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63: R53 Related Party Transactions - Summary of HTML 34K
Significant Transactions between Company and The
Coca-Cola Company (Details)
64: R54 Related Party Transactions - Summary of Liability HTML 41K
to Estimated Fair Value of Contingent
Consideration (Details)
65: R55 Related Party Transactions - Summary of Rental HTML 35K
Payments Related to Leases (Details)
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Allowance for Credit Losses (Details)
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Portfolio within Condensed Consolidated Statement
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Outstanding Commodity Derivative Instruments
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Components of Net Periodic Pension Cost (Details)
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Components of Net Periodic Postretirement Benefit
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Summary of Accumulated Other Comprehensive (Loss)
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Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
iCommon Stock, par value $1.00 per share
Trading Symbol(s)
iCOKE
Name
of each exchange on which registered
iNASDAQ Global Select Market
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. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes
☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☒
As of July 22, 2022, there were i8,368,993
shares of the registrant’s Common Stock, par value $1.00 per share, and i1,004,696 shares of the registrant’s Class B Common Stock, par value $1.00 per share, outstanding.
See
accompanying notes to condensed consolidated financial statements.
5
COCA‑COLA CONSOLIDATED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. iCritical
Accounting Policies
The condensed consolidated financial statements include the accounts and the consolidated operations of Coca‑Cola Consolidated, Inc. and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the periods presented.
Each of the Company’s quarters, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar
period. The Company’s fourth quarter and fiscal year end on December 31 regardless of the day of the week on which December 31 falls. The condensed consolidated financial statements presented are:
•The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended July 1, 2022 (the “second quarter” of fiscal 2022 (“2022”)) and July 2, 2021 (the “second quarter” of fiscal 2021 (“2021”))
and the six-month periods ended July 1, 2022 (the “first half” of 2022) and July 2, 2021 (the “first half” of 2021).
•The changes in cash flows for the first half of 2022 and the first half of 2021.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the
Company’s Annual Report on Form 10-K for 2021 filed with the United States Securities and Exchange Commission (the “SEC”).
The preparation of condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
i
Critical
Accounting Estimates
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of its results of operations and financial position in the preparation of its condensed consolidated financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for 2021 under the caption “Discussion of Critical Accounting Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” a discussion of the Company’s
most critical accounting estimates, which are those the Company believes to be the most important to the portrayal of its financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Any changes in critical accounting estimates are discussed with the Audit Committee of the Company’s Board of Directors during the quarter in which a change is contemplated and prior to making such change.
2. iRelated
Party Transactions
The Coca‑Cola Company
The Company’s business consists primarily of the distribution, marketing and manufacture of nonalcoholic beverages of The Coca‑Cola Company, which is the sole owner of the formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.
On March 17, 2022, the Company entered into a stockholder conversion agreement (the “Stockholder Conversion Agreement”) with the JFH Family Limited Partnership—SW1, the Anne Lupton Carter Trust f/b/o Sue
Anne H. Wells, the JFH Family Limited Partnership—DH1 and the Anne Lupton Carter Trust f/b/o Deborah S. Harrison (collectively, the “Converting Stockholders”), pursuant to which the Company and the Converting Stockholders agreed upon the process for converting an aggregate of
6
i1,227,546
shares of the Company’s Class B Common Stock owned by the Converting Stockholders on a ione share for one share basis into shares of the Company’s Common Stock, effective as of March 17, 2022 (the “Converted Shares”). In the Stockholder Conversion Agreement, the
Company agreed to cause the Converted Shares to be registered for resale pursuant to the Company’s existing automatic shelf registration statement and the Converting Stockholders agreed to certain restrictions on their resale of the Converted Shares, including a trade volume limitation that prohibits the sale of more than i175,000 of the Converted Shares in the aggregate
during any ithree-consecutive month period. On June 21, 2022, the Company filed a prospectus supplement with the SEC pursuant to the Company’s existing automatic shelf registration statement, registering the Converted Shares for resale by the Converting Stockholders. The
Company will not receive any proceeds from any resale of the Converted Shares by the Converting Stockholders.
J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, controls i1,004,394 shares of the Company’s Class B Common Stock, which represent approximately
i71% of the total voting power of the Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis. In addition, other members of the Harrison family control shares of the Company’s Common Stock representing approximately i4%
of the total voting power of the Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis.
As of July 1, 2022, The Coca‑Cola Company owned shares of the Company’s Common Stock representing approximately i9% of the total voting power of the
Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis. The number of shares of the Company’s Common Stock currently held by The Coca‑Cola Company gives it the right to have a designee proposed by the Company for nomination to the Company’s Board of Directors in the Company’s annual proxy statement. J. Frank Harrison, III and the trustees of certain trusts established for the benefit of descendants of the late J. Frank Harrison, Jr., have agreed to vote the shares of the Company’s Class B Common Stock and Common
Stock that they control in favor of such designee. The Coca‑Cola Company does not own any shares of the Company’s Class B Common Stock.
i
The following table summarizes the significant cash transactions between the Company and The Coca‑Cola Company:
Second
Quarter
First Half
(in thousands)
2022
2021
2022
2021
Payments made by the Company to The Coca-Cola Company(1)
$
i510,571
$
i366,808
$
i930,279
$
i716,153
Payments
made by The Coca-Cola Company to the Company
i60,601
i50,325
i120,270
i80,002
(1)This
excludes acquisition related sub-bottling payments made by the Company to Coca-Cola Refreshments USA, Inc., a wholly owned subsidiary of The Coca‑Cola Company, but includes the purchase price of certain additional BODYARMOR distribution rights, each as discussed below.
/
On January 1, 2022, the Company entered into an agreement to acquire $i30.1
million of additional BODYARMOR distribution rights with an estimated useful life of i40 years.
More than i80%
of the payments made by the Company to The Coca‑Cola Company were for concentrate, syrup, sweetener and other finished goods products, which were recorded in cost of sales in the condensed consolidated statements of operations and represent the primary components of the soft drink products the Company manufactures and distributes. Payments made by the Company to The Coca‑Cola Company also included payments for marketing programs associated with large, national customers managed by The Coca‑Cola Company on behalf of the Company, which were recorded as a reduction to net sales in the condensed consolidated statements
of operations. Other payments made by the Company to The Coca‑Cola Company related to cold drink equipment parts, fees associated with the rights to distribute certain brands and other customary items.
Payments made by The Coca‑Cola Company to the Company included annual funding in connection with the Company’s agreement to support certain business initiatives developed by The Coca‑Cola Company and funding associated with the delivery of post-mix products to various customers, both of which were recorded as a reduction to cost of sales in the condensed consolidated statements of operations. 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. Payments made by The Coca‑Cola Company to the Company also included transportation services and fountain product delivery and equipment repair services performed by the Company on The Coca‑Cola Company’s equipment, all of which were recorded in net sales in the condensed consolidated statements of operations.
Coca‑Cola Refreshments USA, Inc. (“CCR”)
The Company, The Coca‑Cola Company and CCR entered into comprehensive beverage
agreements (collectively, the “CBA”), related to a multi-year series of transactions, which were completed in October 2017, through which the Company acquired and
7
exchanged distribution territories and manufacturing plants (the “System Transformation”). The CBA requires the Company to make quarterly sub-bottling payments to CCR on a continuing basis in exchange for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in certain distribution territories the
Company acquired from CCR. These sub-bottling payments are based on gross profit derived from the Company’s sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, a beverage product or certain cross-licensed brands applicable to the System Transformation (“acquisition related sub-bottling payments”).
Acquisition related sub-bottling payments to CCR were $i18.7 million
in the first half of 2022 and $i19.9 million in the first half of 2021. iThe
following table summarizes the liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future expected acquisition related sub‑bottling payments to CCR:
Current portion of acquisition related contingent consideration
$
i40,321
$
i51,518
Noncurrent
portion of acquisition related contingent consideration
i481,938
i490,587
Total
acquisition related contingent consideration
$
i522,259
$
i542,105
Southeastern
Container (“Southeastern”)
The Company is a shareholder of Southeastern, a plastic bottle manufacturing cooperative. The Company accounts for Southeastern as an equity method investment. The Company’s investment in Southeastern, which was classified as other assets in the condensed consolidated balance sheets, was $i21.8 million
as of July 1, 2022 and $i21.7 million as of December 31, 2021.
South Atlantic Canners, Inc. (“SAC”)
The Company is a shareholder of SAC, a manufacturing cooperative located in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has
equal voting rights. The Company accounts for SAC as an equity method investment. The Company’s investment in SAC, which was classified as other assets in the condensed consolidated balance sheets, was $ii8.2/ million
as of both July 1, 2022 and December 31, 2021. The Company also guarantees a portion of SAC’s debt; see Note 20 for additional information.
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, which were recorded as a reduction to cost of sales in the condensed consolidated statements of operations, were $i4.4 million
in the first half of 2022 and $i4.5 million in the first half of 2021.
Coca‑Cola Bottlers’ Sales & Services Company LLC (“CCBSS”)
Along with all other Coca‑Cola bottlers in the United States and Canada, the Company is a member of CCBSS, a company formed to provide certain procurement and other services with the intention of enhancing the efficiency
and competitiveness of the Coca‑Cola bottling system. The Company accounts for CCBSS as an equity method investment and its investment in CCBSS is not material.
CCBSS negotiates the procurement for the majority of the Company’s raw materials, excluding concentrate, and the Company receives a rebate from CCBSS for the purchase of these raw materials. The Company had rebates due from CCBSS of $i16.7 million
on July 1, 2022 and $i7.9 million on December 31, 2021, which were classified as accounts receivable, other in the condensed consolidated balance sheets. Changes in rebates receivable relate to volatility in raw material prices.
In addition, the Company pays an administrative fee to CCBSS for its services.
The Company incurred administrative fees to CCBSS of $i1.1 million in the first half of 2022 and $i1.4
million in the first half of 2021, which were classified as selling, delivery and administrative (“SD&A”) expenses in the condensed consolidated statements of operations.
CONA Services LLC (“CONA”)
The Company is a member of CONA, an entity formed with The Coca‑Cola Company and certain other Coca‑Cola bottlers to provide business process and information technology services to its members. The Company accounts for CONA as an equity method investment. The Company’s investment in CONA, which was classified as other assets in the condensed consolidated balance sheets,
was $i15.4 million as of July 1, 2022 and $i13.7 million as of December 31, 2021.
8
Pursuant
to an amended and restated master services agreement with CONA, the Company is authorized to use the Coke One North America system (the “CONA System”), a uniform information technology system developed to promote operational efficiency and uniformity among North American Coca‑Cola bottlers. In exchange for the Company’s rights to use the CONA System and receive CONA-related services, it is charged service fees by CONA. The Company incurred CONA service fees of $i13.0 million
in the first half of 2022 and $i12.4 million in the first half of 2021.
Related Party Leases
The Company leases its headquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation, of which J. Frank Harrison, III is the majority stockholder and Morgan H. Everett, Vice Chair of the
Company’s Board of Directors, is a minority stockholder. The annual base rent the Company is obligated to pay under this lease is subject to an adjustment for an inflation factor and the lease expires on December 31, 2029. The principal balance outstanding under this lease was $i26.9 million on July 1, 2022 and $i28.2 million
on December 31, 2021.
The Company previously leased the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina (the “Snyder Production Center”) from Harrison Limited Partnership One (“HLP”), which is directly and indirectly owned by trusts of which J. Frank Harrison, III and Sue Anne H. Wells, a former director of the Company, are trustees and beneficiaries and of which Morgan H. Everett is a permissible, discretionary beneficiary. On March 17, 2022, CCBCC Operations, LLC (“Operations”), a wholly owned subsidiary of the
Company, entered into a definitive purchase and sale agreement with HLP, pursuant to which Operations purchased the Snyder Production Center from HLP on such date for a purchase price of $i60.0 million. This lease, which was scheduled to expire on December 31, 2035, was terminated in connection with the purchase of the Snyder Production Center by Operations. There was ino
principal balance outstanding under this lease on July 1, 2022 and there was a principal balance outstanding of $i59.1 million on December 31, 2021.
i
A
summary of rental payments for these leases related to the second quarter and the first half of 2022 and 2021 is as follows:
Second Quarter
First Half
(in
thousands)
2022
2021
2022
2021
Company headquarters
$
i964
$
i945
$
i1,927
$
i1,890
Snyder
Production Center
i—
i1,113
i927
i2,226
/
Long-Term
Performance Equity Plan
The Long-Term Performance Equity Plan compensates J. Frank Harrison, III based on the Company’s performance. Awards granted to Mr. Harrison under the Long-Term Performance Equity Plan are earned based on the Company’s attainment during a performance period of certain performance measures, each as specified by the Compensation Committee of the Company’s Board of Directors. These awards may be settled in cash and/or shares of the Company’s Class B Common Stock, based on the average of the closing prices of shares of the
Company’s Common Stock during the last i20 trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which was included in SD&A expenses in the condensed consolidated statements of operations, was $ii3.6/ million
in both the second quarter of 2022 and the second quarter of 2021 and $i5.6 million and $i5.5 million in the first half of 2022 and the first half of 2021, respectively.
3. iRevenue
Recognition
i
The Company’s sales are divided into itwo
main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, post-mix products, transportation revenue and equipment maintenance revenue.
The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Generally,
the Company’s service contracts and contracts related to the delivery of specifically identifiable products have a single performance obligation. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time (“point
in time”). Point in time sales accounted for approximately ii97/% of the
Company’s net sales in both the first half of 2022 and the first half of 2021.
/
9
Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time (“over time”). Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than ione
day but can extend up to ione month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the condensed consolidated financial statements.
i
The
following table represents a disaggregation of revenue from contracts with customers:
Second Quarter
First Half
(in
thousands)
2022
2021
2022
2021
Point in time net sales:
Nonalcoholic Beverages - point in time
$
i1,550,255
$
i1,388,991
$
i2,912,506
$
i2,614,203
Total
point in time net sales
$
i1,550,255
$
i1,388,991
$
i2,912,506
$
i2,614,203
Over
time net sales:
Nonalcoholic Beverages - over time
$
i11,759
$
i10,924
$
i22,729
$
i20,802
All
Other - over time
i33,201
i33,171
i64,338
i67,938
Total
over time net sales
$
i44,960
$
i44,095
$
i87,067
$
i88,740
Total
net sales
$
i1,595,215
$
i1,433,086
$
i2,999,573
$
i2,702,943
/
The
Company’s allowance for doubtful accounts in the condensed consolidated balance sheets includes a reserve for customer returns and an allowance for credit losses. The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than ii1/%
of bottle/can sales and post-mix sales could be at risk for return by customers. Returned product is recognized as a reduction to net sales. The Company’s reserve for customer returns was $ii3.0/ million
as of both July 1, 2022 and December 31, 2021.
The Company estimates an allowance for credit losses, based on historic days’ sales outstanding trends, aged customer balances, previously written-off balances and expected recoveries up to balances previously written off, in order to present the net amount expected to be collected. Accounts receivable balances are written off when determined uncollectible and are recognized as a reduction to the allowance for credit losses. iFollowing
is a summary of activity for the allowance for credit losses during the first half of 2022 and the first half of 2021:
First Half
(in thousands)
2022
2021
Beginning balance - allowance for credit losses
$
i14,336
$
i18,070
Additions
charged to expenses and as reductions to net sales
i47
i1,652
Deductions
(i2,860)
(i6,790)
Ending
balance - allowance for credit losses
$
i11,523
$
i12,932
4. iSegments
The
Company evaluates segment reporting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operating Decision Maker (the “CODM”). The Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM.
The Company believes ithree
operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional itwo 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.”
(1)The
entire net sales elimination represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction.
/
5. iNet
Income Per Share
i
The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method:
Second
Quarter
First Half
(in thousands, except per share data)
2022
2021
2022
2021
Numerator for basic and diluted net income per Common Stock and Class B Common Stock share:
Net
income
$
i99,562
$
i48,180
$
i192,952
$
i101,543
Less
dividends:
Common Stock
i2,092
i1,786
i3,878
i3,571
Class B
Common Stock
i251
i558
i809
i1,116
Total
undistributed earnings
$
i97,219
$
i45,836
$
i188,265
$
i96,856
Common
Stock undistributed earnings – basic
$
i86,796
$
i34,921
$
i157,918
$
i73,792
Class B
Common Stock undistributed earnings – basic
i10,423
i10,915
i30,347
i23,064
Total
undistributed earnings – basic
$
i97,219
$
i45,836
$
i188,265
$
i96,856
Common
Stock undistributed earnings – diluted
$
i86,565
$
i34,795
$
i157,498
$
i73,525
Class B
Common Stock undistributed earnings – diluted
i10,654
i11,041
i30,767
i23,331
Total
undistributed earnings – diluted
$
i97,219
$
i45,836
$
i188,265
$
i96,856
Numerator
for basic net income per Common Stock share:
Dividends on Common Stock
$
i2,092
$
i1,786
$
i3,878
$
i3,571
Common
Stock undistributed earnings – basic
i86,796
i34,921
i157,918
i73,792
Numerator
for basic net income per Common Stock share
$
i88,888
$
i36,707
$
i161,796
$
i77,363
Numerator
for basic net income per Class B Common Stock share:
Dividends on Class B Common Stock
$
i251
$
i558
$
i809
$
i1,116
Class B
Common Stock undistributed earnings – basic
i10,423
i10,915
i30,347
i23,064
Numerator
for basic net income per Class B Common Stock share
$
i10,674
$
i11,473
$
i31,156
$
i24,180
/
11
Second
Quarter
First Half
(in thousands, except per share data)
2022
2021
2022
2021
Numerator for diluted net income per Common Stock share:
Dividends on Common
Stock
$
i2,092
$
i1,786
$
i3,878
$
i3,571
Dividends
on Class B Common Stock assumed converted to Common Stock
i251
i558
i809
i1,116
Common
Stock undistributed earnings – diluted
i97,219
i45,836
i188,265
i96,856
Numerator
for diluted net income per Common Stock share
$
i99,562
$
i48,180
$
i192,952
$
i101,543
Numerator
for diluted net income per Class B Common Stock share:
Dividends on Class B Common Stock
$
i251
$
i558
$
i809
$
i1,116
Class B
Common Stock undistributed earnings – diluted
i10,654
i11,041
i30,767
i23,331
Numerator
for diluted net income per Class B Common Stock share
$
i10,905
$
i11,599
$
i31,576
$
i24,447
Denominator
for basic net income per Common Stock and Class B Common Stock share:
Common Stock weighted average shares outstanding – basic
i8,369
i7,141
i7,863
i7,141
Class B
Common Stock weighted average shares outstanding – basic
i1,005
i2,232
i1,511
i2,232
Denominator
for diluted net income per Common Stock and Class B Common Stock share:
Common Stock weighted average shares outstanding – diluted (assumes conversion of Class B Common Stock to Common Stock)
i9,399
i9,407
i9,399
i9,407
Class B
Common Stock weighted average shares outstanding – diluted
i1,030
i2,266
i1,536
i2,266
Basic
net income per share:
Common Stock
$
i10.62
$
i5.14
$
i20.58
$
i10.83
Class B
Common Stock
$
i10.62
$
i5.14
$
i20.62
$
i10.83
Diluted
net income per share:
Common Stock
$
i10.59
$
i5.12
$
i20.53
$
i10.79
Class B
Common Stock
$
i10.59
$
i5.12
$
i20.56
$
i10.79
NOTES
TO TABLE
(1)For purposes of the diluted net income per share computation for Common Stock, all shares of Class B Common Stock are assumed to be converted; therefore, ii100/%
of undistributed earnings is allocated to Common Stock.
(2)For purposes of the diluted net income per share computation for Class B Common Stock, weighted average shares of Class B Common Stock are assumed to be outstanding for the entire period and not converted.
(3)For periods presented during which the Company has net income, the denominator for diluted net income per share for Common Stock and Class B Common Stock includes the dilutive effect of shares relative to the Long-Term Performance Equity Plan. For periods presented during which the Company has net loss, the unvested shares granted pursuant to the Long-Term
Performance Equity Plan are excluded from the computation of diluted net loss per share, as the effect would have been anti-dilutive. See Note 2 for additional information on the Long-Term Performance Equity Plan.
(4)The Long-Term Performance Equity Plan awards may be settled in cash and/or shares of the Company’s Class B Common Stock. Once an election has been made to settle an award in cash, the dilutive effect of shares relative to such award is prospectively removed from the denominator in the computation of diluted net income per share.
(5)The Company did iino/t
have anti-dilutive shares for any periods presented.
(6)i1,227,546 shares of the Company’s Class B Common Stock were converted on a ione
share for one share basis into shares of the Company’s Common Stock, effective as of March 17, 2022. See Note 2 for additional information on the Stockholder Conversion Agreement.
As of July 1, 2022, certain properties owned by the Company met the accounting guidance criteria to be classified as assets held for sale. The properties primarily relate to warehousing and distribution operations that have been consolidated into new facilities. All properties classified as held for sale are included in the Nonalcoholic Beverages segment. There are not any liabilities held for sale associated with these properties and none meet the accounting guidance criteria to be classified as discontinued operations.
i
Following
is a summary of the assets held for sale:
On
March 17, 2022, the Company terminated its financing lease for the Snyder Production Center, which was scheduled to expire on December 31, 2035. See Note 2 for additional information on the lease termination.
Following is a summary of the Company’s leases within the condensed consolidated statements of operations:
Second
Quarter
First Half
(in thousands)
2022
2021
2022
2021
Operating lease costs
$
i7,336
$
i6,565
$
i14,639
$
i12,819
Short-term
and variable leases
i3,695
i4,494
i7,275
i8,371
Depreciation
expense from financing leases
i412
i1,414
i1,492
i2,828
Interest
expense on financing lease obligations
i144
i579
i614
i1,163
Total
lease cost
$
i11,587
$
i13,052
$
i24,020
$
i25,181
The
future minimum lease payments related to the Company’s leases include renewal options the Company has determined to be reasonably certain and exclude payments to landlords for real estate taxes and common area maintenance. iiFollowing
is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of July 1, 2022:/
(in thousands)
Operating Leases
Financing Leases
Remainder
of 2022
$
i14,441
$
i1,354
2023
i27,815
i2,750
2024
i23,315
i2,808
2025
i17,413
i2,869
2026
i16,086
i1,233
Thereafter
i65,939
i1,304
Total
minimum lease payments including interest
$
i165,009
$
i12,318
Less: Amounts
representing interest
i23,182
i1,412
Present
value of minimum lease principal payments
i141,827
i10,906
Less: Current
portion of lease liabilities
i24,771
i2,214
Noncurrent
portion of lease liabilities
$
i117,056
$
i8,692
14
Following
is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of December 31, 2021:
(in thousands)
Operating Leases
Financing Leases
2022
$
i26,026
$
i7,145
2023
i24,893
i7,201
2024
i20,639
i7,396
2025
i16,740
i7,593
2026
i15,575
i6,100
Thereafter
i65,695
i49,728
Total
minimum lease payments including interest
$
i169,568
$
i85,163
Less: Amounts
representing interest
i25,474
i14,097
Present
value of minimum lease principal payments
i144,094
i71,066
Less: Current
portion of lease liabilities
i22,048
i6,060
Noncurrent
portion of lease liabilities
$
i122,046
$
i65,006
i
Following
is a summary of the Company’s leases within the condensed consolidated statements of cash flows:
First Half
(in thousands)
2022
2021
Cash flows from
operating activities impact:
Operating leases
$
i14,056
$
i13,689
Interest
payments on financing lease obligations
i614
i1,163
Total
cash flows from operating activities impact
$
i14,670
$
i14,852
Cash
flows from financing activities impact:
Principal payments on financing lease obligations
$
i1,904
$
i2,368
Total
cash flows from financing activities impact
$
i1,904
$
i2,368
/
Subsequent
to quarter-end, the Company entered into an operating lease commitment with a lease term of ifive years. This lease commitment is expected to commence during the third quarter of 2022. The additional lease liability associated with this lease commitment is expected to be approximately $i9.8 million.
11. iDistribution
Agreements, Net
i
Distribution agreements, net, which are amortized on a straight-line basis and have an estimated useful life of i20
to i40 years, consisted of the following:
Current
portion of acquisition related contingent consideration
i40,321
i51,518
Accrued
marketing costs
i35,102
i32,249
Employee
and retiree benefit plan accruals
i31,146
i32,007
Current
portion of deferred payroll taxes under CARES Act
i18,739
i18,739
Accrued
taxes (other than income taxes)
i8,260
i6,638
All
other accrued expenses
i44,030
i33,973
Total
other accrued liabilities
$
i229,398
$
i226,769
/
The
Company has taken advantage of certain provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which allowed an employer to defer the deposit and payment of the employer’s portion of social security taxes that would otherwise have been due on or after March 27, 2020 and before January 1, 2021. The law permits an employer to deposit half of these deferred payments by December 31, 2021 and the other half by December 31, 2022. The Company repaid a portion of the deferred payroll taxes during 2021 and intends to repay the remaining portion of the deferred payroll taxes during 2022.
14. iCommodity
Derivative 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 commodity derivative instruments. The Company does not use commodity derivative instruments for trading or speculative purposes. These commodity derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. 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 counterparties.
Commodity derivative instruments held by the Company are marked to market on a monthly basis and are recognized in earnings consistent with the expense classification of the underlying hedged item. The Company generally pays a fee for these commodity derivative instruments,
which is amortized over the corresponding period of each commodity derivative instrument. Settlements of commodity derivative instruments are included in cash flows from operating activities in the condensed consolidated statements of cash flows. iThe following table summarizes pre-tax changes in the fair values of the Company’s commodity derivative instruments and the classification of such
changes in the condensed consolidated statements of operations:
Second Quarter
First Half
(in thousands)
2022
2021
2022
2021
Cost
of sales
$
(i13,663)
$
i2,128
$
(i6,169)
$
i2,416
Selling,
delivery and administrative expenses
i998
i505
i7,223
i1,065
Total
gain (loss)
$
(i12,665)
$
i2,633
$
i1,054
$
i3,481
All
commodity derivative instruments are recorded at fair value as either assets or liabilities in the condensed consolidated balance sheets. The Company has master agreements with the counterparties to its commodity derivative instruments 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 condensed consolidated balance sheets and the net amounts of derivative liabilities are recognized in either other accrued liabilities or other liabilities in the condensed consolidated balance sheets. iThe
16
following table summarizes the fair values of the Company’s commodity derivative instruments and the classification of such instruments in the condensed consolidated balance sheets:
The
following table summarizes the Company’s gross commodity derivative instrument assets and gross commodity derivative instrument liabilities in the condensed consolidated balance sheets:
Notional amount of outstanding commodity
derivative instruments
$
i41,074
$
i74,558
Latest
maturity date of outstanding commodity derivative instruments
December 2022
December 2022
/
15. iFair
Values of Financial Instruments
GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data.
i
The
below 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.
Financial Instrument
Fair Value Level
Methods and Assumptions
Deferred
compensation plan assets and liabilities
Level 1
The fair value of the Company’s nonqualified deferred compensation plan for certain executives and other highly compensated employees is based on the fair values of associated assets and liabilities, which are held in mutual funds and are based on the quoted market values of the securities held within the mutual funds.
Commodity derivative instruments
Level 2
The fair values of the
Company’s commodity derivative instruments are based on current settlement values at each balance sheet date, which represent the estimated amounts the Company would have received or paid upon termination of these instruments. The Company’s credit risk related to the commodity derivative instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair values of commodity derivative instruments.
Debt
Level 2
The
carrying amounts of the Company’s variable rate debt approximate the fair values due to variable interest rates with short reset periods. The fair values of the Company’s fixed rate debt are based on estimated current market prices.
Acquisition related contingent consideration
Level 3
The fair value of the Company’s acquisition related contingent consideration is based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data.
17
i
The
following tables summarize the carrying amounts and fair values by level of the Company’s deferred compensation plan assets and liabilities, commodity derivative instruments, debt and acquisition related contingent consideration:
The
acquisition related contingent consideration was valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to acquisition related sub-bottling payments to fair value by discounting future expected acquisition related sub-bottling payments required under the CBA using the Company’s estimated WACC.
The future expected acquisition related sub-bottling payments extend through the life of the applicable distribution assets acquired from CCR, which is generally i40
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 acquisition related sub-bottling payments that will be made in the future under the CBA, and current acquisition related 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 liability and could materially impact the amount of non-cash expense (or income) recorded each reporting period.
The acquisition related contingent consideration liability is the
Company’s only Level 3 asset or liability. iA summary of the Level 3 activity is as follows:
Second
Quarter
First Half
(in thousands)
2022
2021
2022
2021
Beginning balance - Level 3 liability
$
i527,926
$
i435,746
$
i542,105
$
i434,694
Payments
of acquisition related contingent consideration
(i8,888)
(i9,874)
(i18,710)
(i19,920)
Reclassification
to current payables
(i800)
i1,200
i300
i1,300
Increase
(decrease) in fair value
i4,021
i45,983
(i1,436)
i56,981
Ending
balance - Level 3 liability
$
i522,259
$
i473,055
$
i522,259
$
i473,055
As
of July 1, 2022 and July 2, 2021, discount rates of i8.9% and i7.7%,
respectively, were utilized in the valuation of the Company’s acquisition related contingent consideration liability. The decrease in the fair value of the acquisition related contingent consideration liability in the first half of 2022 was primarily driven by an increase in the discount rate used to calculate fair value, partially offset by higher projections of future cash flows in the distribution territories subject to acquisition related sub-bottling payments. This fair value adjustment was recorded in other expense, net in the condensed consolidated statement of operations for the first half of 2022.
18
The
Company anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to acquisition related sub-bottling payments will be in the range of $i39 million to $i69 million.
16. iIncome
Taxes
The Company’s effective income tax rate was i25.9% for the first half of 2022 and i26.9%
for the first half of 2021. The Company’s income tax expense was $i67.6 million for the first half of 2022 and $i37.3 million
for the first half of 2021. The increase in income tax expense was primarily attributable to higher income before taxes during the first half of 2022 compared to the first half of 2021.
The Company had uncertain tax positions, including accrued interest, of $iiii1.7/// million
on both July 1, 2022 and December 31, 2021, all of which would affect the Company’s effective income 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 material impact on the condensed consolidated financial statements.
Prior tax years beginning in year 2018 remain open to examination by the Internal Revenue Service, and various tax years beginning in year 1999 remain open to examination by certain state tax jurisdictions due to loss carryforwards.
17. iPension
and Postretirement Benefit Obligations
Pension Plans
There are itwo 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 that 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.
i
The components of net periodic pension cost were as follows:
Second
Quarter
First Half
(in thousands)
2022
2021
2022
2021
Service cost
$
i1,861
$
i1,863
$
i3,721
$
i3,726
Interest
cost
i2,659
i2,455
i5,318
i4,908
Expected
return on plan assets
(i2,036)
(i3,248)
(i4,071)
(i6,498)
Recognized
net actuarial loss
i988
i1,216
i1,977
i2,435
Amortization
of prior service cost
i—
i—
i—
i1
Net
periodic pension cost
$
i3,472
$
i2,286
$
i6,945
$
i4,572
/
The
Company did not make any contributions to the itwo Company-sponsored pension plans during the first half of 2022. Contributions to the itwo
Company-sponsored pension plans in 2022 are expected to be in the range of $i20 million to $i30 million.
During the first half of 2022, the Company began the process of terminating the Primary Plan. The Company expects to offer a lump sum benefit payout option to certain plan participants prior to completing the purchase of group annuity contracts that will transfer the pension benefit obligation to an insurance company.
Postretirement Benefits
The Company provides postretirement benefits for employees meeting specified
criteria. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service. The Company does not prefund these benefits and has the right to modify or terminate certain of these benefits in the future.
19
The components of net periodic postretirement benefit cost were as follows:
(1)The
senior bonds due in 2025 were issued at i99.975% of par.
/
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.
The indenture under which the Company’s senior bonds were issued does not include financial covenants but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The agreements under which the Company’s nonpublic debt was issued include itwo
financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreement. The Company was in compliance with these covenants as of July 1, 2022. These covenants have not restricted, and are not expected to restrict, the Company’s liquidity or capital resources.
All outstanding debt has been issued by the Company and inone
has been issued by any of its subsidiaries. There are ino guarantees of the Company’s debt.
20
20. iCommitments
and Contingencies
Manufacturing Cooperatives
The Company is obligated to purchase at least i80% of its requirements of plastic bottles for certain designated territories from Southeastern. The Company
is also obligated to purchase i17.5 million cases of finished product from SAC on an annual basis through June 2024. The Company purchased i13.4 million
cases and i14.3 million cases of finished product from SAC in the first half of 2022 and the first half of 2021, respectively.
i
The
following table summarizes the Company’s purchases from these manufacturing cooperatives:
Second Quarter
First Half
(in
thousands)
2022
2021
2022
2021
Purchases from Southeastern
$
i41,246
$
i34,029
$
i73,268
$
i61,573
Purchases
from SAC
i50,562
i42,557
i95,928
i83,810
Total
purchases from manufacturing cooperatives
$
i91,808
$
i76,586
$
i169,196
$
i145,383
/
The
Company guarantees a portion of SAC’s debt, which expires in 2024. The amount guaranteed was $ii9.5/ million
on both July 1, 2022 and December 31, 2021. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust the selling prices of its products to adequately mitigate the risk of material loss from the
Company’s guarantee.
The Company holds no assets as collateral against the SAC guarantee, the fair value of which is immaterial to the condensed consolidated financial statements. The Company monitors its investment in SAC and would be required to write down its investment if an impairment, other than a temporary impairment, was identified. iNo
impairment of the Company’s investment in SAC was identified as of July 1, 2022, and there was ino impairment identified in 2021.
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 $ii37.6/ million
on both July 1, 2022 and December 31, 2021.
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of July 1, 2022, the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $i139.2 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 the ultimate disposition of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.
The Company is subject to audits by tax authorities in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolved with the authorities or potentially
through the courts. Management believes the Company has adequately provided for any assessments likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the condensed consolidated financial statements.
21. iAccumulated Other Comprehensive Income (Loss)
Accumulated
other comprehensive income (loss) (“AOCI(L)”) is comprised of adjustments to the Company’s pension and postretirement medical benefit plans and the foreign currency translation for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.
21
i
Following
is a summary of AOCI(L) for the second quarter of 2022 and the second quarter of 2021:
(1)In 2019,
the Company entered into a $i100 million fixed rate swap to hedge a portion of the interest rate risk on its previous term loan facility, both of which matured on June 7, 2021. This interest rate swap was designated as a cash flow hedging instrument and changes in its fair value were not material to the condensed consolidated balance sheets.
Following is a summary of AOCI(L) for the first
half of 2022 and the first half of 2021:
Following
is a summary of the impact of AOCI(L) on the condensed consolidated statements of operations:
Second Quarter 2022
(in thousands)
Net Pension Activity
Net
Postretirement Benefits Activity
Total
Cost of sales
$
i266
$
i37
$
i303
Selling,
delivery and administrative expenses
i722
i54
i776
Subtotal
pre-tax
i988
i91
i1,079
Income
tax expense
i243
i22
i265
Total
after tax effect
$
i745
$
i69
$
i814
Second
Quarter 2021
(in thousands)
Net Pension Activity
Net Postretirement Benefits Activity
Interest Rate Swap
Foreign Currency Translation Adjustment
Total
Cost of sales
$
i356
$
i104
$
i—
$
i—
$
i460
Selling,
delivery and administrative expenses
i860
i81
i324
i36
i1,301
Subtotal
pre-tax
i1,216
i185
i324
i36
i1,761
Income
tax expense
i303
i46
i80
i8
i437
Total
after tax effect
$
i913
$
i139
$
i244
$
i28
$
i1,324
First
Half 2022
(in thousands)
Net Pension Activity
Net Postretirement Benefits Activity
Total
Cost of sales
$
i544
$
i78
$
i622
Selling,
delivery and administrative expenses
i1,433
i105
i1,538
Subtotal
pre-tax
i1,977
i183
i2,160
Income
tax expense
i486
i45
i531
Total
after tax effect
$
i1,491
$
i138
$
i1,629
First
Half 2021
(in thousands)
Net Pension Activity
Net Postretirement Benefits Activity
Interest Rate Swap
Foreign Currency Translation Adjustment
Total
Cost of sales
$
i704
$
i207
$
i—
$
i—
$
i911
Selling,
delivery and administrative expenses
i1,732
i164
i739
(i13)
i2,622
Subtotal
pre-tax
i2,436
i371
i739
(i13)
i3,533
Income
tax expense
i606
i92
i183
(i4)
i877
Total
after tax effect
$
i1,830
$
i279
$
i556
$
(i9)
$
i2,656
/
23
22. iSupplemental
Disclosures of Cash Flow Information
i
Changes in current assets and current liabilities affecting cash were as follows:
First
Half
(in thousands)
2022
2021
Accounts receivable, trade
$
(i82,059)
$
(i56,553)
Allowance
for doubtful accounts
(i2,813)
(i5,188)
Accounts
receivable from The Coca‑Cola Company
i8,160
(i9,272)
Accounts
receivable, other
(i7,711)
i10,710
Inventories
(i688)
(i12,066)
Prepaid
expenses and other current assets
(i8,776)
(i2,177)
Accounts
payable, trade
i20,314
i68,167
Accounts
payable to The Coca‑Cola Company
i53,064
i32,579
Other
accrued liabilities
i2,629
i17,870
Accrued
compensation
(i41,016)
(i19,773)
Accrued
interest payable
(i108)
i35
Change
in current assets less current liabilities
$
(i59,004)
$
i24,332
/
24
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Consolidated, Inc., a Delaware corporation (together with its majority-owned subsidiaries, the “Company,”“we,”“us” or “our”), should be read in conjunction with the condensed consolidated financial statements of the Company and the accompanying notes to the condensed consolidated financial statements. The condensed consolidated financial statements include the consolidated operations of the Company and
its majority-owned subsidiaries. All comparisons are to the corresponding period in the prior year unless specified otherwise.
Each of the Company’s quarters, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The Company’s fourth quarter and fiscal year end on December 31 regardless of the day of the week on which December 31 falls. The condensed consolidated financial statements presented are:
•The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended July 1, 2022 (the “second quarter” of fiscal 2022 (“2022”)) and July 2, 2021 (the “second quarter” of fiscal 2021 (“2021”)) and the six-month periods ended July 1, 2022 (the “first half” of 2022) and July 2, 2021 (the “first half” of 2021).
•The changes in cash flows for the first half of 2022 and the first half of 2021.
Our
Business and the Nonalcoholic Beverage Industry
We distribute, market and manufacture nonalcoholic beverages in territories spanning 14 states and the District of Columbia. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest Coca‑Cola bottler in the United States. Approximately 86% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage companies, including Keurig Dr Pepper Inc. (“Dr Pepper”) and Monster Energy Company (“Monster Energy”). Our purpose is to honor God in all we do, serve
others, pursue excellence and grow profitably. Our Common Stock is traded on the NASDAQ Global Select Market under the symbol COKE.
We offer a range of nonalcoholic beverage products and flavors, including both sparkling and still beverages, designed to meet the demands of our consumers. 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, ready to drink 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. Bottle/can
net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, post-mix products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.
The Company’s products are sold and distributed in the United States through various channels, which include selling directly to customers, including grocery stores, mass merchandise stores, club stores, convenience stores and
drug stores, selling to on-premise locations, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, and selling through other channels such as vending machine outlets.
The nonalcoholic beverage industry is highly competitive for both sparkling and still beverages. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of PepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper products.
The principal methods of competition in the nonalcoholic beverage industry are new brand and product introductions, point-of-sale merchandising, new vending and dispensing equipment, packaging changes, pricing,
sales 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.
25
Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters of the fiscal year, as sales of our products are typically correlated with warmer weather. We believe that we and other manufacturers from whom we purchase finished products have adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. Sales volume can also be impacted by weather conditions.
Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.
Executive Summary
Net sales increased 11% to $1.60 billion in the second quarter of 2022, while physical case volume increased 1.0%. The increase in net sales was driven primarily by price increases taken on most of our Sparkling and Still beverages over the last year. Sparkling beverage volume increased 1.8% in the quarter, as consumer demand remained strong, especially for our multi-serve can packages. Sales of Sparkling single-serve products sold in immediate consumption channels also continued to perform well, with volume increasing 1.9% in the quarter. Still beverage volume decreased 0.6% in the quarter, as certain brands
within this category were impacted by supply chain issues. We continue to see strong sales momentum in several key brands within the Still category, including Monster, smartwater and BODYARMOR. Net sales increased 11% and physical case volume increased 0.3% in the first half of 2022.
Gross profit in the second quarter of 2022 increased $55.7 million, or 11%, while gross margin remained flat at 34.5%. On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section, gross profit in the second quarter of 2022 was $564.4 million, which represented an increase of $69.8 million, or 14%. Adjusted gross margin was 35.4%, an increase of 90 basis points compared to the second quarter of 2021. The improvement in gross profit resulted from strong price realization and solid volume growth in our Sparkling beverages, which enabled higher gross margins during this period of rising input and production
costs. Gross profit in the first half of 2022 increased $114.6 million, or 12%.
Selling, delivery and administrative (“SD&A”) expenses in the second quarter of 2022 increased $29.3 million, or 8%. SD&A expenses as a percentage of net sales decreased 80 basis points to 25.3% in the second quarter of 2022. The increase in SD&A expenses related primarily to an increase in labor costs as compared to the second quarter of 2021. Over the last year, we have made compensation adjustments across our workforce to remain competitive in a tight labor market. In addition, SD&A expenses across a number of categories increased during the quarter as a result of the current, high inflationary environment. SD&A expenses in the first half of 2022 increased $51.4 million, or 7%. SD&A expenses as a percentage of net sales in the first half of 2022 decreased 100 basis points to 26.0% as compared
to the first half of 2021.
Income from operations in the second quarter of 2022 was $147.3 million, compared to $120.9 million in the second quarter of 2021, an increase of $26.4 million, or 22%. On an adjusted basis, income from operations in the second quarter of 2022 was $160.1 million, an increase of 33%. For the first half of 2022, income from operations increased $63.2 million to $278.3 million.
Net income in the second quarter of 2022 was $99.6 million, compared to $48.2 million in the second quarter of 2021, an improvement of $51.4 million. Net income increased $91.4 million in the first half of 2022 to $193.0 million as compared to the first half of 2021.
Cash flows provided by operations for the first half of 2022 were $243.5 million, compared to $271.4 million for the first
half of 2021. Our strong operating performance, led by our top‑line growth and effective management of operating expenses, drove cash flows from operations during the period. Cash flows from operations were impacted by changes in working capital, which reflect seasonality and the timing of certain cash payments and receipts. We continue to invest in long‑term strategic projects to optimize our supply chain and broaden our brand portfolio.
COVID-19 Impact
The Company continues to diligently monitor and manage through the impact of the ongoing COVID-19 pandemic on all aspects of its business, including the impact on its teammates,
communities and customers.
The Company continues to implement its COVID-19 Response Program, including numerous actions to protect and promote the health and safety of its consumers, customers, suppliers, teammates and communities. Such actions include following prescribed Company and other accepted health and safety standards and protocols, including those adopted by the Centers for Disease Control and Prevention (the “CDC”) and local health authorities. Risk mitigation and safety activities continue; examples include adhering to sanitation protocols and promoting hygiene practices recommended by the CDC; offering supplemental sick time for non-exempt teammates; providing access to personal protective equipment and educational resources; and modifying our health and welfare plans for COVID-19-related events.
26
At
this time and based on current trends, we do not expect the COVID-19 pandemic to materially impact our liquidity position or access to capital in 2022. We also have not experienced, and do not expect, any material impairments or adjustments to the fair values of our assets or the collectability of our receivables as a result of the COVID-19 pandemic.
Areas of Emphasis
Key priorities for the Company include commercial execution, revenue management, supply chain optimization and cash flow generation.
Commercial Execution: Our success
is dependent on our ability to execute our commercial strategy within our customers’ stores. Our ability to obtain shelf space within stores and remain in-stock across our portfolio of brands and packages in a profitable manner will have a significant impact on our results. We are focused on execution at every step in our supply chain, including raw material and finished product procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur. We continue to invest in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and drive long-term value in our business.
Revenue Management: Our revenue management strategy focuses on pricing our brands and packages optimally within product categories and channels, creating effective working relationships with
our customers and making disciplined fact-based decisions. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs, the roles certain brands play in our product portfolio and other market conditions.
Supply Chain Optimization: We are continually focused on optimizing our supply chain, which includes identifying nearby warehousing and distribution operations that can be consolidated into new facilities to increase capacity, expand production capabilities, reduce overall production costs and add automation to allow the Company to better serve its customers and consumers.
Cash Flow Generation: We have
several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures, as we continue to prioritize debt repayment and to focus on strengthening our balance sheet.
Results of Operations
Second Quarter Results
The Company’s results of operations for the second quarter of 2022 and the second quarter of 2021 are highlighted in the table below and discussed in the following paragraphs.
Second
Quarter
(in thousands)
2022
2021
Change
Net sales
$
1,595,215
$
1,433,086
$
162,129
Cost
of sales
1,044,556
938,146
106,410
Gross profit
550,659
494,940
55,719
Selling, delivery and administrative expenses
403,366
374,079
29,287
Income
from operations
147,293
120,861
26,432
Interest expense, net
7,146
8,365
(1,219)
Other expense, net
6,199
47,041
(40,842)
Income
before taxes
133,948
65,455
68,493
Income tax expense
34,386
17,275
17,111
Net income
99,562
48,180
51,382
Other
comprehensive income, net of tax
814
1,324
(510)
Comprehensive income
$
100,376
$
49,504
$
50,872
27
Net
Sales
Net sales increased $162.1 million, or 11.3%, to $1.60 billion in the second quarter of 2022, as compared to $1.43 billion in the second quarter of 2021. The increase in net sales was primarily attributable to the following (in millions):
Second Quarter 2022
Attributable to:
$
148.1
Increase in net sales related to price
increases and the shift in product mix. Approximately 90% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers, while approximately 10% was related to the shift in product mix to higher revenue still products in order to meet consumer preferences.
10.7
Increased physical case volume
5.7
Increased physical case volume to other Coca-Cola bottlers
(2.4)
Other
$
162.1
Total
increase in net sales
Net sales by product category were as follows:
Second Quarter
(in thousands)
2022
2021
%
Change
Bottle/can sales:
Sparkling beverages
$
879,935
$
754,683
16.6
%
Still beverages
539,589
498,990
8.1
%
Total
bottle/can sales
1,419,524
1,253,673
13.2
%
Other sales:
Sales
to other Coca‑Cola bottlers
94,158
88,494
6.4
%
Post-mix and other
81,533
90,919
(10.3)
%
Total other sales
175,691
179,413
(2.1)
%
Total
net sales
$
1,595,215
$
1,433,086
11.3
%
Product category sales volume of physical cases and the percentage change by product category were as follows:
Second
Quarter
(in thousands)
2022
2021
% Change
Bottle/can sales volume:
Sparkling beverages
66,738
65,549
1.8
%
Still
beverages
30,670
30,863
(0.6)
%
Total bottle/can sales volume
97,408
96,412
1.0
%
Cost of Sales
Inputs
representing a substantial portion of the Company’s cost of sales include: (i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles and sweetener, (iii) concentrate costs and (iv) manufacturing costs, including labor, overhead and warehouse costs. In addition, cost of sales includes shipping, handling and fuel costs related to the movement of finished products from manufacturing plants to distribution centers, amortization expense of distribution rights, distribution fees of certain products and marketing credits from brand companies. Raw material costs represent approximately 20% of total cost of sales on an annual basis.
28
Cost
of sales increased $106.4 million, or 11.3%, to $1.04 billion in the second quarter of 2022, as compared to $938.1 million in the second quarter of 2021. The increase in cost of sales was primarily attributable to the following (in millions):
Second Quarter 2022
Attributable to:
$
90.0
Increased input costs, including aluminum, PET resin and transportation costs, partially due to the impacts
of inflation and supply chain challenges, as well as the shift in product mix to meet consumer preferences
6.3
Increased physical case volume
5.0
Increased physical case volume to other Coca-Cola bottlers
5.1
Other
$
106.4
Total increase in cost of sales
The
Company relies extensively on advertising and sales promotions 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, including national advertising programs, to develop their brand identities and promote sales in the Company’s territories. Certain of these marketing and advertising expenditures are made pursuant to annual arrangements. 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 $37.3 million in the
second quarter of 2022 and $35.7 million in the second quarter of 2021.
Selling, Delivery and Administrative Expenses
SD&A expenses include the following: sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution center warehousing costs, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangible assets and administrative support labor and operating costs.
SD&A expenses increased $29.3 million, or 7.8%, to $403.4 million in the second quarter of 2022, as compared to $374.1 million in the second quarter of 2021. SD&A expenses
as a percentage of net sales decreased to 25.3% in the second quarter of 2022 from 26.1% in the second quarter of 2021. The increase in SD&A expenses was primarily attributable to the following (in millions):
Second Quarter 2022
Attributable to:
$
15.2
Increase in labor costs due to compensation adjustments across our workforce to remain competitive in a tight labor market
9.5
Increase
in commitments to various charities and donor-advised funds in light of the Company’s financial performance
4.6
Other
$
29.3
Total increase in SD&A expenses
Shipping and handling costs included in SD&A expenses were $190.8 million in the second quarter of 2022 and $169.1 million in the second quarter of 2021.
Interest Expense, Net
Interest
expense, net decreased $1.2 million, or 14.6%, to $7.1 million in the second quarter of 2022, as compared to $8.4 million in the second quarter of 2021. The decrease was primarily a result of lower average debt balances.
Other Expense, Net
A summary of other expense, net is as follows:
Second Quarter
(in thousands)
2022
2021
Increase
in the fair value of the acquisition related contingent consideration liability
$
4,021
$
45,983
Non-service cost component of net periodic benefit cost
2,178
1,058
Total other expense, net
$
6,199
$
47,041
Each
reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to acquisition related sub-bottling payments to fair value. The fair value is determined by discounting future
29
expected acquisition related sub-bottling payments required under the Company’s comprehensive beverage agreements, which extend through the life of the applicable distribution assets, using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted
by many factors, including long-term interest rates and future cash flow projections. The life of these distribution assets is generally 40 years. The Company is required to pay the current portion of the acquisition related sub-bottling payment on a quarterly basis.
The change in the fair value of the acquisition related contingent consideration liability in the second quarter of 2022 as compared to the second quarter of 2021 was primarily driven by an increase in the discount rate used to calculate fair value.
Income Tax Expense
The Company’s effective income tax rate was 25.7% for the second quarter of 2022 and 26.4%
for the second quarter of 2021. The Company’s income tax expense increased $17.1 million, or 99.1%, to $34.4 million for the second quarter of 2022, as compared to $17.3 million for the second quarter of 2021. The increase in income tax expense was primarily attributable to higher income before taxes during the second quarter of 2022 compared to the second quarter of 2021.
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was $0.8 million in the second quarter of 2022 and $1.3 million in the second quarter of 2021.
First Half Results
Our
results of operations for the first half of 2022 and the first half of 2021 are highlighted in the table below and discussed in the following paragraphs.
First Half
(in thousands)
2022
2021
Change
Net
sales
$
2,999,573
$
2,702,943
$
296,630
Cost of sales
1,941,338
1,759,300
182,038
Gross profit
1,058,235
943,643
114,592
Selling,
delivery and administrative expenses
779,957
728,598
51,359
Income from operations
278,278
215,045
63,233
Interest expense, net
14,845
17,111
(2,266)
Other
expense, net
2,920
59,096
(56,176)
Income before taxes
260,513
138,838
121,675
Income tax expense
67,561
37,295
30,266
Net
income
192,952
101,543
91,409
Other comprehensive income, net of tax
1,629
2,656
(1,027)
Comprehensive income
$
194,581
$
104,199
$
90,382
Net
Sales
Net sales increased $296.6 million, or 11.0%, to $3.00 billion in the first half of 2022, as compared to $2.70 billion in the first half of 2021. The increase in net sales was primarily attributable to the following (in millions):
First Half 2022
Attributable to:
$
287.8
Increase in net sales related to price
increases and the shift in product mix. Approximately 80% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers, while approximately 20% was related to the shift in product mix to higher revenue still products in order to meet consumer preferences.
8.3
Increased physical case volume to other Coca-Cola bottlers
3.4
Increased physical case volume
(2.9)
Other
$
296.6
Total
increase in net sales
30
Net sales by product category were as follows:
First Half
(in
thousands)
2022
2021
% Change
Bottle/can sales:
Sparkling beverages
$
1,655,866
$
1,448,489
14.3
%
Still
beverages
1,006,816
919,070
9.5
%
Total bottle/can sales
2,662,682
2,367,559
12.5
%
Other
sales:
Sales to other Coca‑Cola bottlers
178,455
170,153
4.9
%
Post-mix and other
158,436
165,231
(4.1)
%
Total
other sales
336,891
335,384
0.4
%
Total net sales
$
2,999,573
$
2,702,943
11.0
%
Product
category sales volume of physical cases and the percentage change by product category were as follows:
First Half
(in thousands)
2022
2021
%
Change
Bottle/can sales volume:
Sparkling beverages
126,940
126,565
0.3
%
Still beverages
56,870
56,763
0.2
%
Total
bottle/can sales volume
183,810
183,328
0.3
%
The following table summarizes the percentage of the Company’s total bottle/can sales volume to its largest customers, as well as the percentage of the Company’s total net sales that such volume represents:
First
Half
2022
2021
Approximate percent of the Company’s total bottle/can sales volume:
Wal-Mart Stores, Inc.
20
%
20
%
The Kroger Company
12
%
13
%
Total
approximate percent of the Company’s total bottle/can sales volume
32
%
33
%
Approximate percent of the Company’s total net sales:
Wal-Mart
Stores, Inc.
15
%
14
%
The Kroger Company
9
%
9
%
Total approximate percent of the Company’s total net sales
24
%
23
%
Cost
of Sales
Cost of sales increased $182.0 million, or 10.3%, to $1.94 billion in the first half of 2022, as compared to $1.76 billion in the first half of 2021. The increase in cost of sales was primarily attributable to the following (in millions):
First Half 2022
Attributable to:
$
177.5
Increased input costs, including aluminum, PET resin
and transportation costs, partially due to the impacts of inflation and supply chain challenges, as well as the shift in product mix to meet consumer preferences
7.1
Increased physical case volume to other Coca-Cola bottlers
2.0
Increased physical case volume
(4.6)
Other
$
182.0
Total
increase in cost of sales
Total marketing funding support from The Coca‑Cola Company and other beverage companies was $71.7 million in the first half of 2022, as compared to $65.7 million in the first half of 2021.
31
Selling, Delivery and Administrative Expenses
SD&A expenses increased $51.4 million, or 7.0%, to $780.0 million in the first half of 2022, as compared to $728.6 million in the first half of 2021. SD&A expenses as a percentage of net sales decreased to 26.0% in the first half of 2022 from 27.0% in the first half of 2021. The increase in SD&A expenses was primarily attributable to the
following (in millions):
First Half 2022
Attributable to:
$
35.2
Increase in labor costs due to compensation adjustments across our workforce to remain competitive in a tight labor market
11.2
Increase in commitments to various charities
and donor-advised funds in light of the Company’s financial performance
5.0
Other
$
51.4
Total increase in SD&A expenses
Shipping and handling costs included in SD&A expenses were $371.2 million in the first half of 2022 and $326.5 million in the first half of 2021.
Interest Expense, Net
Interest
expense, net decreased $2.3 million, or 13.2%, to $14.8 million in the first half of 2022, as compared to $17.1 million in the first half of 2021. The decrease was primarily a result of lower average debt balances.
Other Expense, Net
A summary of other expense, net is as follows:
First Half
(in thousands)
2022
2021
Increase
(decrease) in the fair value of the acquisition related contingent consideration liability
$
(1,436)
$
56,981
Non-service cost component of net periodic benefit cost
4,356
2,115
Total other expense, net
$
2,920
$
59,096
The
change in the fair value of the acquisition related contingent consideration liability in the first half of 2022 as compared to the first half of 2021 was primarily driven by an increase in the discount rate used to calculate fair value.
Income Tax Expense
The Company’s effective income tax rate was 25.9% for the first half of 2022 and 26.9% for the first half of 2021. The Company’s income tax expense increased $30.3 million, or 81.2%, to $67.6 million for the first half of 2022, as compared to $37.3 million for the first half of 2021. The increase in income tax expense was primarily attributable to higher income before taxes during the first half of 2022 compared to the first
half of 2021.
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was $1.6 million in the first half of 2022 and $2.7 million in the first half of 2021.
Segment Operating Results
The Company evaluates segment reporting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operating Decision Maker (the “CODM”). The
Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM.
The Company believes three operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.”
(1)The
entire net sales elimination represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction.
Adjusted Non-GAAP Results
The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users of the financial statements with additional, meaningful financial information that should be considered when assessing the
Company’s ongoing 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 results (GAAP) to adjusted results (non-GAAP):
Second
Quarter 2022
(in thousands, except per share data)
Gross profit
SD&A expenses
Income from operations
Income before taxes
Net income
Basic net income per share
Reported results (GAAP)
$
550,659
$
403,366
$
147,293
$
133,948
$
99,562
$
10.62
Fair
value adjustment of acquisition related contingent consideration(1)
—
—
—
4,021
3,028
0.32
Fair value adjustments for commodity derivative instruments(2)
13,663
998
12,665
12,665
9,536
1.02
Supply
chain optimization(3)
84
(33)
117
117
88
0.01
Total reconciling items
13,747
965
12,782
16,803
12,652
1.35
Adjusted
results (non-GAAP)
$
564,406
$
404,331
$
160,075
$
150,751
$
112,214
$
11.97
Second
Quarter 2021
(in thousands, except per share data)
Gross profit
SD&A expenses
Income from operations
Income before taxes
Net income
Basic net income per share
Reported results (GAAP)
$
494,940
$
374,079
$
120,861
$
65,455
$
48,180
$
5.14
Fair
value adjustment of acquisition related contingent consideration(1)
—
—
—
45,983
34,487
3.67
Fair value adjustments for commodity derivative instruments(2)
(2,128)
505
(2,633)
(2,633)
(1,975)
(0.21)
Supply
chain optimization(3)
1,828
(652)
2,480
2,480
1,860
0.20
Total reconciling items
(300)
(147)
(153)
45,830
34,372
3.66
Adjusted
results (non-GAAP)
$
494,640
$
373,932
$
120,708
$
111,285
$
82,552
$
8.80
33
First
Half 2022
(in thousands, except per share data)
Gross profit
SD&A expenses
Income from operations
Income before taxes
Net income
Basic net income per share
Reported results (GAAP)
$
1,058,235
$
779,957
$
278,278
$
260,513
$
192,952
$
20.58
Fair
value adjustment of acquisition related contingent consideration(1)
—
—
—
(1,436)
(1,081)
(0.12)
Fair value adjustments for commodity derivative instruments(2)
6,169
7,223
(1,054)
(1,054)
(794)
(0.08)
Supply
chain optimization(3)
89
(72)
161
161
121
0.01
Total reconciling items
6,258
7,151
(893)
(2,329)
(1,754)
(0.19)
Adjusted
results (non-GAAP)
$
1,064,493
$
787,108
$
277,385
$
258,184
$
191,198
$
20.39
First
Half 2021
(in thousands, except per share data)
Gross profit
SD&A expenses
Income from operations
Income before taxes
Net income
Basic net income per share
Reported results (GAAP)
$
943,643
$
728,598
$
215,045
$
138,838
$
101,543
$
10.83
Fair
value adjustment of acquisition related contingent consideration(1)
—
—
—
56,981
42,736
4.56
Fair value adjustments for commodity derivative instruments(2)
(2,416)
1,065
(3,481)
(3,481)
(2,611)
(0.28)
Supply
chain optimization(3)
2,104
(758)
2,862
2,862
2,147
0.23
Total reconciling items
(312)
307
(619)
56,362
42,272
4.51
Adjusted
results (non-GAAP)
$
943,331
$
728,905
$
214,426
$
195,200
$
143,815
$
15.34
Following
is an explanation of non-GAAP adjustments:
(1)This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates and future cash flow projections of the distribution territories subject to acquisition related sub-bottling payments.
(2)The Company enters into commodity derivative instruments from time to time to hedge some or all of its projected purchases of aluminum, PET resin, diesel fuel and unleaded gasoline in order to mitigate commodity price risk. The Company accounts for its commodity derivative instruments on a mark-to-market basis.
(3)Adjustment
reflects expenses within the Nonalcoholic Beverages segment as the Company continues to optimize efficiency opportunities across its business.
Financial Condition
Total assets were $3.58 billion as of July 1, 2022, which was an increase of $136.1 million from December 31, 2021. Net working capital, defined as current assets less current liabilities, was $235.8 million as of July 1, 2022, which was a decrease of $6.0 million from December 31, 2021.
•An increase in cash and cash equivalents of $46.5 million, primarily as a result of our strong operating performance.
•An increase in accounts receivable, trade of $82.1 million, driven primarily by increased net sales and the timing of cash receipts.
•An increase in current portion of debt of $125.0 million due to the Company’s senior notes maturing on February 27, 2023.
•An
increase in accounts payable to The Coca-Cola Company of $53.1 million due to the timing of cash payments.
•A decrease in accrued compensation of $41.0 million, primarily as a result of the timing of bonus and incentive payments in the first half of 2022.
Liquidity and Capital Resources
The Company’s sources of capital include cash flows from operations, available credit facilities and the issuance of debt and equity securities. As of July 1, 2022, the
Company had $188.8 million in cash and cash equivalents. The Company has obtained its debt from public markets, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to repay 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 the condensed consolidated financial
34
statements. At this time, the Company does not expect the COVID-19
pandemic to have a material impact on its liquidity or access to capital.
Senior bonds and unamortized discount on senior bonds(1)
11/25/2025
349,970
349,966
2021
Revolving Credit Facility
7/9/2026
—
—
Senior notes
10/10/2026
100,000
100,000
Senior notes
3/21/2030
150,000
150,000
Debt
issuance costs
(1,337)
(1,523)
Total debt
$
723,633
$
723,443
(1)The
senior bonds due in 2025 were issued at 99.975% of par.
The indenture under which the Company’s senior bonds were issued does not include financial covenants but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The agreements under which the Company’s nonpublic debt was issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash
flow ratio, each as defined in the respective agreement. The Company was in compliance with these covenants as of July 1, 2022. These covenants have not restricted, and are not expected to restrict, the Company’s liquidity or capital resources.
All outstanding 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 Board of Directors has declared, and the Company has paid, dividends on the Common Stock and the Class B Common Stock and each class of common stock has participated equally in all dividends each quarter for more than 25 years. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future.
The Company’s credit ratings are reviewed periodically by certain nationally
recognized 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 adverse impact on the Company’s operating results or financial position. As of July 1, 2022, the Company’s credit ratings and outlook for its debt were as follows:
Credit
Rating
Rating Outlook
Moody’s
Baa1
Stable
Standard & Poor’s
BBB
Positive
The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability. There were no transfers from Level 1 or Level 2 in any period presented. Fair value adjustments
were non-cash, and, therefore, did not impact the Company’s liquidity or capital resources. Following is a summary of the Level 3 activity:
Second Quarter
First
Half
(in thousands)
2022
2021
2022
2021
Beginning balance - Level 3 liability
$
527,926
$
435,746
$
542,105
$
434,694
Payments
of acquisition related contingent consideration
(8,888)
(9,874)
(18,710)
(19,920)
Reclassification to current payables
(800)
1,200
300
1,300
Increase
(decrease) in fair value
4,021
45,983
(1,436)
56,981
Ending balance - Level 3 liability
$
522,259
$
473,055
$
522,259
$
473,055
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Cash
Sources and Uses
A summary of cash-based activity is as follows:
First Half
(in thousands)
2022
2021
Cash Sources:
Net
cash provided by operating activities(1)
$
243,535
$
271,385
Proceeds from the sale of property, plant and equipment
5,255
1,678
Borrowings under revolving credit facility
—
55,000
Total
cash sources
$
248,790
$
328,063
Cash Uses:
Additions to property, plant and equipment
$
145,182
$
80,308
Acquisition
of BODYARMOR distribution rights
30,149
1,998
Payments of acquisition related contingent consideration
18,710
19,920
Cash dividends paid
4,687
4,687
Payments
on financing lease obligations
1,904
2,368
Payments on term loan facility
—
217,500
Other
1,669
1,871
Total cash uses
$
202,301
$
328,652
Net
increase (decrease) in cash during period
$
46,489
$
(589)
(1)Net cash provided by operating activities included net income tax payments of $55.7 million in the first half of 2022 and $29.4 million in the first half of 2021.
Cash Flows From Operating Activities
During the first half of 2022, cash provided by operating activities was $243.5 million, which was a decrease of $27.9 million as compared to the first half of 2021. The cash flows from
operations were primarily the result of our strong operating performance, led by our top‑line growth and effective management of operating expenses. Cash flows from operations were impacted by changes in working capital, which reflect seasonality and the timing of certain cash payments and receipts.
Cash Flows From Investing Activities
During the first half of 2022, cash used in investing activities was $171.6 million, which was an increase of $89.3 million as compared to the first half of 2021. The increase was primarily a result of additions to property, plant and equipment, which were $145.2 million during the first half of 2022 and $80.3 million during the first half of 2021. There were $19.6 million and $16.7 million of additions to property, plant and equipment accrued in accounts payable, trade as of July 1,
2022 and July 2, 2021, respectively.
On January 1, 2022, the Company acquired $30.1 million of BODYARMOR distribution rights. On March 17, 2022, CCBCC Operations, LLC, a wholly owned subsidiary of the Company, purchased the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina for a purchase price of $60.0 million, which was included in additions to property, plant and equipment.
Cash Flows From Financing Activities
During the first half
of 2022, cash used in financing activities was $25.4 million, which was a decrease of $164.2 million as compared to the first half of 2021. The decrease was primarily a result of payments on the Company’s term loan facility made during the first half of 2021, partially offset by borrowings under the Company’s revolving credit facility, both of which did not recur in the first half of 2022.
The Company had cash payments for acquisition related contingent consideration of $18.7 million during the first half of 2022 and $19.9 million during the first half of 2021. The Company
anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to acquisition related sub-bottling payments will be in the range of $39 million to $69 million.
36
During 2021, the Company used a combination of cash on hand and borrowings under its previous revolving credit facility (the “2018 Revolving Credit Facility”) to repay the remaining balance of its previous term loan facility that matured on June 7, 2021.
Also during 2021, the
Company entered into a credit agreement, providing for a five-year unsecured revolving credit facility with an aggregate maximum borrowing capacity of $500 million (the “2021 Revolving Credit Facility”), maturing on July 9, 2026. Borrowings under the 2021 Revolving Credit Facility bear interest at a base rate or adjusted London InterBank Offered Rate (“LIBOR”), at the Company’s option, plus an applicable rate, depending on the rating for the Company’s long-term senior unsecured, non-credit-enhanced debt (“Debt Rating”). The 2021 Revolving Credit Facility’s underlying credit agreement includes successor LIBOR provisions, providing that the Secured Overnight Financing Rate will be used as the LIBOR replacement rate for borrowings
under the facility after June 30, 2023, unless the Company and its lenders agree to an alternative reference rate based on prevailing market convention at the replacement date. In addition, the Company must pay a facility fee on the lenders’ aggregate commitments under the 2021 Revolving Credit Facility ranging from 0.060% to 0.175% per annum, depending on the Company’s Debt Rating. The Company currently believes all banks participating in the 2021 Revolving Credit Facility have the ability to and will meet any funding requests from the
Company. The 2021 Revolving Credit Facility replaced the 2018 Revolving Credit Facility.
Also during 2021, the Company entered into a term loan agreement, providing for a three-year senior unsecured term loan facility in the aggregate principal amount of $70 million (the “2021 Term Loan Facility”), maturing on July 9, 2024. Borrowings under the 2021 Term Loan Facility bore interest at a base rate or adjusted LIBOR, at the Company’s option, plus an applicable rate, depending on the Company’s Debt Rating. The entire amount of the 2021 Term Loan Facility was fully drawn and subsequently repaid during
2021.
Hedging Activities
The Company uses commodity derivative instruments to manage its exposure to fluctuations in certain commodity prices. Fees paid by the Company for commodity derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity derivative instruments on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or SD&A expenses, consistent with the expense classification of the underlying hedged item.
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 commodity derivative instruments that provide for net settlement of derivative transactions. The net impact of the commodity derivative instruments on the condensed consolidated statements of operations was as follows:
Certain statements made in this report, or in other public filings, press releases, or other written or oral communications made by the Company, 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 involve risks and uncertainties which we expect will or may occur in the future and may impact our business, financial condition and results of operations. The words “anticipate,”“believe,”“expect,”“intend,”“project,”“may,”“will,”“should,”“could” and similar expressions are intended to identify
those forward-looking statements. These forward-looking statements reflect the Company’s best judgment based on current information, and, although we base these statements on circumstances that we believe to be reasonable when made, there can be no assurance that future events will not affect the accuracy of such forward-looking information. As such, the forward-looking statements are not guarantees of future performance, and actual results may vary materially from the projected results and expectations discussed in this report. Factors that might cause the Company’s actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to: increased costs (including due to inflation), disruption of supply or unavailability or shortages
of raw materials, fuel and other supplies; the inability to attract and retain front-line employees in a tight labor market; the reliance on purchased finished products from external sources; changes in public and consumer perception and preferences, including concerns related to product safety and sustainability, artificial ingredients, brand
37
reputation and obesity; the COVID-19 pandemic and other pandemic outbreaks in the future; changes in government regulations related to nonalcoholic beverages, including regulations related to obesity, public health, artificial ingredients and product safety and sustainability; decreases from historic levels of marketing funding support provided to us by The Coca‑Cola Company and other beverage companies; material changes in the performance
requirements for marketing funding support or our inability to meet such requirements; decreases from historic levels of advertising, marketing and product innovation spending by The Coca‑Cola Company and other beverage companies, or advertising campaigns that are negatively perceived by the public; any failure of the several Coca‑Cola system governance entities of which we are a participant to function efficiently or on our best behalf and any failure or delay of ours to receive anticipated benefits from these governance entities; provisions in our beverage distribution and manufacturing agreements with The Coca‑Cola Company that could delay or prevent a change in control of us or a sale of our Coca‑Cola distribution or manufacturing businesses; the concentration of our capital stock ownership; our inability to meet requirements under our beverage distribution and manufacturing agreements; changes
in the inputs used to calculate our acquisition related contingent consideration liability; technology failures or cyberattacks on our technology systems or our effective response to technology failures or cyberattacks on our customers’, suppliers’ or other third parties’ technology systems; unfavorable changes in the general economy; changes in our top customer relationships and marketing strategies; lower than expected net pricing of our products resulting from continued and increased customer and competitor consolidations and marketplace competition; the effect of changes in our level of debt, borrowing costs and credit ratings on our access to capital and credit markets, operating flexibility and ability to obtain additional financing to fund future needs; the failure to attract, train and retain qualified employees while controlling labor costs, and other labor issues; the failure to maintain productive relationships with our employees covered by collective bargaining
agreements, including failing to renegotiate collective bargaining agreements; changes in accounting standards; our use of estimates and assumptions; changes in tax laws, disagreements with tax authorities or additional tax liabilities; changes in legal contingencies; natural disasters, changing weather patterns and unfavorable weather; climate change or legislative or regulatory responses to such change; and the risks discussed in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and elsewhere in this report.
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 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 reports and other filings with the United States Securities and Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to interest rate risk on its revolving credit facility and did not have any outstanding borrowings on its revolving credit
facility as of July 1, 2022. As such, assuming no changes in the Company’s capital structure, if market interest rates average 1% more over the next 12 months than the interest rates as of July 1, 2022, there would be no change to interest expense for the next 12 months.
The Company’s acquisition related contingent consideration liability, which is adjusted to fair value each reporting period, is also impacted by changes in interest rates. The risk-free interest rate used to estimate the Company’s WACC is a component of the discount rate used to calculate the
present value of expected future acquisition related sub-bottling payments due under the Company’s comprehensive beverage agreements. As a result, any changes in the underlying risk-free interest rate could result in material changes to the fair value of the acquisition related contingent consideration liability and could materially impact the amount of non-cash expense (or income) recorded each reporting period.
The Company is exposed to certain market risks and commodity price risk that arise in the ordinary course of business. The Company may enter into commodity derivative instruments to manage or reduce market risk. The
Company does not use commodity derivative instruments for trading or speculative purposes.
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 commodity derivative 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 $75.6 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 agreement. The Company accounts for its commodity derivative instruments on a mark-to-market basis with any expense or
38
income being reflected as an adjustment to cost of sales or SD&A expenses,
consistent with the expense classification of the underlying hedged item.
The rate of inflation in the United States, as measured by year-over-year changes in the Consumer Price Index (the “CPI”), was 9.1% in June 2022, as compared to 7.0% in December 2021 and 1.4% in December 2020. Inflation in the prices of those commodities important to the Company’s business is reflected in changes in the CPI, but commodity prices are volatile and in recent years have moved at a faster rate of change than the CPI.
The principal effect of inflation in both commodity and consumer prices on the Company’s operating results is to increase costs, both of goods sold and SD&A expenses.
Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover these increased costs and may reduce their volume of purchases of those products. In that event, selling price increases may not be sufficient to offset completely the Company’s cost increases.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of July 1, 2022.
There
has been no change in the Company’s internal control over financial reporting during the quarter ended July 1, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
39
PART II - OTHER INFORMATION
Item
1. Legal Proceedings.
The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes the ultimate disposition of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.
Item
1A. Risk Factors.
There have been no material changes in the Company’s risk factors from those disclosed in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10‑K for 2021.
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* Indicates a management contract
or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.