractor, Affiliate or Bottler Third-Party Contractor agrees to maintain and use the confidentiality of such Confidential Information to the same extent required by this Article 12.  Upon termination of this Master Agreement, CONA and Bottler shall immediately cease use of and destroy all copies of the other party’s Confidential Information.

12.05Unauthorized Acts. Bottler and CONA will: (1) notify the other party promptly of any unauthorized use, or attempt thereof, of the other party’s Confidential Information by any person or entity which may become known to such party, (2) promptly furnish to the other party full details of the unauthorized use of the other party’s Confidential Information, or attempt thereof, and use commercially reasonable efforts to assist the other party in investigating or preventing the reoccurrence thereof, and (3) use commercially reasonable efforts to cooperate with the other party in any litigation and investigation against third parties deemed necessary by the other party to protect its proprietary rights Each party will bear the cost it incurs as a result of compliance with this Section 12.05.

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ARTICLE 13.REPRESENTATIONS, WARRANTIES AND COVENANTS

13.01By Bottler. Bottler represents, warrants and covenants that:

(a)it is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware;

(b)it has all the requisite corporate power and authority to execute, deliver and perform its obligations under this Master Agreement;

(c)the execution, delivery and performance of this Master Agreement by Bottler has been duly authorized by Bottler;

(d)Bottler has not as of the Master Agreement Effective Date, and will not, disclose any Confidential Information of CONA in violation of the terms of this Master Agreement, unless such disclosure was permitted under another agreement between the parties at the time of disclosure;

(e)there is no claim, action, suit, investigation, or proceeding pending or, to Bottler’s knowledge, contemplated or threatened against Bottler which seeks damages or penalties in connection with any of the transactions contemplated by this Master Agreement or to restrict or delay the transactions contemplated hereby or to limit in any manner CONA’s rights under this Master Agreement; and

(f)Bottler has obtained, or will obtain, all consents, approvals, licenses or assignments necessary to perform the obligations for which Bottler is responsible under this Master Agreement and/or any Services Exhibit and to receive the Services.

13.02By CONA. CONA represents, warrants and covenants that:

(a)it is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Delaware;

(b)CONA has all requisite company power and authority to execute, deliver and perform its obligations under this Master Agreement;

(c)the execution, delivery and performance of this Master Agreement by CONA has been duly authorized by CONA;

(d)CONA has not, as of the Master Agreement Effective Date, and will not, disclose any Confidential Information of Bottler in violation of the terms of this Master Agreement, unless such disclosure was permitted under another agreement between the parties at the time of disclosure;

(e)there is no claim, action, suit, investigation, or proceeding pending or, to CONA’s knowledge, contemplated or threatened against CONA which seeks damages or penalties in connection with any of the transactions contemplated by this Master Agreement or to restrict or delay the transactions contemplated hereby or to limit in any manner Bottler’s rights under this Master Agreement; and

(f)CONA has obtained, or will obtain, all consents, approvals, licenses or assignments necessary to perform the Services for which CONA is responsible under this Master Agreement and/or any Services Exhibit.

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13.03Other Warranties.

(a)Warranties. CONA represents and warrants that it will diligently perform, and use commercially reasonable efforts to cause the Vendors to perform, the Services in a professional quality conforming to generally accepted industry standards and practices.

(b)Pass-Through Warranties and Indemnities. CONA agrees that it will pass through to Bottler any rights it obtains under warranties and indemnities given by the Vendors in connection with any Service, Vendor Software, Equipment or Deliverable to the extent permitted by the applicable Vendor contract or consented to by the applicable Vendor on a case-by-case basis. If pass-through warranties and indemnities are not available from a particular Vendor, CONA will enforce the applicable warranty or indemnity on behalf of Bottler as provided below.  In the event of a Service, Vendor Software, Equipment or Deliverable nonconformance, CONA will coordinate with, and be the point of contact for resolution of the problem through, the applicable Vendor and, upon becoming aware of a problem, will notify such Vendor and will use commercially reasonable efforts to cause such Vendor to promptly repair or replace the nonconforming item in accordance with such Vendor’s warranty.

(c)EXCEPT AS EXPRESSLY SET FORTH IN THIS MASTER AGREEMENT, BOTH CONA AND BOTTLER EXPRESSLY DISCLAIM ALL OTHER WARRANTIES EXPRESS, IMPLIED, OR STATUTORY WITH RESPECT TO THIS MASTER AGREEMENT, THE SERVICES EXHIBITS, AND ANY PRODUCTS, SERVICES, SOFTWARE OR DATA THAT THEY PROVIDE TO THE OTHER PARTY HEREUNDER, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR PARTICULAR PURPOSE, TITLE OR NON-INFRINGEMENT, AND FURTHER DISCLAIMS ANY LIABILITY FOR REPRESENTATIONS OR PROMISES NOT CONTAINED IN THIS MASTER AGREEMENT.

ARTICLE 14.DISPUTE RESOLUTION

14.01Disputes. Any dispute between any parties arising out of this Master Agreement and any Services Exhibit will first be heard by CONA’s Board of Directors (or a committee of the CONA Board of Directors established for that purpose).  Either party may request consultation by giving the other party-disputant detailed written notice that, in its opinion, a dispute has arisen, and stating the basis for the dispute and its position on the dispute.  If a committee of the CONA Board of Directors is unable to finally resolve the matter, the disputed matter will be referred to CONA’s full Board of Directors to resolve the matter. If the dispute cannot be resolved by the CONA Board of Directors, then the matter will be exclusively submitted to the American Arbitration Association (“AAA”) for arbitration at a mutually agreed  location.  Unless otherwise expressly stated herein, the arbitration will be conducted in accordance with AAA’s Commercial Arbitration Rules including the Optional Rules for Emergency Measures of Protection in effect at the time of the submission to arbitration.  The arbitral tribunal will consist of three neutral arbitrators pursuant to the procedures of the AAA.  The arbitral award will be non-appealable, final and binding upon both parties.  Neither party shall be required to give general discovery of documents, but may be required by the arbitrators to produce specific, identified documents that are relevant to the dispute. The language of arbitration will be English.  The parties will keep confidential any matters with respect to such arbitration proceedings.

No dispute under this Master Agreement or any Services Exhibit will be the subject of litigation or other formal proceeding between any parties (excluding any actions based upon the indemnity obligations under Article 17, actions seeking injunctive relief for an actual or threatened breach of Article 12, and an action to compel compliance with this Section).

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14.02Continued Performance. In the event of a good faith dispute between Bottler and CONA regarding this Master Agreement and any Services Exhibit pursuant to which Bottler in good faith believes it is entitled to withhold payment, Bottler will, upon request by CONA and on the date which any Service Fees are required to be made during the pendency of such dispute, deposit the full disputed amount of the Service Fees in an interest-bearing escrow account in a nationally-recognized bank or depository specified by CONA and furnish evidence of such deposit to CONA. For as long as Bottler makes any such required escrow deposits during the pendency of such dispute, CONA will continue to provide the Services and Bottler will pay, and continue to pay, all undisputed amounts. Upon resolution of the dispute, the money in the escrow account, plus any interest earned on such money, will be distributed to the prevailing party or will be distributed among Bottler and CONA pro rata in accordance with the claims or portions of claims resolved in each party’s favor.

ARTICLE 15.EFFECTIVENESS; TERM; TERMINATION

15.01Master Agreement Term. The term (the “Master Agreement Term”) of this Master Agreement will commence on the date first written above (the “Master Agreement Effective Date”) and will continue until terminated pursuant to this Article 15.

15.02Termination for Cause.

(a)Material Breach By Bottler.  If Bottler fails to perform its material obligations under Article 10 (“Payments to CONA”), Article 12 (“Confidentiality”), Article 13 (“Representations, Warranties and Covenants”) or Article 17 (“Indemnities”), and such failure is not cured within ninety (90) days after written notice is given to Bottler specifying the nature of the default, CONA may, upon further ninety (90)-day written notice to Bottler, terminate this Master Agreement and any Services Exhibit as to Bottler as of the date specified in such notice of termination.

(b)Material Breach by CONA.  If CONA commits a material breach under this Master Agreement that is having a material adverse effect upon Bottler’s business in the Territories, and such failure is not cured within ninety (90) days after written notice is given to CONA specifying the nature of the default, Bottler may, upon further ninety (90)-day written notice to CONA, terminate this Master Agreement as it applies to Bottler as of the date specified in such notice of termination.

(c)Termination for Insolvency. If CONA or Bottler becomes or is declared insolvent or bankrupt, is the subject of any proceedings relating to its liquidation, dissolution, its insolvency or for the appointment of a receiver or similar officer for it, makes an assignment for the benefit of all or substantially all of its creditors or enters into an agreement for the composition, extension, or readjustment of all or substantially all of its obligations, then, unless the insolvent or bankrupt party immediately gives adequate assurance of the future performance of this Master Agreement or any Services Exhibit, CONA or Bottler may, by giving written notice thereof to the other party-disputant, terminate this Master Agreement as of a date specified in such notice of termination.

15.03Termination upon Dissolution of CONA.  If CONA is dissolved in accordance with the provisions of the CONA LLC Agreement, this Master Agreement will terminate, and Bottler will have the rights to use the CONA System provided for under the CONA LLC Agreement.

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15.04Effect of Termination. Except as otherwise provided in Section 11.03 of the CONA LLC Agreement with respect to a member withdrawing from CONA, upon the termination of this Master Agreement and/or any Services Exhibit:

(a)If requested by Bottler, CONA will, and/or will use good faith efforts to require Vendors to, continue to provide to Bottler those Services and reasonable assistance in Bottler’s transitioning its business back to its legacy systems or another system provided for or by Bottler, for up to the Termination Assistance Period pursuant to Article 16 as may further be detailed in mutually agreed Services Exhibit (“Termination Assistance Services”).  Bottler will pay for such Services in accordance with the provisions of Article 10 as of the date of such termination or as otherwise set forth in the applicable Services Exhibit; provided that , if CONA terminated this Master Agreement for nonpayment, CONA’s obligation under this Section 15.04(a) and Article 16 will be subject to prepayment by Bottler for Termination Assistance Services and payment of all other amounts owed by Bottler that remain due and payable to CONA prior to commencement of any Termination Assistance Services.

(b)Bottler will pay CONA for all authorized Services performed, and CONA Software or Equipment purchased at Bottler’s request and delivered to Bottler, through the date of such termination;

(c)each party will have the ownership rights specified in Article 6; and

(d)Bottler will not be (1) obligated to pay any termination fee to CONA in the event of a termination of this Master Agreement and/or any  Services Exhibit, except as provided to the contrary in an applicable Services Exhibit or in the CONA LLC Agreement, and (2) required to make any further payments under Article 10 in respect of any terminated Services Exhibit, except as provided for in Section 15.04(a) and Section 15.04(b), or as provided in the applicable Services Exhibit or the CONA LLC Agreement.

The provisions of this Section 15.04 are in addition to, and not in lieu of, any remedies provided for by law or equity or in the CONA LLC Agreement.

ARTICLE 16.TERMINATION ASSISTANCE SERVICES

16.01Availability. The Termination Assistance Services will commence upon any notice of termination of the Master Agreement Term, and continue for up to six (6) consecutive months following the effective date of the termination of the Master Agreement Term (as such effective date may be extended by the parties’ agreement) (“Termination Assistance Period”). At Bottler’s request, CONA will, and/or will use good faith efforts to require Vendors to, provide Termination Assistance Services described in Section 15.04(a) and this Article 16 to Bottler. If provided, CONA will, and will require Vendors to, perform the Termination Assistance Services with at least the same degree of accuracy, quality, completeness, timeliness, responsiveness and cost‑effectiveness as it provided and was required to provide for the same or similar Services during the Master Agreement Term. The quality of the Services provided by CONA following its receipt of a notice of termination or non‑renewal will not be degraded or deficient in any material respect.

16.02Scope of Service. As part of the Termination Assistance Services, CONA will, and will require Vendors to, transfer, in a timely manner, the control and responsibility for all information technology functions and Services previously performed by or for CONA to Bottler and/or its designees by the execution of any documents reasonably necessary to effect such transfers.

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ARTICLE 17.INDEMNITIES

17.01Bottler Indemnities. Bottler agrees to defend CONA, and its subsidiaries, divisions and affiliates, and each of their employees, officers and directors, from and against all third-party claims, suits and proceedings brought against CONA, and will pay all final judgments awarded or settlements entered into on such claims, for (A) bodily injury (including loss of life) or damage to real property or tangible personal property caused by the gross negligence or willful misconduct of Bottler, its agents, employees or contractors, or (B) a violation of any applicable Privacy Law attributable to the gross negligence or willful misconduct of Bottler, its agents, employees or contractors, in each case arising out of or in connection with this Master Agreement and Services Exhibits. These indemnities will pass through to the Vendors, as applicable.

17.02CONA Indemnities. CONA agrees to defend Bottler, its subsidiaries, divisions, affiliates, and each of their employees, officers and directors, from and against all third-party claims, suits and proceedings brought against Bottler, and will pay all final judgments awarded or settlements entered into on such claims, for (A) bodily injury (including loss of life) or damage to real property or tangible personal property caused by the gross negligence or willful misconduct of CONA, its agents, employees or Vendors, or (B) a violation of any applicable Privacy Law attributable to the gross negligence or willful misconduct of CONA, its agents, employees or Vendors, in each case arising out of or in connection with this Master Agreement and Services Exhibits.  CONA will use commercially reasonable efforts to obtain like indemnities from Vendors for the benefit of Bottler.

17.03Infringement Claims. If any claim should be made against Bottler at any time during the Master Agreement Term, that by virtue of its use of the Services, Bottler is infringing any intellectual property rights, the parties shall reasonably cooperate and use commercially reasonable efforts to resolve the situation. If the claim is based on a Service that does include Vendor Software or services, CONA will, promptly after receiving notice of the claim made against Bottler, coordinate with, and be the point of contact for resolution of the problem through, the applicable Vendor and will notify such Vendor and will use commercially reasonable efforts to cause such Vendor to obtain a license for Bottler to continue using the Services, promptly modify the Services (without any change in functionality), so that they become non-infringing, or replace the Services with functionally equivalent non-infringing Services in accordance with such Vendor’s warranty.  If any such claim proceeds to litigation, Bottler agrees that the CONA Board may direct CONA to control the defense of the claim in order to ensure that the interests of the respective members are adequately protected.

ARTICLE 18.DAMAGES; LIABILITY WAIVER

18.01CONSEQUENTIAL DAMAGES. NEITHER CONA NOR BOTTLER WILL BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES OR LOST PROFITS, OR ANY OTHER DAMAGES THAT ARE NOT DIRECT AND OUT-OF-POCKET, ARISING OUT OF OR RELATING TO SUCH PARTY’S PERFORMANCE UNDER THIS MASTER AGREEMENT AND SERVICES EXHIBITS.

18.02DAMAGES CAP. EXCEPT AS PROVIDED IN SECTION 18.03 OR THE NEXT SENTENCE, NEITHER CONA NOR BOTTLER WILL BE LIABLE FOR ANY DAMAGES, WHETHER BASED ON AN ACTION OR CLAIM IN CONTRACT, EQUITY, NEGLIGENCE, TORT OR OTHERWISE, UNDER THE MASTER AGREEMENT AND SERVICES EXHIBITS. IN RECOGNITION OF THE PASS-THROUGH NATURE OF THE SERVICES TO BE PROVIDED BY VENDORS, SUBJECT TO SECTION 1.04, CONA WILL NOT BE LIABLE TO BOTTLER FOR ANY

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DAMAGES, WHETHER BASED ON AN ACTION OR CLAIM IN CONTRACT, EQUITY, NEGLIGENCE, TORT OR OTHERWISE, UNDER THE MASTER AGREEMENT AND SERVICES EXHIBITS, FOR ANY ACT OR OMISSION OF ANY VENDOR, TO ANY GREATER EXTENT THAN THE APPLICABLE VENDOR IS LIABLE TO CONA FOR SUCH ACT OR OMISSION.

18.03EXCEPTIONS TO LIMITATIONS OF LIABILITY. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, THE FOREGOING LIMITATIONS WILL NOT APPLY TO (I) A PARTY’S OWN WILLFUL MISCONDUCT; OR (II) THE INDEMNIFICATION OBLIGATIONS SET FORTH IN ARTICLE 17; OR (III) BREACH OF THE CONFIDENTIALITY OBLIGATIONS SET FORTH IN ARTICLE 12; OR (IV) BOTTLER’S OBLIGATION TO PAY IN ACCORDANCE WITH THIS AGREEMENT FOR SERVICES RENDERED.

18.04TCCC AND CCR LIABILITY WAIVER. BOTTLER, ON BEHALF OF ITSELF AND ALL OF ITS PAST AND PRESENT SUBSIDIARIES, PARENTS, SUCCESSORS AND PREDECESSORS, AFFILIATES, RELATED ENTITIES AND DIVISIONS, SUCCESSORS, AND ASSIGNS (COLLECTIVELY, THE “BOTTLER PARTIES”), HEREBY RELEASES AND DISCHARGES TCCC, CCR AND ALL OF THEIR RESPECTIVE PAST AND PRESENT SUBSIDIARIES, PARENTS, SUCCESSORS AND PREDECESSORS, AFFILIATES, RELATED ENTITIES AND DIVISIONS, REPRESENTATIVES, SUCCESSORS AND ASSIGNS (COLLECTIVELY, THE “TCCC PARTIES”), FROM ANY AND ALL LIABILITIES, CLAIMS, CAUSES OF ACTION, OBLIGATIONS, DEMANDS, LOSSES, COSTS OR EXPENSES OF ANY KIND OR NATURE WHATSOEVER, PAST OR PRESENT, ASCERTAINED OR UNASCERTAINED, KNOWN OR UNKNOWN, SUSPECTED OR UNSUSPECTED, CLAIMED OR UNCLAIMED WHICH THE BOTTLER PARTIES HAVE, OR HAVE EVER HAD, BY VIRTUE OF ANY ACT, OMISSION, REASON, CAUSE OR THING ALLEGED OR THAT COULD HAVE BEEN ALLEGED IN ANY JUDICIAL OR ARBITRATION PROCEEDINGS WITH RESPECT TO THE PROVISION OF SERVICES BY CONA PURSUANT TO THIS AGREEMENT.  CONA ITSELF WILL NOT CONSTITUTE EITHER A BOTTLER PARTY OR A TCCC PARTY FOR PURPOSES OF THIS SECTION 18.04 (I.E., CONA IS NOT WAIVING ANY CLAIMS AGAINST THE TCCC PARTIES UNDER THIS SECTION 18.04, AND BOTTLER PARTIES ARE NOT WAIVING ANY CLAIMS AGAINST CONA UNDER THIS SECTION 18.04).  FOR CLARITY, NOTWITHSTANDING THE FOREGOING LANGUAGE OF THIS SECTION 18.04, CONA WILL RETAIN ALL RIGHTS UNDER ANY AGREEMENT BETWEEN CONA AND TCCC OR CCR, RESPECTIVELY, INCLUDING WITHOUT LIMITATION THE ASSET PURCHASE AGREEMENT, FINANCIAL MATTERS AGREEMENT AND MASTER SERVICES AGREEMENTS.

ARTICLE 19.MISCELLANEOUS

19.01Force Majeure.

(a)No party will be liable, or be deemed to be in default, to another party hereunder (except as provided in Section 5.05) by reason or on account of any delay or omission caused by epidemic, fire, order of a court of competent jurisdiction (other than preliminary or permanent injunctions issued pursuant to an indemnity obligation for intellectual property infringement set forth in Article 17), executive decree or order, act of God or public enemy, war, riot, civil commotion, earthquake, accident, explosion, casualty or embargo; provided that such force majeure event that is an accident or casualty is not caused directly or indirectly by the excused party and could not have been prevented by such party’s reasonable diligence; and provided, further, that such events will not be excused to the extent they are intended to be addressed by, or can be obviated by the implementation of, the Disaster Recovery Plan.

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(b)Upon the occurrence of a force majeure event, the non‑performing party will be excused from any further performance of those of its obligations pursuant to the applicable Services Exhibit affected by the force majeure event for as long as (a) such force majeure event continues and (b) such party continues to use commercially reasonable efforts to recommence performance whenever and to whatever extent possible without delay. The party delayed by a force majeure event will immediately notify the other party or parties by telephone (to be confirmed by written notice within twenty-four (24) hours of the inception of the failure or delay) of the occurrence of a force majeure event and describe in reasonable detail the nature of the force majeure event.

(c)The occurrence of a force majeure event does not limit or otherwise affect CONA’s obligation to provide either normal recovery procedures or any other disaster recovery services as described in Section 5.05 except to the extent the force majeure event prevents the performance of such obligations.

19.02Compliance with Rules and Regulations.  Each party will instruct its personnel, agents and subcontractors to comply with the safety standards, security regulations and other published policies of the other party while on the other party’s premises.  Each party shall ensure that when entering or within the other party’s premises, all such party’s personnel, agents and subcontractors must establish their identity to the satisfaction of security personnel and comply with all directions given by them, including directions to display any identification cards provided by such other party.

19.03Severability.  If any provision contained in this Master Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Master Agreement, and this Master Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained in this Master Agreement.

19.04Assignment.

(a)Neither CONA nor Bottler may assign this Master Agreement, without the prior written consent of the other party; provided, however, that Bottler may, upon notice to CONA, assign this Master Agreement, without CONA’s consent, to any subsidiary or affiliate of Bottler.  Bottler’s rights under this Master Agreement may be assigned in connection with a permitted transfer of Bottler’s interest in CONA in accordance with the terms of the CONA LLC Agreement.

(b)Any assignment in contravention of this Section 19.04 will be void.

19.05Notices. Except as otherwise specified in this Master Agreement or Services Exhibit, all notices, requests, approvals, and consents and other communications required or permitted under this Master Agreement or any Services Exhibit will be in writing and will be sent by express mail, Federal Express, or other, similar overnight bonded mail delivery services to the address specified below:

In the case of Bottler:

Coca-Cola Bottling Co. Consolidated

4100 Coca-Cola Plaza

Charlotte, NC 28211

Attention: Chief Information Officer

With a copy to: General Counsel

 

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In the case of CONA:

CONA Services LLC

1 Coca-Cola Plaza

Atlanta, GA 30313

Attention: Reinhard Meister, CEO

With a copy to: General Counsel

Each party may change its address or facsimile number for notification purposes by giving the other party notice of the new address or facsimile number and the date upon which it will become effective.

19.06Counterparts. This Master Agreement and any Services Exhibit may be executed in any number of counterparts, all of which taken together will constitute one single agreement among the parties.

19.07Headings; Cross References. The article and section headings and the table of contents are for reference and convenience only and will not be considered in the interpretation of this Master Agreement or any Services Exhibit. All cross-references in this Master Agreement and any Services Exhibit to Sections, Appendices or Exhibits will be deemed to be references to the corresponding section or article in, or exhibit to, this Master Agreement or the applicable Services Exhibit, unless the context otherwise clearly indicates.

19.08Relationship. The performance by CONA of its duties and obligations under this Master Agreement and any Services Exhibit will be that of an independent contractor and nothing contained in this Master Agreement or any Services Exhibit will create or imply an agency relationship between any of the parties, nor will this Master Agreement or any Services Exhibit be deemed to constitute a joint venture or partnership between any of the parties.

19.09Consents, Approvals and Requests. All consents and approvals to be given by a party under this Master Agreement and any Services Exhibit will not be unreasonably withheld or delayed and the requesting party will make only reasonable requests under this Master Agreement and/or any Services Exhibit. No approval will be valid or acceptable unless given by an authorized representative of the appropriate party.

19.10Waiver. No delay or omission by either party to exercise any right or power it has under this Master Agreement or any Services Exhibit will impair or be construed as a waiver of such right or power. A waiver by either party of any breach or covenant will not be construed to be a waiver of any succeeding breach or any other covenant. All waivers must be in writing and signed by the party waiving its rights.

19.11Entire Agreement. This Master Agreement, including each Services Exhibit (and including all Schedules thereto) and each of the Appendices which are hereby incorporated by reference into this Master Agreement (including all Attachments thereto), are the entire agreement between the parties with respect to the Services, and there are no other representations, understandings or agreements between any parties relative to such subject matter.

19.12Interpretation of Documents. The terms and conditions of the Services Exhibits will be supplemental and additional to the terms and conditions of the Master Agreement; provided, however, that if by reference to specific sections in the Master Agreement, a Services Exhibit expressly states that certain specified terms and conditions of the Master Agreement will not apply in the contractual relationship among the parties, the relevant parts of such Services Exhibit will prevail over the specified sections of the Master Agreement. Any boilerplate terms contained in any purchase order, order confirmation or invoice will be void and of no effect with respect to this Master Agreement and/or any Services Exhibit.

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19.13Amendments. No amendment to, or change, waiver or discharge of, any provision of this Master Agreement or any Services Exhibit will be valid unless in writing and signed by a respective authorized representative of each party.

19.14Governing Law and Forum. This Master Agreement, including each Services Exhibit, will be governed by the laws of the State of Georgia, U.S.A. without reference to conflict of laws principles.

19.15Survival. In addition to those provisions expressly surviving termination or expiration, the terms of Article 8, Section 10.05, Article 12, Article 13, Article 14, Article 15, Article 16 and all applicable provisions of this Master Agreement and each Services Exhibit with respect to any Termination Assistance Services being provided by CONA, Article 17, Article 18, and Article 19 will survive the termination of this Master Agreement for any reason.

19.16Third-Party Beneficiaries. Except as expressly specified in this Master Agreement, this Master Agreement and each Services Exhibit will not benefit, or create any right or cause of action in or on behalf of, any person or entity other than Bottler (and its Affiliates using Services as permitted hereunder) and CONA.

19.17Covenant of Further Assurances. The parties covenant and agree that, subsequent to the execution and delivery of this Master Agreement and without any additional consideration, they will execute and deliver any further legal instruments and perform any acts which are or may become necessary to effectuate the purposes of this Master Agreement. The parties covenant and agree that, subsequent to the execution and delivery of a Services Exhibit and without any additional consideration, each of them will execute and deliver any further legal instruments and perform any acts which are or may become necessary to effectuate the purposes of such Services Exhibit.

19.18Export Regulations. This Master Agreement is expressly made subject to any United States government laws, regulations, orders or other restrictions regarding export from the United States of Equipment, computer hardware, software, technical data or derivatives of such Equipment, hardware, software or technical data. Notwithstanding anything to the contrary in this Master Agreement, no party will directly or indirectly export (or re-export) any Equipment, computer hardware, software, Deliverables technical data or derivatives of such Equipment, hardware, software, Deliverables or technical data, or permit the shipment of same: (a) into (or to a national or resident of) any country to which the United States has embargoed goods; (b) to anyone on the U.S. Treasury Department’s List of Specially Designated Nationals, List of Specially Designated Terrorists or List of Specially Designated Narcotics Traffickers, or the U.S. Commerce Department’s Denied Parties List; or (c) to any country or destination for which the United States government or a United States governmental agency requires an export license or other approval for export without first having obtained such license or other approval. The parties will reasonably cooperate with the other and will provide to the other promptly upon request any end-user certificates, affidavits regarding re-export or other certificates or documents as are reasonably requested to obtain approvals, consents, licenses and/or permits required for any payment or any export or import of products or services under this Master Agreement.

19.19Disclaimers. Bottler acknowledges that, as between it and CONA, it is solely responsible for determining its requirements and specifications to address its legal or regulatory compliance, including its Sarbanes-Oxley compliance. CONA is not providing any legal advice to Bottler. Bottler will consult with and rely exclusively on its own legal counsel for legal advice regarding its legal and regulatory compliance obligations. The foregoing will not limit CONA’s obligations hereunder with respect to compliance with laws, rules and regulations applicable to CONA’s provision of the Services.

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19.20Favored Nations Status.  The Services hereunder are being provided by CONA to Bottler and other CONA members on a “cost pass through” basis.  This Master Agreement contains the same terms and conditions as the Master Services Agreement of each other CONA  member, except in the case of member-specific terms, such as description of specific services to be provided by CONA, applicable service levels and the cost of such member-specific services. [***].

 

— Signature page follows —

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IN WITNESS WHEREOF, the parties have each caused this Master Agreement to be signed and delivered by its duly authorized representative.

 

 

COCA-COLA BOTTLING CO. CONSOLIDATED

 

 

By: /s/ James E. Harris                             

Printed Name: James E. Harris

Title: Executive Vice President

 

 

CONA SERVICES LLC

 

 

By: /s/ Reinhard Meister                          

Printed Name: Reinhard Meister

Title: Chief Executive Officer

 

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List of Exhibits and Appendices to

Master Services Agreement

 

Exhibits

A.CONA Functionalities

B.Build

C.Deploy

D.Operate

Schedule 1: Key Performance Indicators, Service Level Specifications and Credits

Schedule 2: Disaster Recovery Plan

 

Appendices

1.Defined Terms

2.Security Practices

Attachment 1: CONA Data Classification and Encryption Policies

Attachment 2: Terms and Conditions of Service for Single Sign-On Capability

3.CONA Hosting Security Guidelines

4.Vendor Third Party Software

5.Costs and Fees

6.Bottler’s Phase 1(a) Territories and Phase 1(a) Cases

7.Distribution Territories Projected to be on the CONA System to reach Steady State Date (DSD)

 

 

 

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Exhibit A

 

CONA Functionalities

 

CONA provides full scope solutions customer operations finance & HR integrated customer care central order capture service & issue management integrated account management one view of the customer integrated customer management knowledge repository sales force automation order management in-store sales processes pricing / trade promotion mgmt. pricing hierarchy (release 4) promotion & rebates mgmt. revenue growth management on- and off-line pricing Customer asset management equiptment placement Service & tracking Integrated operations planning Demand, operations and inventory planning Centralized purchasing and inventory movement manufacturing (release 4) production scheduling production execution & reporting Line maintenance warehouse & transport mgmt. inventory visability warehouse productivity spare parts inventory mgmt. fleet management optimized delivery route & vehicle space optimization route settlement invoicing full service vending on-line / predictive ordering optimize working capital financial accounting AR / collections dispute resolution accounts payable credit management travel & expense management Single source of hr data compensation & benefits performance management talent management organization management learning CONA Services LLC | 1

 

 

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Exhibit B

 

Build

 

 

28

 

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Exhibit C

 

Deploy

 

 

29

 

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30

 

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Exhibit D

Operate

 

31

 

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SCHEDULE 1 to EXHIBIT D

Key Performance Indicators, Service Level Specifications and Credits

 

The following specifications define the technical and performance service level commitments that CONA will require of its Vendors.

 

 

1.2 Monthly Incident Service Level Specifications and Credits

CONA will require Vendors to provide the following monthly incident SLAs and credits:

At Risk Amount: [***]%

 

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1.3 Quarterly Service Level Specifications and Credits

CONA will require the following quarterly SLA and credit:

 

 

1.4 Critical Event Service Level Specifications and Credits

CONA will require Vendors to provide the following critical events SLA and credit:

 

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SCHEDULE 2 to EXHIBIT D

Disaster Recovery Service Summary

 

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[***]

 

 

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Appendix 1

 

Defined Terms

 

For all purposes of this Master Agreement, the following terms have the following meanings and such definitions are equally applicable to both the singular and plural forms of any of the terms herein defined. Terms other than those defined are to be given their plain English meaning or their normal industry standard meaning.

 

“AAA” is defined in Section 14.01.

“Actions” is defined in Section 8.06(d).

“Additional Services” is defined in Section 1.05.

“Additional Service Fees” is defined in Section 1.05.

“Affiliates” means, with respect to any person or entity, any other person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, that person or entity.

“Beverages” means non-alcoholic beverages which Bottler is authorized or permitted to distribute under Bottler’s Comprehensive Beverage Agreement or any other agreement with TCCC.

“Bottler” is defined in the preamble.

“Bottler Data” is defined in Section 8.02.

“Bottler Parties” is defined in Section 18.04.

“Bottler Software” is defined in Section 6.02.

“Bottler Third-Party Contractors” is defined in Section 7.01(a).

“Change Control Procedures” is defined in Section 5.02.

“Change Order” is defined in Section 5.02.

“Change(s)” is defined in Section 5.02.

“CONA” is defined in the preamble.

“CONA Board of Directors” is defined in Section 1.05.

“CONA LLC Agreement” is defined in the recitals.

“CONA Software” is defined in Section 6.04.

“CONA System” is defined in the recitals.

“CONA System Specifications” is defined in Section 1.03(e).

“Confidential Information” is defined in Section 12.01.

“Data Center” is defined in Section 2.01.

“Deliverable” means any item, tangible or intangible, other than Equipment or CONA Software, expressly designated as a deliverable in the applicable Services Exhibit.

“Developed Software” is defined in Section 6.03.

“Disaster Recovery Plan” is defined in Section 5.05.

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“Equipment” is defined in Section 6.01.

“Financial Matters Agreement” is defined in Appendix 5.

“Intellectual Property” is defined in Section 6.10.

“KPIs” is defined in Section 3.01.

“Legacy Territories” means the Beverage distribution territories held by Bottler as of January 1, 2014.

“Master Agreement” is defined in the preamble.

“Master Agreement Effective Date” is defined in Section 15.01.

“Master Agreement Term” is defined in Section 15.01.

“Personal Information” means any information that identifies or can be used to identify an individual, including, without limitation: (a) name; (b) mailing address; (c) telephone or fax number; (d) email address; and (e) identification number.

“Phase 1(a) Cases” means the number of physical cases distributed in a Phase 1(a) Territory [***], as identified on Appendix 5.

“Phase 1(a) Territories” means the Territories of Bottler identified on Appendix 5.

“Privacy Laws” is defined in Section 8.06(a).

“Records” is defined in Section 5.04.

“Recovery Period” is defined in Appendix 5.

“Reports” is defined in Section 5.03.

“Service Levels” is defined in Section 3.01.

“Service Fees” is defined in Appendix 5.

“Services” is defined in Section 1.03.

“Services Exhibit” is defined in Section 1.03.

“Steady State Date (DSD)” means the earlier of (1) the date on which all Territories identified in the CONA deployment plan, as updated from time to time and approved by the CONA Board of Directors, have converted to the CONA System; or (2) December 31, 2018.

“Steady State Date (Manufacturing)” means the earliest of (1) the date on which all manufacturing facilities identified in the CONA deployment plan, as updated from time to time and approved by the CONA Board of Directors, have converted to the CONA System; or (2) December 31, 2018.

“TCCC” is defined in the recitals.

“TCCC Parties” is defined in Section 18.04.

“Termination Assistance Period” is defined in Section 16.01.

“Termination Assistance Services” is defined in Section 15.04(a).

“Territories” means the territories in which Bottler is authorized to distribute products of TCCC in accordance with Bottler’s Comprehensive Beverage Agreement with TCCC.  

“Third-Party Services Contracts” means contracts between Bottler and Bottler Third-Party Contractors relating to the Bottler Third-Party Contractors’ performance of services that complement the Services.

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“Vendor” is defined in the recitals.

“Vendor Software” means the portion of CONA Software that is licensed by CONA from Vendors.

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Appendix 2

Security Practices

 

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Attachment 1

 

CONA Data Classification and Encryption Policy

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[***]

 

[***]

 

[***]

 

[***]

 

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Attachment 2

TERMS AND CONDITIONS OF SERVICE FOR SINGLE SIGN-ON CAPABILITY

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Appendix 3

CONA Hosting Security Guidelines

 

 

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Appendix 4

Vendor Software

 

CONA will be financially responsible to obtain the right to use, operate or to have access to (third party) software as set forth below to provide the Services to Bottler, unless it is stated below that Bottler will be financially responsible. The cost of obtaining any such rights will be treated in accordance with Article 10. Bottler shall have the responsibility, including the financial responsibility, to obtain the right to use, operate or to have access to any (third party) software or equipment not included in the Vendor Software described below.

 

CONA third party software

 

 

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Appendix 5

 

Costs and Fees

I.            DSD Functionality

(a)Each party hereto will bear its own expenses associated with the deployment of the CONA DSD functionality in Bottler’s operations (see details in Exhibit C).

(b)CONA shall charge Bottler fees (the “Service Fees”) with regard to the CONA DSD functionality as follows:

(i)The Service Fees for any Phase 1(a) Territories will be (A) $[***], multiplied by (B) the Phase 1(a) Cases in such Phase 1(a) Territory divided by twelve, until the earlier of for Phase 1(a) Cases in each Phase 1(a) Territory (I) the tenth anniversary of the date on which Bottler acquired [***] such Phase 1(a) Territory, or (II) the date on which Bottler has paid its pro rata share of the expenses incurred by CCR in connection with CONA startup (i.e., based on the Bottler’s percentage interest in CONA) (the payment terms for Phase 1(a) Territory Service Fees are described in more detail in the Financial Matters Agreement, dated April 1, 2016, by and among the CONA members (the “Financial Matters Agreement”)) (each such period, a “Recovery Period”).  From and after the end of each Recovery Period, the Service Fees for cases distributed in the applicable Phase 1(a) Territory will be the amount determined under Section I.(b)(iv) below.

(ii)The Service Fees for each of Bottler’s Territories (other than the Phase 1(a) Territories and the Legacy Territories), or portion thereof, that either use the CONA System upon acquisition by Bottler or that subsequently convert to the CONA System will be, at the date of such acquisition and/or subsequent conversion, $[***], multiplied by the number of physical cases of Beverages distributed in such Territory (or portion thereof) during the related calendar month, until the Steady State Date (DSD).  From and after the Steady State Date (DSD), the Service Fees for cases of Beverages distributed in Bottler’s Territories (other than the Phase 1(a) Territories and the Legacy Territories) will be the amount determined under Section I.(b)(iv) below.

(iii)The Service Fees for any Legacy Territories that have converted to the CONA System will be $[***], multiplied by the number of physical cases of Beverages distributed in such Legacy Territory (or portion thereof) during the related calendar month, until the Steady State Date (DSD).  From and after the Steady State Date (DSD), the Service Fees for cases distributed in the Legacy Territories will be the amount determined under Section I.(b)(iv) below.

(iv)From and after the Steady State Date (DSD) (and except for the Service Fees payable during each Recovery Period as described in Section I.(b)(i) above), the Service Fees will be an amount per physical case of Beverages equal to the aggregate costs incurred by CONA to maintain and operate the CONA System and provide the Services (for DSD functionality), divided by the total number of standard physical cases of Beverages distributed by all of the members of CONA during the related calendar month (except as provided in Section I(b)(i) with respect to Phase 1(a) Cases during the Recovery Periods).  Such amount will be determined by the Board of Directors of CONA in accordance with the provisions of the CONA LLC Agreement. CONA shall charge, and Bottler agrees to pay, the Service Fees under this Section I.(b)(iv) even if Bottler is not using the CONA System for all or any portion of its operations in its Territories.

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II.           Manufacturing Functionality

(i)Capital investments to develop the manufacturing functionality shall be allocated among the manufacturing member bottlers of CONA according to each such member’s pro rata share as reflected in Schedule II to the CONA LLC Agreement, which may be updated or amended from time to time;

(ii)Each party hereto will bear its own expenses associated with deployment in Bottler’s manufacturing facilities; and

(iii)Operating start-up costs shall be allocated among CONA manufacturing members according to each such member’s pro rata share as reflected in Schedule II to the CONA LLC Agreement, which may be updated or amended from time to time.

(i)Until the Steady State Date (Manufacturing), the Service Fees applicable to Bottler’s use of the CONA System (manufacturing functionality) for any Territory will be $[***] multiplied by the number of physical cases of Beverages manufactured by Bottler in such Territory (or portion thereof) during the related calendar month; and

(ii)From and after the Steady State Date (Manufacturing), the Service Fees applicable to the CONA manufacturing functionality will be an amount (per physical case of Beverages manufactured in the territory) equal to the aggregate costs incurred by CONA to maintain and operate the CONA System and provide the Services (for the manufacturing functionality), divided by the total number of physical cases of Beverages manufactured by all of the manufacturing members of CONA during the related calendar month.  Such amount will be determined by the Board of Directors of CONA in accordance with the provisions of the CONA LLC Agreement.

III.          Other Provisions Related to Costs and Fees

On an annual basis, CONA will perform an analysis of the aggregate costs incurred by CONA to maintain and operate the CONA System and provide the Services and any Additional Services to determine the percentage of total costs attributable to (1) third-party software (including software licenses, subscriptions, software as a service, or by whatever name referred to) and (2) services, including, but not limited to, data processing services, software maintenance services, information services, and all other categories of services as may be necessary.  CONA will provide this percentage to Bottler annually upon completion of the analysis.  CONA will collect and remit tax on the taxable percentage related to the taxable items in states where CONA has a legal obligation to collect and remit sales and use tax. If CONA does not charge the applicable sales tax, Bottler is responsible to determine whether Bottler owes use taxes on such charges based on the percentage provided.

Except as provided in this Master Agreement and the Services Exhibits (including the exhibits and attachments hereto and thereto), each party will bear its own expenses in connection with the provision and receipt of the Services. Unless otherwise provided in the applicable Services Exhibit, all invoices and payments for Service Fees will be made in U.S. dollars.

Any amendments or waivers to this Appendix 5 will require the approval of the Board of Directors of CONA.

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Appendix 6

 

Bottler’s Phase 1(a) Territories and Phase 1(a) Cases

 

 

 

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Appendix 7

 

Distribution Territories Projected to be on CONA to Reach Steady State Date (DSD)

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Exhibit 10.72

 

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETED ASTERISKS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

 

AMENDMENT TO COMPREHENSIVE BEVERAGE AGREEMENTS

 

This Amendment to Comprehensive Beverage Agreement (this “Amendment”) is entered into on October 2, 2017 (the “Effective Date”), by and between The Coca-Cola Company, a Delaware corporation (“Company”), Coca-Cola Refreshments USA, Inc., a Delaware corporation and a wholly owned subsidiary of Company (“CCR”), Coca-Cola Bottling Co. Consolidated, a Delaware corporation (“CCBCC”), Piedmont Coca-Cola Bottling Partnership, a Delaware general partnership (“Piedmont”), and CCBC of Wilmington, Inc., a Delaware corporation (“CCBC Wilmington”). Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the CBAs (as hereinafter defined).

RECITALS

 

WHEREAS, Company, CCR and CCBCC are parties to that certain Comprehensive Beverage Agreement Form EPB First-Line and Sub-Bottling (as amended hereby and from time to time hereafter, the “CCBCC CBA”), having an effective date of March 31, 2017, as amended by that certain First Amendment to Comprehensive Beverage Agreement dated April 28, 2017;

WHEREAS, Company and Piedmont are parties to (a) that certain Comprehensive Beverage Agreement Form EPB First-Line (as amended hereby and from time to time hereafter, the “Piedmont CBA”), having an effective date of March 31, 2017, and (b) that certain Comprehensive Beverage Agreement Form EPB First-Line (as amended hereby and from time to time hereafter, the “Marion CBA”), having an effective date of March 31, 2017;

WHEREAS, Company and CCBC Wilmington are parties to that certain Comprehensive Beverage Agreement Form EPB First-Line (as amended hereby and from time to time hereafter, the “CCBC Wilmington CBA” and, together with the CCBCC CBA, the Piedmont CBA and the Marion CBA, each a “CBA” and collectively the “CBAs”), having an effective date of March 31, 2017; and

WHEREAS, Company, CCR, CCBCC, Piedmont and CCBC Wilmington, as applicable, now wish to amend the CBAs as set forth herein.

NOW, THEREFORE, in consideration of these promises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.The parties hereto hereby amend Exhibit A (Covered Beverages) to each CBA by adding the following to each such Exhibit: “Coca-Cola Zero Sugar”.

2.Company, CCR and CCBCC hereby amend Exhibit C-1 (First-Line Territory) to the CCBCC CBA by deleting the territory set forth on Attachment A hereto from such Exhibit.

3.Company, CCR and CCBCC hereby further amend Exhibit C-1 (First-Line Territory) to the CCBCC CBA by adding the territory set forth on Attachment B hereto to such Exhibit.

 

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4.Company, CCR and CCBCC hereby amend Exhibit C-2 (Sub-Bottling Territory) to the CCBCC CBA by adding the territory set forth on Attachment C hereto to such Exhibit.  

5.Company and Piedmont hereby amend Exhibit C (First-Line Territory) to the Piedmont CBA by deleting the territory set forth on Attachment D hereto from such Exhibit.

6.Company and Piedmont hereby further amend Exhibit C (First-Line Territory) to the Piedmont CBA by adding the territory set forth on Attachment E hereto to such Exhibit.

7.The parties hereto hereby amend Schedule 2.17.2 (Participating Bottlers) to each CBA by deleting such Schedules in their entirety and replacing each such Schedule with the Schedule 2.17.2 set forth on Attachment F hereto.

8.Company, CCR and CCBCC hereby amend Schedule 3.2 (Sub-Bottling Payments) to the CCBCC CBA by deleting the second paragraph of such Schedule in its entirety and replacing it with the following:

Until such time as Company and Bottler may amend this Schedule 3.2 in accordance with the final paragraph hereof,

(a) the amount of the Sub-Bottling Payment for the Indianapolis/Bloomington/Columbus/Mansfield Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-A corresponding to the [***];  [Note: The fixed quarterly deduction for the Indianapolis/Bloomington/Columbus/Mansfield Subterritory included on the Effective Date is a provisional amount (“Provisional Phase 2 Quarterly Deduction”) based on CCR’s most recently available financial information at the time of entering into this Agreement. CCR will provide within 120 days of the Effective Date an updated amount based on certain financial information as of the Effective Date and as of the most recent quarter ending prior to the Effective Date (“Updated Phase 2 Quarterly Deduction”). Bottler will have 120 days to review and respond to the Updated Phase 2 Quarterly Deduction and the parties will have 30 days after Bottler responds to agree on the Updated Phase 2 Quarterly Deduction. Any Sub-Bottling Payments due for such Subterritory before the parties agree on the Updated Phase 2 Quarterly Deduction will be calculated in accordance with the Provisional Phase 2 Quarterly Deduction.]

(b) except as set forth in clauses (e), (f), (g), (h) and (i) below, the amount of the Sub-Bottling Payment for each portion of the Existing Sub-Bottling Territory (as hereinafter defined) shall continue to be calculated in the same manner in which such Sub-Bottling Payment was calculated immediately prior to the execution and delivery of this Agreement;

- 2 -

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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(c) the amount of the Sub-Bottling Payment for the Akron/Elyria/Toledo/Willoughby/Youngstown Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-B corresponding to the [***]  [Note: The fixed quarterly deduction for the Akron/Elyria/Toledo/Willoughby/Youngstown Subterritory included on the “Effective Date” as defined in the First Amendment to this Agreement (the “First CBA Amendment”) is a provisional amount (“Provisional Phase 3 Quarterly Deduction”) based on CCR’s most recently available financial information at the time of entering into such First CBA Amendment. CCR will provide within 120 days of such Effective Date an updated amount based on certain financial information as of such Effective Date and as of the most recent quarter ending prior to such Effective Date (“Updated Phase 3 Quarterly Deduction”). Bottler will have 120 days to review and respond to the Updated Phase 3 Quarterly Deduction and the parties will have 30 days after Bottler responds to agree on the Updated Phase 3 Quarterly Deduction. Any Sub‑Bottling Payments due for such Subterritory before the parties agree on the Updated Phase 3 Quarterly Deduction will be calculated in accordance with the Provisional Phase 3 Quarterly Deduction.];

(d) the amount of the Sub-Bottling Payment for the Memphis Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-C corresponding to the [***]  [Note: The fixed quarterly deduction for the Memphis Subterritory included on the “Effective Date” as defined in the Second Amendment to this Agreement (the “Second CBA Amendment”) is a provisional amount (“Provisional Memphis Quarterly Deduction”) based on CCR’s most recently available financial information at the time of entering into such Second CBA Amendment. CCR will provide within 120 days of such Effective Date an updated amount based on certain financial information as of such Effective Date and as of the most recent quarter ending prior to such Effective Date (“Updated Memphis Quarterly Deduction”). Bottler will have 120 days to review and respond to the Updated Memphis Quarterly Deduction and the parties will have 30 days after Bottler responds to agree on the Updated Memphis Quarterly Deduction. Any Sub‑Bottling Payments due for such Subterritory before the parties agree on the Updated Memphis Quarterly Deduction will be calculated in accordance with the Provisional Memphis Quarterly Deduction.];

(e) the amount of the Sub-Bottling Payment for the Johnson City/Morristown Subterritory identified on Exhibit C-2 will be calculated for

- 3 -

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-D corresponding to the [***];

(f) the amount of the Sub-Bottling Payment for the Knoxville Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-E corresponding to the [***];

(g) the amount of the Sub-Bottling Payment for the Cleveland/Cookeville Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-F corresponding to the [***];

(h) the amount of the Sub-Bottling Payment for the Louisville/Evansville Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-G corresponding to the [***]; and

(i) the amount of the Sub-Bottling Payment for the Paducah/Pikeville Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-H corresponding to the [***].

9.Company, CCR and CCBCC hereby further amend Schedule 3.2 (Sub-Bottling Payments) to the CCBCC CBA by adding the following note to the end of such schedule:

[Note: Schedule 3.2.1-B included on the “Effective Date” as defined in the First CBA Amendment is a provisional table (“Provisional Phase 3 Table”) based on CCR’s most recently available financial information at the time of entering into such First CBA

- 4 -

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Amendment, and Schedule 3.2.1-C included on the “Effective Date” of the Second CBA Amendment is a provisional table (“Provisional Memphis Table” and, together with the Provisional Phase 3 Table, each a “Provisional Table”). CCR will provide (a) within 120 days of the Effective Date of the First CBA Amendment an updated table based on certain financial information as of such Effective Date and as of the most recent quarter ending prior to such Effective Date (“Updated Phase 3 Table”), and (b) within 120 days of the Effective Date of the Second CBA Amendment an updated table based on certain financial information as of such Effective Date and as of the most recent quarter ending prior to such Effective Date (“Updated Memphis Table” and, together with the Updated Phase 3 Table, each an “Updated Table”). Bottler will have 120 days to review and respond to an Updated Table and the parties will have 30 days after Bottler responds to agree on such Updated Table. Any Sub-Bottling Payments due before the parties agree on an Updated Table will be calculated in accordance with the applicable Provisional Table.]

10.Company, CCR and CCBCC hereby further amend the CCBCC CBA by renaming existing Schedule 3.2.1 “Schedule 3.2.1-A” wherever such phrase was used.

11.Company, CCR and CCBCC hereby further amend the CCBCC CBA by adding the Schedules attached hereto as Attachments G, H, I, J, K and L as new Schedules 3.2.1-C, 3.2.1‑D, 3.2.1-E, 3.2.1-F, 3.2.1-G and 3.2.1-H to the CCBCC CBA.

12.Other than as expressly amended by this Amendment, the CBAs will continue in effect in accordance with their respective terms.

13.This Amendment shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to principles of conflict of laws.

14.This Amendment may be signed in counterparts, which together shall constitute one agreement.

[Signature Page Follows]

 

- 5 -

 

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IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their duly authorized representatives as of the date first written above.

 

THE COCA-COLA COMPANY

 

 

 

 

COCA-COLA REFRESHMENTS USA, INC.

 

 

 

 

COCA-COLA BOTTLING CO. CONSOLIDATED

 

 

 

 

PIEDMONT COCA-COLA BOTTLING PARTNERSHIP

 

By: Coca-Cola Bottling Co. Consolidated,

its manager

 

 

 

 

CCBC OF WILMINGTON, INC.

 

 

 

 

Signature Page to Amendment to Comprehensive Beverage Agreements

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ATTACHMENT A

 

Albany, GA territory:

(From 1904 contract)

The Central of Georgia Railway, Albany to and including Americus. Central of Georgia Railway from Albany to Alabama State line. The Central of Georgie Railway from Smithville to and including Georgetown. The Central of Georgia Railway from Cuthbert Junction to Alabama State line. The Seaboard Air Line Railway from Albany to and not including Richland. Seaboard Air Line, Plains to Americus. The Albany and Northern Railway from Albany to and including Cordele. The Atlantic Coast Line Railway from Albany to but not including Thomasville. The Atlantic Coast Line Railway from Cairo to Alabama State line. The Atlantic Coast Line Railway from Climax to Florida State line. The Atlantic Coats Line Railway from Albany to Willacoochee. The Georgia Northern Railway from Albany to, but not including Pidcock. The Tifton, Thomasville & Gulf Railway from Tifton to but not including Thomasville. The Tifton and Northern Railway Tifton to but not including Abbeville. The Georgia Southern & Florida Railway from Cordele to but not including Sparks.

 

(Deleted 1931)

Seaboard Air Line Railway from and including Parrott, Ga., to and not including Richland, Ga.

 

(Added 1931)

The town of Eufaula and all territory in the State of Georgia which may lie within fifteen miles of Eufaula, together with all territory in the State of Alabama adjacent to Eufaula beginning at a point on the Chattahoochee River fifteen miles north of Eufaula and running to but not including the town of Lugo, Ala., to a point half way between Eufaula and White Oak Springs on the Central of Georgia Ry., from thence to a point fifteen miles south of Eufaula on the Chattahoochee River.

 

(Added 1938)

Beginning at but not including Box Springs; thence to but not including Cusseta; thence to but not including Plains; thence to and including Ellaville; thence to but not including Rupert; thence to Box Springs, Georgia, the point of beginning.

 

(Added 1939)

Pine Park, Georgia

 

(Deleted 1939)

That portion of Grady County, Georgia south and east of a line beginning at a point on the eastern boundary of Grady County one and one-half mile north of present Georgia State Highway No. 3 and running southwestwardly, parallel to and one and one-half mile from said highway, to the Georgia-Florida State line.

 

(Added 1968)

That territory in the State of Georgia included within the following boundaries, to-wit: Beginning at but not including Cusseta and running thence in a straight line to where the Seaboard Air Line Railroad from Richland to Americus leaves Webster County; thence to and including Parrott; thence on a straight line toward Eufaula, Alabama to a point 15 miles from Eufaula; thence Northwardly and Westwardly along a circle of 15 miles radius from Eufaula to the Chattahoochee River; thence North along the East bank of the Chattahoochee River to a point due West of Cusseta; thence due East to but not including Cusseta, the point of beginning.

 

 

Attachment A-1

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Columbus, GA territory:

All that section of country included within a boundary line beginning at and including Cusseta, Ala., to but not including Buffalo, Ala., thence to the northeast corner of Tallapoosa County, Ala., thence to west along said county line to and including Hollins, Ala., to and including Gabbett, Ala., to and including Guerryton, Ala., to but not including Cochran, Ala., to and including Eufaula, Ala., to and including Parrot, Ga., to and including Ellaville, Ga., to and including Butler, Ga., to and including Neal, Ga., to and including Greenville, Ga., thence to but not including Odessadale, Ga., thence to and including Durand, Ga., thence to but not including Whitesville, Ga., thence to but not including Blanton, Ala., thence to and including Cusseta, Ala., the point of beginning.

 

(All references above as same existed on October 1, 1915.)

 

LESS on July 2, 1917:

All territory included within the following boundary lines: commencing at but not including Blanton, Ala.; to and including Tip Top on the Central of Georgia railroad; thence to and including Cleola on the Southern railroad; thence to and including Beall on the A B & A railroad; thence to but not including Ypsailanti; thence to a point on the Flint River where a straight line from Butler to Neal crosses same; from this point on Flint River to and including Neal, Ga., to and including Greenville, Ga., thence to but not including Odessadale, Ga., thence to and including Durand, Ga., thence to but not including Whitesville, Ga., thence to the point of beginning.

 

LESS on November 1, 1917:

Eufaula, Ala., and all the territory belonging to the undersigned within fifteen miles of Eufaula, Ala., in both Alabama and Georgia.

 

LESS on August 15, 1924:

Beginning at and including Box Springs; thence to and including Repert; thence to and including Butler; thence to where a straight line from Butler to Neal crosses the Flint River; thence to, but not including Cleola; thence to and including the point of beginning, and all territory within the above described line.

 

LESS on February 26, 1932:

Beginning at but not including Hannon, Ala.; thence to and including Franklin, Ala.; thence north and east along the Macon and Lee County line to the southwest corner of Chambers County; thence north along said county line to where the Tallapoosa River crosses a straight line from Vichie, Ala., to Buffalo, Ala.; thence to but not including Buffalo, Ala.; thence to and including Cusseta, Ala.; thence to and including Beulah, Ala.; thence to and including Salem, Ala.; thence to and including Marvyn, Ala.; thence to but not including Warrior Stand, Ala.; thence to but not including the point of beginning, including all territory within said line.

 

LESS on November 19, 1936:

Beginning at but not including Franklin or Gabbett, Alabama, thence due north to the northwest corner of Macon County, thence east along the Macon County and Tallapoosa County Line to the intersection of Lee County, thence along the Lee County and Tallapoosa County Line to the intersection of the Chambers County line, thence along the Tallapoosa County and Chambers County line to the Tallapoosa River, thence southwest along the east bank of the Tallapoosa River to the mouth of the Sougahatchee Creek, thence to the point of beginning.

 

LESS on November 19, 1936:

Beginning at and including the town of Vichie, Ala.; thence west on a straight line to and including Hollins, Ala.; thence southeast along a straight line drawn between Hollins, Ala., and Franklin, Ala., from Hollins to a point where said line joins the Tallapoosa River; thence north and east along the west bank of

Attachment A-2

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the Tallapoosa River to a point where said river intersects a line drawn from Buffalo, Ala., to Vichie; thence along said line to Vichie, Ala., the point of beginning.

 

LESS on January 1, 1938:

Beginning at but not including Box Springs, thence to but not including Cusseta, thence to but not including Plains, thence to and including Ellaville, thence to but not including Rupert, thence to Box Springs, Ga., the point of beginning.

 

LESS on October 25, 1938:

That territory in the State of Georgia included within the following boundaries, to-wit: Beginning at but not including Cusseta and running thence in a straight line to where the Seaboard Air Line Railroad from Richland to Americus leaves Webster County; thence to and including Parrott; thence on a straight line toward Eufaula, Alabama to a point 15 miles from Eufaula; thence northwardly and westwardly along a circle of 15 miles radius from Eufaula to the Chattahoochee River; thence north along the east bank of the Chattahoochee River to a point due west of Cusseta; thence due east to but not including Cusseta, the point of beginning.

 

 

Panama City, FL territory:

All of Bay County, Florida.

 

That portion of Washington County, Florida lying East and North of a line running from the Northwest corner of Holmes County to but not including Chipley; thence Southwestwardly to but not including Ebro in the Southwest corner of Washington County.

 

That portion of Gulf County, Florida lying North of a line running due East and West across the County from a point where the dividing line between Bay and Gulf Counties touches the Gulf of Mexico to the Apalachicola River.

 

Added December 31, 1976:

All of Liberty County, Florida.

 

All of Gadsden County, Florida, except the town of Chattahoochee, Florida, and all points on U. S. Highway #90 from the Western City limits of Chattahoochee, Florida to the Western boundary of Gadsden County.

 

 

Mobile, AL territory:

1 That portion of the States of Alabama and Mississippi included within the

2 following boundaries to-wit: Beginning at the Southwest corner of Escambia

3 County, Alabama; thence North along the West boundary of Escambia County

4 to the Northwest corner of Section 6 TIN R5E; thence Eastwardly along the

5 Northern boundary of TIN R5E to its intersection with a straight line extending

6 from the point of intersection of the L & N Railroad and the Frisco Railroad,

7 in the town of Atmore, to the Northwest corner of Escambia County; thence

8 Northwest along said line in a straight line to the Northwest corner of Escambia

9 County; thence Westwardly along the Northern bank of Little River to the

10 Alabama River; thence Northwardly along the Eastern bank of the Alabama

11 River to a point where said River crosses the East-West dividing line between

12 Clarke and Monroe Counties; thence North along the Monroe-Clarke County

13 Line to the intersection of the southern boundary of Wilcox County Line; thence

Attachment A-3

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14 West and North along the Clarke-Wilcox County Line to the intersection of

15 Marengo County Line; thence Westwardly along the Marengo-Clarke County

16 Line to the 88th Meridian of Longitude; thence running in a straight line in a

17 Southwestwardly direction to the point of intersection of the East bank of

18 Tombigbee River with the Washington-Choctaw County Line; thence Westwardly

19 along the Washington-Choctaw County Line to the Mississippi-Alabama State

20 Line; thence South along the Mississippi-Alabama State Line to a point where

21 the Wayne-Green County, Mississippi Line intersects said State Line; thence

22 running West along the Wayne-Green County, Mississippi Line, including the

23 town of State Line (as the same existed on April 13, 1939) to the Northeast

24 corner of Perry County; thence Southwardly along the Perry-Green County

25 Line to the Southeast corner of Section 36 T4N R9W; thence Westwardly along

26 the Southern boundaries of Sections 36, 35, 34, 33, 32 and 31 T4N R9W to the

27 Northeast corner of Section 1 T3N R10W; thence Southwardly along Eastern

28 boundaries of Sections 1, 12, 13 and 24 T3N R10W to the Southeast corner of

29 Section 24 T3N R10W; thence Westwardly along Southern boundaries of Sections

30 24, 23 and 22 to the Southwest corner of Section 22 T3N R10W; thence South-

31 wardly along the Western boundaries of Sections 27 and 34 T3N R10W and the

32 Western boundaries of Sections 3, 10, 15, 22, 27 and 34 T2N R10W and the

33 Western boundaries of Sections 3, 10, 15, 22, 27 and 34 T1N R10W to the St.

34 Stephens base line; thence West along said St. Stephens base line to the North-

35 west corner of Section 4 T1S R10W; thence Southwardly along the Western

36 boundaries of Sections 4, 9, 16, 21, 28 and 33 T1S R10W to the Perry-Stone

37 County Line; thence Westwardly along the Northern boundary of Stone County

38 to a point where the West boundary of Range 10 West crosses the North boundary

39 of Stone County, Mississippi, and running South along said West boundary of

40 Range 10 West to the North boundary of Harrison County, Mississippi; thence

41 East along the North boundaries of Sections 30 and 29 T45 R10W to the Northwest

42 corner of Section 28 T4S R10W; thence South along the West boundaries of

43 Sections 28 and 33 T4S R10W and continuing South along the West boundaries of

44 Sections 4, 9, 16, 21, 28 and 33 T5S R10W to the Northwest corner of Section

45 4 T6S Rl0W; thence East along the North boundary of Section 4 T6S R10W to the

46 Northwest corner of Section 3 T6S R10W; thence South along the West boundaries

47 of Sections 3 and 10 T6S R10W to the Northwest corner of Section 15 T6S R10W;

48 thence East along the North boundary of Section 15 T6S R10W to the Northwest

49 corner of Section 14 T6S R10W; thence South along the West boundaries of Sections

50 14, 23, 26 and 35 T6S R10W and continuing South along the West Boundaries of

51 Sections 2, 11, 14, and 23 T7S R10W to the North boundary of the South 1/2 of

52 said Section 23 T7S R10W to the North boundary of the South

53 1/2 of said Section 23 T7S R10W to the East boundary of West 1/2 of the

54 West 1/2 of the East 1/2 of Section 23 T7S R10W (said point lying 660 feet East

55 of the East boundary of the West 1/2 of said Section 23 T7S R10W); thence

56 South along the East boundaries of the West 1/2 of the West 1/2 of the East

57 1/2 of Sections 23, 26 and 35 T7S R10W (said line running parallel to and

58 660 feet East of the East boundaries of the West 1/2 of said Sections 23,

59 26 and 35 T7S R10W) and extended to include the inland waters and islands

60 of and a projection thereof to the Gulf of Mexico; thence East along the

61 South boundaries of Harrison and Jackson Counties, Mississippi and con-

62 tinuing East along the South boundaries of Mobile and Baldwin Counties,

63 Alabama to the Southeast corner of Baldwin County; thence North along the

64 East boundary of Baldwin County to the Southwest corner of Escambia County,

Attachment A-4

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65 Alabama, the point of beginning.

 

 

Laurel, MS territory:

IN THE STATE OF MISSISSIPPI:

That portion of the State of Mississippi included within the following boundaries to-wit:

Beginning at a point on the Wayne-Greene County line which is intersected by the Range Line between Ranges 7 and 8 West and running Northwardly along said Range Line between Ranges 7 and 8 West to the Northeast corner of Section 1 Township 7 North Range 8 West; thence Northwestwardly in a straight line to the Northwest corner of Section 4 T8N R9W; thence North along the Western boundary of Section 33 T9N R9W to the Northwest corner of said Section 33 T9N R9W; thence Westwardly along the Northern boundaries of Sections 32 and 31 T9N R9W and the Northern boundaries of Sections 36 and 35 T9N R10W to the Northwest corner of Section 35 T9N R10W; thence Northwardly along the Eastern boundaries of Sections 27 and 22 T9N Rl0W to the Northeast corner of Section 22 T9N Rl0W; thence Westwardly along the Northern boundaries of Sections 22, 21, 20 and 19 T9N Rl0W to the Northwest corner of Section 19 T9N Rl0W; thence Northwardly along the Eastern boundary of Section 13 T9N R11Wto the Northeast corner of Section 13 T9N R11W; thence Northwestwardly in a straight line to the Northwest corner of Section 12 T9N R11W; thence Northwestwardly in a straight line to the Northwest corner of Section 7 T2N R11E; thence Westwardly in a straight line along the Northern boundaries of Sections 12, 11, 10, 9 and 8 T2N R10E to the Northwest corner of Section 8 T2N R10E; thence Northwardly along the Eastern boundary of Section 6 T2N R10E and continuing Northwardly along the Eastern boundary of Section 31 T3N R10E to the Northeast corner of said Section 31 T3N R10E; thence Westwardly along the Northern boundary of Section 31 T3N R10E and the Northern boundaries of Sections 36, 35, 34, 33, 32 and 31 T3N R9E and the Northern boundaries of Sections 36, 35, 34, 33, 32, and 31 T3N R8E and the Northern boundaries of Sections 36, 35, 34, 33, 32 and 31 T3N R7E and the Northern boundaries of Sections 36 and 35 T3N R6E to the point of intersection of a straight line drawn from a point on the Smith-Scott County line that lies due South of a point on the Y. & M. V. Railroad half-way between the towns of Raworth and Forest to the Northeast corner of Simpson County; thence along said straight line to the Northeast corner of Simpson County; thence Southwardly along the Smith-Simpson County line to the Southeast corner of Simpson County; thence East along the Covington- Smith County line to the Eastern boundary of Section 35 T10N R15W; thence Southwardly along the Western boundary of Section 36 T10N R15W and the Western boundaries of Sections 1, 12, 13, 24, 25 and 36 T9N R15W to the Southwest corner of Section 36 T9N R15W; thence Eastwardly along the Southern boundary of Section 36 T9N R15W and the Southern boundaries of Sections 31, 32 and 33 T9N R14W to the Northeast corner of Section 4 T8N R14W; thence Southwardly along the Covington-Jones County line to the southwest corner of Section 34 T8N R14W; thence Eastwardly along the Northern boundaries of Sections 3, 2 and 1 T7N R14W and the Northern boundaries of Sections 6 and 5 T7N R13W to the Northeast corner of Section 5 T7N R13W; thence Southwardly along the Western boundaries of Sections 4, 9, 16 and 21 T7N R13W to the Southwest corner of Section 21 T7N R13W; thence Eastwardly along the Southern boundaries of Sections 21, 22, 23 and 24 T7N R13W to the Southeast corner of Section 24 T7N R13W ; thence Southwardly along the Western boundaries of Sections 30 and 31 T7N R12W to the Southwest corner of Section 31 T7N R12W; thence Eastwardly along the Southern boundaries of Sections 31, 32, 33 and 34 T7N R12W to the Southeast corner of Section 34 T7N R12W; thence Southwardly along the Western boundaries of Sections 2, 11, 14, 23, 26 and 35 T6N R12W to the Forrest-Jones County line; thence Eastwardly along the Forrest-Jones County line and the Perry-Jones County line to the Northwest corner of Section 5 T5N Rl0W; thence Southwardly along the Western boundaries of Sections 5, 8, 17, 20, 29 and 32 T5N R10W to the Southwest corner of Section 32 T5N R10W; thence Eastwardly along the Southern boundaries of Sections 32 and 33 T5N R10W to the Southeast corner of Section 33 T5N R10W ; thence Southwardly along the Western boundaries of Sections 3, 10, 15, 22, 27 and 34 T4N R10W and the Western boundaries of Sections 3, 10, 15, and 22 T3N R10W to the Southwest corner of Section 22 T3N R10W; thence Eastwardly along the Southern boundaries of Sections 22, 23 and 24 T3N

Attachment A-5

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R10W to the Southeast corner of Section 24 T3N R10W; thence Northwardly along the Eastern boundaries of Sections 24, 13, 12 and 1 T3N R10W to the Northeast corner of Section 1 T3N R10W; thence Eastwardly along the Southern boundaries of Sections 31, 32, 33, 34, 35 and 36 T4N R9W to the Southeast corner of Section 36 T4N R9W, said point lying on the Perry-Greene County Line; thence Northwardly along the Perry-Greene County line to the Northeast corner of Perry County; thence Eastwardly along the Greene-Wayne County line to the Range Line between Ranges 7 and 8 West, said point of beginning.

 

 

Florence, AL territory:

IN THE STATE OF ALABAMA:

“In the Cities of Florence and Sheffield, Alabama, and all points in the State of Alabama, and within ten (10) miles of the line of railroad running from Chattanooga, Tennessee, to Memphis, Tennessee, from and including the town of Leighton, Alabama, west to the Mississippi State Line; and in all of the territory in the State of Tennessee within fifty (50) miles of the said City of Sheffield, Alabama, except such territory as may be within fifty (50) miles of Huntsville, Alabama; Nashville, Tennessee, Clarksville, Tennessee; or Jackson, Tennessee (as the Jackson, Tennessee fifty mile radius may be more clearly defined in the Agreement, dated June 1, 1967, by and between Florence Coca-Cola Bottling Company, Inc. and Corinth Coca-Cola Bottling Company), providing that the territory so described does not encroach upon nor conflict with the territory controlled or operated by any other Coca-Cola bottling plant.

“All points in Lauderdale County, Alabama, are included in this contract and all points in Tishomingo County, Mississippi, are specifically excluded.”

(All points referred to are as they existed May 2, 1946.)

 

 

Attachment A-6

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Attachment A-7

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ATTACHMENT B

 

Little Rock/South Arkansas Subterritory:

 

Attachment B-1

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Attachment B-2

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Attachment B-3

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Attachment B-4

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Attachment B-5

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Attachment B-6

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Attachment B-7

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Attachment B-8

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ATTACHMENT C

 

Memphis Subterritory:

 

Attachment C-1

---

 

 

 

Attachment C-2

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ATTACHMENT D

 

IN THE STATE OF GEORGIA:

That portion of the State of Georgia described as follows:

All of Hart County, all of Franklin County, except the South West Corner, bounded by a line drawn from Carlan in Banks to Aid, and from Aid running West of Bold Springs to the corner of Banks and Madison Counties; That part of Madison County lying North and East of lines drawn from Fort Lamar to the Northern limits of the town of Danielsville, and from the Eastern Limits of Danielsville to Dye in Elbert County, and that part of Elbert County lying North of lines drawn from Dye to a point on the Southern Railroad midway between Goss and Elberton and from this point to a point on the Savannah River, this last line running North of Hulme and Gaines and South of Critic.

(All points referred to are as the same existed on July 11, 1955.)

 

 

Attachment D-1

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ATTACHMENT E

 

Attachment E-1

---

 

 

 

 

 

 

 

Attachment E-2

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ATTACHMENT F

 

SCHEDULE 2.17.2

Participating Bottlers

As of the Effective Date:

 

Added After the Effective Date:

 

 

 

Attachment F-1

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ATTACHMENT G

 

SCHEDULE 3.2.1-C

 

Memphis Subterritory Sub-Bottling Payment Schedule

 

Attachment G-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment G-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment G-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment G-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment G-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment G-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

 

 

 

Attachment G-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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ATTACHMENT H

 

SCHEDULE 3.2.1-D

 

Johnson City/Morristown Subterritory Sub-Bottling Payment Schedule

 

Attachment H-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment H-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment H-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment H-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment H-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment H-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

 

 

 

Attachment H-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

ATTACHMENT I

 

SCHEDULE 3.2.1-E

 

Knoxville Subterritory Sub-Bottling Payment Schedule

 

Attachment I-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment I-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment I-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment I-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment I-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment I-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

 

 

 

Attachment I-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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ATTACHMENT J

 

SCHEDULE 3.2.1-F

 

Cleveland/Cookeville Subterritory Sub-Bottling Payment Schedule

 

Attachment J-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment J-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment J-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment J-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment J-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment J-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

 

 

 

Attachment J-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

ATTACHMENT K

 

SCHEDULE 3.2.1-G

 

Louisville/Evansville Subterritory Sub-Bottling Payment Schedule

 

Attachment K-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment K-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment K-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment K-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment K-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment K-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

 

 

 

Attachment K-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

ATTACHMENT L

 

SCHEDULE 3.2.1-H

 

Paducah/Pikeville Subterritory Sub-Bottling Payment Schedule

 

Attachment L-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment L-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment L-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment L-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment L-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

Attachment L-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

 

 

Attachment L-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

Exhibit 10.73

 

SECOND AMENDMENT TO REGIONAL MANUFACTURING AGREEMENT

 

This Second Amendment to Regional Manufacturing Agreement (this “Amendment”) is entered into on October 2, 2017 (the “Effective Date”), by and between The Coca‑Cola Company, a Delaware corporation (“Company”), and Coca-Cola Bottling Co. Consolidated, a Delaware corporation (“Bottler”). Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the Agreement.

RECITALS

 

WHEREAS, Company and Bottler are parties to that certain Regional Manufacturing Agreement (as amended hereby and from time to time hereafter, the “Agreement”), having an effective date of March 31, 2017, as amended by that certain First Amendment to Regional Manufacturing Agreement dated April 28, 2017; and

WHEREAS, Company and Bottler now wish to amend the Agreement as set forth herein.

NOW, THEREFORE, in consideration of these promises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.The parties hereto hereby amend Exhibit A (Regional Manufacturing Facilities) to the Agreement by deleting the following from such Exhibit: “Mobile, AL”.

2.The parties hereto hereby further amend Exhibit A (Regional Manufacturing Facilities) to the Agreement by adding the following to such Exhibit: “Memphis, TN” and “West Memphis, AR”.

3.The parties hereto hereby amend Exhibit B (Authorized Covered Beverages) to the Agreement by adding the following to such Exhibit: “Coca-Cola Zero Sugar”.

4.Other than as expressly amended by this Amendment, the Agreement will continue in effect in accordance with its terms.

5.This Amendment shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to principles of conflict of laws.

6.This Amendment may be signed in counterparts, which together shall constitute one agreement.

[Signature Page Follows]

 

 

---

 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their duly authorized representatives as of the date first written above.

 

 

 

Signature Page to Amendment to Regional Manufacturing Agreement

Exhibit 10.74

 

CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETED ASTERISKS, HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 24B-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.

 

THIRD AMENDMENT TO COMPREHENSIVE BEVERAGE AGREEMENT

 

This Third Amendment to Comprehensive Beverage Agreement (this “Amendment”) is entered into on December 26, 2017 (the “Effective Date”), by and between The Coca‑Cola Company, a Delaware corporation (“Company”), Coca-Cola Refreshments USA, Inc., a Delaware corporation and a wholly owned subsidiary of Company (“CCR”), and Coca‑Cola Bottling Co. Consolidated, a Delaware corporation (“Bottler”). Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed thereto in the CBA (as hereinafter defined).

RECITALS

 

WHEREAS, Company, CCR and Bottler are parties to that certain Comprehensive Beverage Agreement Form EPB First-Line and Sub-Bottling (as amended hereby and from time to time hereafter, the “CBA”), having an effective date of March 31, 2017, as amended April 28, 2017 and October 2, 2017; and

WHEREAS, Company, CCR and Bottler now wish to amend the CBA as set forth herein.

NOW, THEREFORE, in consideration of these promises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Company, CCR and Bottler hereby amend Schedule 3.2 (Sub-Bottling Payments) to the CBA by deleting subparagraphs (a) and (b) of the second paragraph of such Schedule in their entirety and replacing them with the following:

(a) the amount of the Sub-Bottling Payment for the Indianapolis/Bloomington/Columbus/Mansfield Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-A corresponding to the [***];

(b) except as set forth in clauses (e), (f), (g), (h), (i), (j), (k), (l), (m) and (n) below, the amount of the Sub-Bottling Payment for each portion of the Existing Sub‑Bottling Territory (as hereinafter defined) shall continue to be calculated in the same manner in which such Sub-Bottling Payment was calculated immediately prior to the execution and delivery of this Agreement;

2.Company, CCR and Bottler hereby further amend Schedule 3.2 (Sub-Bottling Payments) to the CBA by adding the following new subparagraphs (j), (k), (l), (m) and (n) at the end of the second paragraph of such Schedule:

 

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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(j) the amount of the Sub-Bottling Payment for the Richmond/ Yorktown/Easton/Salisbury Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-I corresponding to the [***];

(k) the amount of the Sub-Bottling Payment for the Alexandria/Capitol Heights/La Plata Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-J corresponding to the [***];

(l) the amount of the Sub-Bottling Payment for the Baltimore/ Cumberland/Hagerstown Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-K corresponding to the [***];

(m) the amount of the Sub-Bottling Payment for the Cincinnati/Dayton/ Lima/Portsmouth/Louisa Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-L corresponding to the [***]; and

(n) the amount of the Sub-Bottling Payment for the Anderson/Fort Wayne/Lafayette/South Bend/Terre Haute Subterritory identified on Exhibit C-2 will be calculated for each Bottler fiscal quarter by (i) multiplying Bottler’s Sub-Bottling Gross Profit in such Subterritory for such fiscal quarter by the [***] set forth in Schedule 3.2.1-M corresponding to the [***].

3.Company, CCR and Bottler hereby further amend the CBA by deleting Schedule 3.2.1-A to the CBA in its entirety and replacing it with the new Schedule 3.2.1-A attached hereto as Attachment A.

 

 

- 2 -

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

---

 

 

4.Company, CCR and Bottler hereby further amend the CBA by adding the Schedules attached hereto as Attachments B, C, D, E and F as new Schedules 3.2.1-I, 3.2.1‑J, 3.2.1-K, 3.2.1-L and 3.2.1-M to the CBA.

5.Other than as expressly amended by this Amendment, the CBA will continue in effect in accordance with its terms.

6.This Amendment shall be governed by and construed in accordance with the laws of the State of Georgia, without regard to principles of conflict of laws.

7.This Amendment may be signed in counterparts, which together shall constitute one agreement.

[Signature Page Follows]

 

 

- 3 -

---

 

IN WITNESS WHEREOF, the parties hereto have executed this Amendment by their duly authorized representatives as of the date first written above.

 

 

 

Signature Page to Amendment to Comprehensive Beverage Agreement

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ATTACHMENT A

 

SCHEDULE 3.2.1-A

 

Indianapolis/Bloomington/Columbus/Mansfield Subterritory Sub-Bottling Payment Schedule

 

Attachment A-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment A-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment A-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment A-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment A-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment A-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment A-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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ATTACHMENT B

 

SCHEDULE 3.2.1-I

 

Richmond/Yorktown/Easton/Salisbury Subterritory Sub-Bottling Payment Schedule

 

Attachment B-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment B-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment B-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment B-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment B-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment B-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment B-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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ATTACHMENT C

 

SCHEDULE 3.2.1-J

 

Alexandria/Capitol Heights/La Plata Subterritory Sub-Bottling Payment Schedule

 

Attachment C-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment C-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment C-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment C-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment C-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment C-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment C-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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ATTACHMENT D

 

SCHEDULE 3.2.1-K

 

Baltimore/ Cumberland/Hagerstown Subterritory Sub-Bottling Payment Schedule

 

Attachment D-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment D-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment D-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment D-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment D-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment D-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment D-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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ATTACHMENT E

 

SCHEDULE 3.2.1-L

 

Cincinnati/Dayton/Lima/Portsmouth/Louisa Subterritory Sub-Bottling Payment Schedule

 

Attachment E-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment E-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment E-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment E-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment E-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment E-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment E-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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ATTACHMENT F

 

SCHEDULE 3.2.1-M

 

Anderson/Fort Wayne/Lafayette/South Bend/Terre Haute Subterritory

Sub-Bottling Payment Schedule

 

Attachment F-1

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment F-2

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment F-3

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment F-4

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment F-5

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment F-6

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

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Attachment F-7

 

[***] – THIS CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT.

Exhibit 12

COCA-COLA BOTTLING CO. CONSOLIDATED

RATIO OF EARNINGS TO FIXED CHARGES

 

 

 

 

Exhibit 21

COCA-COLA BOTTLING CO. CONSOLIDATED

LISTING OF SUBSIDIARIES AS OF JANUARY 1, 2017

 

 

 

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-181345) of Coca-Cola Bottling Co. Consolidated of our report dated February 28, 2018 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

 

/s/ PricewaterhouseCoopers LLP

Charlotte, North Carolina

February 28, 2018

 

 

Exhibit 31.1

CERTIFICATION

I, J. Frank Harrison, III, certify that:

 

 

 

 

Exhibit 31.2

CERTIFICATION

I, David M. Katz, certify that:

 

 

 

 

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Coca-Cola Bottling Co. Consolidated (the “Company”) for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, and David M. Katz, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350 as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.