Item 1. Financial Statements
Item 1. Financial Statements.
COCA-COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Second Quarter First Half
(in thousands, except per share data) 2020 2019 2020 2019
Net sales $ 1,227,215 $ 1,273,659 $ 2,400,236 $ 2,376,571
Cost of sales 797,914 837,880 1,565,640 1,551,484
Gross profit 429,301 435,779 834,596 825,087
Selling, delivery and administrative expenses 346,183 368,565 718,657 737,719
Income from operations 83,118 67,214 115,939 87,368
Interest expense, net 9,184 11,995 18,745 24,881
Other expense, net 16,134 31,181 18,432 47,032
Income before income taxes 57,800 24,038 78,762 15,455
Income tax expense 15,187 7,182 20,548 4,177
Net income 42,613 16,856 58,214 11,278
Less: Net income attributable to noncontrolling interest 3,044 1,486 3,983 2,739
Net income attributable to Coca-Cola Consolidated, Inc. $ 39,569 $ 15,370 $ 54,231 $ 8,539
Basic net income per share based on net income attributable to Coca-Cola Consolidated, Inc.:
Common Stock $ 4.23 $ 1.64 $ 5.79 $ 0.91
Weighted average number of Common Stock shares outstanding 7,141 7,141 7,141 7,141
Class B Common Stock $ 4.23 $ 1.64 $ 5.79 $ 0.91
Weighted average number of Class B Common Stock shares outstanding 2,232 2,232 2,232 2,225
Diluted net income per share based on net income attributable to Coca-Cola Consolidated, Inc.:
Common Stock $ 4.19 $ 1.64 $ 5.74 $ 0.91
Weighted average number of Common Stock shares outstanding – assuming dilution 9,440 9,421 9,440 9,415
Class B Common Stock $ 4.18 $ 1.63 $ 5.73 $ 0.90
Weighted average number of Class B Common Stock shares outstanding – assuming dilution 2,299 2,280 2,299 2,274
Cash dividends per share:
Common Stock $ 0.25 $ 0.25 $ 0.50 $ 0.50
Class B Common Stock $ 0.25 $ 0.25 $ 0.50 $ 0.50
See accompanying notes to condensed consolidated financial statements.
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COCA-COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Net income $ 42,613 $ 16,856 $ 58,214 $ 11,278
Other comprehensive income, net of tax:
Defined benefit plans reclassification including pension costs:
Actuarial gains 897 679 1,793 1,358
Prior service benefits 3 5 7 9
Postretirement benefits reclassification included in benefits costs:
Actuarial gains 66 147 132 295
Prior service costs — ( 243 ) — ( 487 )
Interest rate swap 2 — ( 1,013 ) —
Foreign currency translation adjustment 3 5 2 ( 4 )
Other comprehensive income, net of tax 971 593 921 1,171
Comprehensive income 43,584 17,449 59,135 12,449
Less: Comprehensive income attributable to noncontrolling interest 3,044 1,486 3,983 2,739
Comprehensive income attributable to Coca-Cola Consolidated, Inc. $ 40,540 $ 15,963 $ 55,152 $ 9,710
See accompanying notes to condensed consolidated financial statements.
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COCA-COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data) June 28, 2020 December 29, 2019
ASSETS
Current Assets:
Cash and cash equivalents $ 77,550 $ 9,614
Accounts receivable, trade 471,962 433,552
Allowance for doubtful accounts ( 21,244 ) ( 13,782 )
Accounts receivable from The Coca-Cola Company 48,092 62,411
Accounts receivable, other 40,453 43,094
Inventories 211,128 225,926
Prepaid expenses and other current assets 72,170 69,461
Total current assets 900,111 830,276
Property, plant and equipment, net 985,178 997,403
Right-of-use assets - operating leases 134,315 111,376
Leased property under financing leases, net 11,573 17,960
Other assets 109,822 113,269
Goodwill 165,903 165,903
Distribution agreements, net 863,954 876,096
Customer lists and other identifiable intangible assets, net 13,724 14,643
Total assets $ 3,184,580 $ 3,126,926
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of obligations under operating leases $ 17,602 $ 15,024
Current portion of obligations under financing leases 4,070 9,403
Accounts payable, trade 216,138 187,476
Accounts payable to The Coca-Cola Company 139,780 108,699
Other accrued liabilities 190,018 208,834
Accrued compensation 62,168 87,813
Accrued interest payable 4,454 4,946
Total current liabilities 634,230 622,195
Deferred income taxes 147,101 125,130
Pension and postretirement benefit obligations 117,839 114,831
Other liabilities 674,669 668,566
Noncurrent portion of obligations under operating leases 122,053 97,765
Noncurrent portion of obligations under financing leases 12,949 17,403
Long-term debt 970,174 1,029,920
Total liabilities 2,679,015 2,675,810
Commitments and Contingencies
Equity:
Common Stock, $ 1.00 par value: 30,000,000 shares authorized; 10,203,821 shares issued
10,204 10,204
Class B Common Stock, $ 1.00 par value: 10,000,000 shares authorized; 2,860,356 shares issued
2,860 2,860
Capital in excess of par value 128,983 128,983
Retained earnings 430,706 381,161
Accumulated other comprehensive loss ( 114,081 ) ( 115,002 )
Treasury stock, at cost: Common Stock – 3,062,374 shares
( 60,845 ) ( 60,845 )
Treasury stock, at cost: Class B Common Stock – 628,114 shares
( 409 ) ( 409 )
Total equity of Coca-Cola Consolidated, Inc. 397,418 346,952
Noncontrolling interest 108,147 104,164
Total equity 505,565 451,116
Total liabilities and equity $ 3,184,580 $ 3,126,926
See accompanying notes to condensed consolidated financial statements.
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COCA-COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
First Half
(in thousands) 2020 2019
Cash Flows from Operating Activities:
Net income $ 58,214 $ 11,278
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense from property, plant and equipment and financing leases 74,878 79,316
Amortization of intangible assets and deferred proceeds, net 11,518 11,512
Fair value adjustment of acquisition related contingent consideration 15,260 43,268
Loss on sale of property, plant and equipment 1,416 4,324
Deferred income taxes 21,670 4,017
Impairment of property, plant and equipment 1,350 1,155
Stock compensation expense — 2,045
Amortization of debt costs 494 752
Change in current assets less current liabilities 20,935 ( 78,842 )
Change in other noncurrent assets 13,420 5,228
Change in other noncurrent liabilities 9,848 4,071
Other — 462
Total adjustments 170,789 77,308
Net cash provided by operating activities $ 229,003 $ 88,586
Cash Flows from Investing Activities:
Additions to property, plant and equipment $ ( 72,886 ) $ ( 57,581 )
Other distribution agreements — ( 4,654 )
Investment in CONA Services LLC ( 1,582 ) ( 486 )
Proceeds from the sale of property, plant and equipment 1,764 823
Net cash used in investing activities $ ( 72,704 ) $ ( 61,898 )
Cash Flows from Financing Activities:
Payments on revolving credit facility $ ( 280,000 ) $ ( 186,339 )
Borrowings under revolving credit facility 235,000 206,339
Payments on term loan facility and senior notes ( 15,000 ) ( 132,500 )
Proceeds from issuance of senior notes — 100,000
Payments of acquisition related contingent consideration ( 20,531 ) ( 12,836 )
Cash dividends paid ( 4,686 ) ( 4,682 )
Payments on financing lease obligations ( 3,001 ) ( 4,261 )
Debt issuance fees ( 145 ) ( 265 )
Net cash used in financing activities $ ( 88,363 ) $ ( 34,544 )
Net increase (decrease) in cash during period $ 67,936 $ ( 7,856 )
Cash at beginning of period 9,614 13,548
Cash at end of period $ 77,550 $ 5,692
Significant non-cash investing and financing activities:
Right-of-use assets obtained in exchange for lease obligations $ 32,224 $ 21,220
Additions to property, plant and equipment accrued and recorded in accounts payable, trade 11,900 10,292
Issuance of Class B Common Stock in connection with stock award — 4,776
See accompanying notes to condensed consolidated financial statements.
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COCA-COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)
(in thousands, except share data)
Common
Stock
Class B
Common
Stock
Capital
in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock - Common
Stock
Treasury
Stock - Class B
Common
Stock
Total
Equity
of Coca-Cola
Consolidated,
Inc.
Non-
controlling
Interest
Total
Equity
Balance on December 30, 2018 $ 10,204 $ 2,839 $ 124,228 $ 359,435 $ ( 77,265 ) $ ( 60,845 ) $ ( 409 ) $ 358,187 $ 96,979 $ 455,166
Net income — — — 8,539 — — — 8,539 2,739 11,278
Other comprehensive income, net of tax — — — — 1,171 — — 1,171 — 1,171
Cash dividends paid:
Common Stock ($ 0.50 per share)
— — — ( 3,570 ) — — — ( 3,570 ) — ( 3,570 )
Class B Common Stock ($ 0.50 per share)
— — — ( 1,112 ) — — — ( 1,112 ) — ( 1,112 )
Issuance of 19,224 shares of Class B Common Stock
— 21 4,755 — — — — 4,776 — 4,776
Reclassification of stranded tax effects — — — 19,720 ( 19,720 ) — — — — —
Balance on June 30, 2019 $ 10,204 $ 2,860 $ 128,983 $ 383,012 $ ( 95,814 ) $ ( 60,845 ) $ ( 409 ) $ 367,991 $ 99,718 $ 467,709
Balance on December 29, 2019 $ 10,204 $ 2,860 $ 128,983 $ 381,161 $ ( 115,002 ) $ ( 60,845 ) $ ( 409 ) $ 346,952 $ 104,164 $ 451,116
Net income — — — 54,231 — — — 54,231 3,983 58,214
Other comprehensive loss, net of tax — — — — 921 — — 921 — 921
Cash dividends paid:
Common Stock ($ 0.50 per share)
— — — ( 3,571 ) — — — ( 3,571 ) — ( 3,571 )
Class B Common Stock ($ 0.50 per share)
— — — ( 1,115 ) — — — ( 1,115 ) — ( 1,115 )
Balance on June 28, 2020 $ 10,204 $ 2,860 $ 128,983 $ 430,706 $ ( 114,081 ) $ ( 60,845 ) $ ( 409 ) $ 397,418 $ 108,147 $ 505,565
See accompanying notes to condensed consolidated financial statements.
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COCA-COLA CONSOLIDATED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Critical Accounting Policies and Recent Accounting Pronouncements
The condensed consolidated financial statements include the accounts of Coca-Cola Consolidated, Inc. and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented:
• The financial position as of June 28, 2020 and December 29, 2019.
• The results of operations and comprehensive income for the 13-week periods ended June 28, 2020 (the “second quarter” of fiscal 2020 (“2020”)) and June 30, 2019 (the “second quarter” of fiscal 2019 (“2019”)), and the 26-week periods ended June 28, 2020 (the “first half” of 2020) and June 30, 2019 (the “first half” of 2019).
• The changes in cash flows and equity for the first half of 2020 and the first half of 2019.
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 2019 filed with the Securities and Exchange Commission.
The preparation of condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its condensed consolidated financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for 2019 under the caption “Discussion of Critical Accounting Policies and Estimates and Recent Accounting Pronouncements” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” a discussion of the Company’s most critical accounting policies, which are those the Company believes to be the most important to the portrayal of its financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is contemplated and prior to making such change.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses at the point a loss is probable to occur, rather than expected to occur, which will generally result in earlier recognition of allowances for credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 in the first quarter of 2020 and the adoption did not have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies and adds certain disclosure requirements in Accounting Standards Codification Topic 820, Fair Value Measurement. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Certain amendments must be applied prospectively while others are to be applied on a retrospective basis to all periods presented. The Company adopted ASU 2018-13 in the first quarter of 2020. See Note 14 for additional information.
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Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which will simplify the accounting for income taxes by removing certain exceptions to the general principles in income tax accounting and improve consistent application of and simplify GAAP for other areas of income tax accounting by clarifying and amending existing guidance. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2019-12 will have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Sub-topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” which is effective for fiscal years ending after December 15, 2020. Under this guidance, disclosures will be removed for the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of assets expected to be returned to the employer, certain related party disclosures, and the effects of a one-percentage-point change in the assumed health care cost trend rates. Additional disclosures will include the weighted average interest crediting rate for plans with promised crediting interest rates and an explanation of the reasons for significant gains and losses related to the benefit obligation for the period.
2. Related Party Transactions
The Coca-Cola Company
The Company’s business consists primarily of the production, marketing and distribution of nonalcoholic beverages of The Coca-Cola Company, which is the sole owner of the formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.
J. Frank Harrison, III, the Chairman of the Board of Directors and Chief Executive Officer of the Company, together with the trustees of certain trusts established for the benefit of certain relatives of the late J. Frank Harrison, Jr., control shares representing approximately 86 % of the total voting power of the Company’s total outstanding Common Stock and Class B Common Stock on a consolidated basis. As of June 28, 2020, The Coca-Cola Company owned approximately 27 % of the Company’s total outstanding Common Stock and Class B Common Stock on a consolidated basis, representing approximately 5 % of the total voting power of the Company’s Common Stock and Class B Common Stock voting together. As long as The Coca-Cola Company holds the number of shares of the Company’s Common Stock it currently owns, it has the right to have its designee proposed by the Company for nomination to the Company’s Board of Directors, and J. Frank Harrison, III and the trustees of the J. Frank Harrison, Jr. family trusts described above, have agreed to vote the shares of the Company’s Class B Common Stock which they control in favor of such designee. The Coca-Cola Company does not own any shares of the Company’s Class B Common Stock.
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The following table summarizes the significant transactions between the Company and The Coca-Cola Company:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Payments made by the Company to The Coca-Cola Company for:
Concentrate, syrup, sweetener and other purchases $ 264,595 $ 344,841 $ 549,515 $ 611,484
Customer marketing programs 32,400 39,221 65,391 72,513
Cold drink equipment parts 4,039 7,067 10,380 14,049
Brand investment programs 3,988 3,473 7,250 6,593
Payments made by The Coca-Cola Company to the Company for:
Marketing funding support payments $ 15,449 $ 26,311 $ 36,995 $ 49,023
Fountain delivery and equipment repair fees 6,345 9,885 15,435 20,634
Presence marketing funding support on the Company’s behalf 4,145 4,502 5,880 4,937
Facilitating the distribution of certain brands and packages to other Coca-Cola bottlers 1,161 1,351 2,318 2,350
In fiscal 2017, The Coca-Cola Company agreed to provide the Company a fee to compensate the Company for the net economic impact of changes made by The Coca-Cola Company to the authorized pricing on sales of covered beverages produced at certain manufacturing facilities owned by the Company (the “Legacy Facilities Credit”). The Company immediately recognized the portion of the Legacy Facilities Credit applicable to a regional manufacturing facility divested in fiscal 2017 and the remaining balance of the Legacy Facilities Credit will be amortized as a reduction to cost of sales over a period of 40 years. The portion of the deferred liability that is expected to be amortized in the next 12 months is classified as current.
Coca-Cola Refreshments USA, Inc. (“CCR”)
The Company, The Coca-Cola Company and CCR, a wholly owned subsidiary of The Coca-Cola Company, entered into a comprehensive beverage agreement on March 31, 2017 (as amended, the “CBA”). Pursuant to the CBA, the Company is required to make quarterly sub-bottling payments to CCR on a continuing basis 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 sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, beverage product or certain cross-licensed brands.
Sub-bottling payments to CCR were $ 20.5 million during the first half of 2020 and $ 12.8 million during the first half of 2019. The following table summarizes the liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future sub-bottling payments to CCR:
(in thousands) June 28, 2020 December 29, 2019
Current portion of acquisition related contingent consideration $ 34,388 $ 41,087
Noncurrent portion of acquisition related contingent consideration 406,725 405,597
Total acquisition related contingent consideration $ 441,113 $ 446,684
Upon the conversion of the Company’s then-existing bottling agreements in fiscal 2017 pursuant to the CBA, the Company received a fee from CCR (the “Territory Conversion Fee”). The Territory Conversion Fee was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years. The portion of the deferred liability that is expected to be amortized in the next 12 months is classified as current.
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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 $ 22.6 million as of June 28, 2020 and $ 23.2 million as of December 29, 2019.
South Atlantic Canners, Inc. (“SAC”)
The Company is a shareholder of SAC, a manufacturing cooperative in Bishopville, South Carolina. All of SAC’s shareholders are Coca-Cola bottlers and each has equal voting rights. The Company accounts for SAC as an equity method investment. The Company’s investment in SAC, which was classified as other assets in the condensed consolidated balance sheets, was $ 8.0 million as of June 28, 2020 and $ 8.2 million as of December 29, 2019.
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 classified as a reduction to cost of sales in the condensed consolidated statements of operations, were $ 4.7 million in the first half of 2020 and $ 4.5 million in the first half of 2019.
Coca-Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”)
Along with other Coca-Cola bottlers in the United States and Canada, the Company is a member of CCBSS, a company formed to provide certain procurement and other services with the intention of enhancing the efficiency and competitiveness of the Coca-Cola bottling system. The Company accounts for CCBSS as an equity method investment and its investment in CCBSS is not material.
CCBSS negotiates the procurement for the majority of the Company’s raw materials, excluding concentrate, and the Company receives a rebate from CCBSS for the purchase of these raw materials. The Company had rebates due from CCBSS of $ 12.4 million on June 28, 2020 and $ 10.0 million on December 29, 2019, which were classified as accounts receivable, other in the condensed consolidated balance sheets.
In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $ 1.6 million in the first half of 2020 and $ 1.0 million in the first half of 2019, 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 $ 11.3 million as of June 28, 2020 and $ 10.5 million as of December 29, 2019.
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 $ 11.6 million in the first half of 2020 and $ 11.5 million in the first half of 2019.
Related Party Leases
The Company leases its headquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation (“Beacon”), of which J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, is the majority stockholder and Morgan H. Everett, Vice Chair of the Companys Board of Directors, is a minority stockholder. During the first quarter of 2020, the Company entered into a new lease agreement, effective January 1, 2020, with Beacon to continue to lease its corporate facilities. The new lease expires on December 31, 2029. The principal balance outstanding under the new lease was $ 31.8 million on June 28, 2020 and the principal balance outstanding under the previous lease, which was replaced by the new lease, was $ 6.8 million on December 29, 2019. See Note 9 for additional information.
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The Company leases the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina 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 director of the Company, are trustees and beneficiaries and of which Morgan H. Everett is a permissible, discretionary beneficiary. The principal balance outstanding under this lease was $ 2.2 million on June 28, 2020 and $ 4.3 million on December 29, 2019. Subsequent to quarter end, the Company entered into an amendment to this lease, effective June 30, 2020, with HLP to continue to lease its production facility in Charlotte, North Carolina. The amendment extended the term of the original lease agreement by 15 years from December 31, 2020 through December 31, 2035. This lease will continue to be classified as a financing lease and the additional lease liability associated with this lease commitment is $ 60.1 million.
A summary of rental payments related to these leases is as follows:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Company headquarters $ 826 $ 1,151 $ 1,652 $ 2,261
Snyder Production Center 1,113 1,081 2,226 2,161
Long-Term Performance Equity Plan
The Long-Term Performance Equity Plan compensates J. Frank Harrison, III based on the Company’s performance. Awards granted under the Long-Term Performance Equity Plan are earned based on the Company’s attainment during a performance period of certain performance measures, each as specified by the 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 the Company’s Common Stock during the last 20 trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which is included in SD&A expenses in the condensed consolidated statements of operations, was $ 4.3 million in the first half of 2020 and $ 6.7 million in the first half of 2019.
3. Revenue Recognition
The Company offers a range of nonalcoholic beverage products and flavors designed to meet the demands of its consumers, including both sparkling and still beverages. Sparkling beverages are carbonated beverages and the Company’s principal sparkling beverage is Coca-Cola. Still beverages include energy products and noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks.
The Company’s products are sold and distributed in the United States through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. The Company typically collects payment from customers within 30 days from the date of sale.
The Company’s 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 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 97 % of the Company’s net sales in the first half of 2020 and approximately 96 % of the Company’s net sales in the first half of 2019. Substantially all of the Company’s revenue is recognized at a point in time and is included in the Nonalcoholic Beverages segment.
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
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recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month . Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the condensed consolidated financial statements.
The following table represents a disaggregation of revenue from contracts with customers:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Point in time net sales:
Nonalcoholic Beverages - point in time $ 1,188,485 $ 1,227,977 $ 2,320,960 $ 2,288,248
Total point in time net sales $ 1,188,485 $ 1,227,977 $ 2,320,960 $ 2,288,248
Over time net sales:
Nonalcoholic Beverages - over time $ 7,039 $ 10,908 $ 17,145 $ 22,864
All Other - over time 31,691 34,774 62,131 65,459
Total over time net sales $ 38,730 $ 45,682 $ 79,276 $ 88,323
Total net sales $ 1,227,215 $ 1,273,659 $ 2,400,236 $ 2,376,571
The Company participates in various sales programs with The Coca-Cola Company, other beverage companies and customers to increase the sale of its products. Programs negotiated with customers include arrangements under which allowances can be earned for attaining agreed-upon sales levels. The cost of these various sales incentives is not considered a separate performance obligation and is included as a deduction to net sales.
Allowance payments made to customers can be conditional on the achievement of volume targets and/or marketing commitments. Payments made in advance are recorded as prepayments and amortized in the condensed consolidated statements of operations over the relevant period for which the customer commitment is made. In the event there is no separate identifiable benefit or the fair value of such benefit cannot be established, the amortization of the prepayment is included as a deduction to net sales.
The Company sells its products and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company evaluates the collectability of its trade accounts receivable based on a number of factors, including the Company’s historic collections pattern and changes to a specific customer’s ability to meet its financial obligations. The Company has established an allowance for doubtful accounts to adjust the recorded receivable to the estimated amount the Company believes will ultimately be collected.
The nature of the Company’s contracts gives rise to several types of variable consideration, including prospective and retrospective rebates. The Company accounts for its prospective and retrospective rebates using the expected value method, which estimates the net price to the customer based on the customer’s expected annual sales volume projections.
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 1 % of bottle/can sales and post-mix sales could be at risk for return by customers. The Company’s reserve for customer returns, which was classified as allowance for doubtful accounts in the condensed consolidated balance sheets, was $ 3.6 million as of both June 28, 2020 and December 29, 2019. Returned product is recognized as a reduction to net sales.
The Company recognizes an allowance for credit losses related to its accounts receivable to present the net amount expected to be collected at the balance sheet date. The Company estimates this allowance based on historical data such as days' sales outstanding trends, previous write-offs of balances, and monthly reviews of aged trial balances, among others. Accounts receivable balances are written off when deemed uncollectible and are recognized as a deduction from the allowance for credit losses. Expected recoveries, not to exceed the amount previously written off, are considered in determining the reserve balance at the balance sheet date. Below is a summary of activity for the allowance for credit losses as of the end of the first half of 2020:
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(in thousands) Allowance for Credit Losses to Accounts Receivable
Balance at December 29, 2019 $ 10,232
Additions charged to costs and expenses 9,376
Write-offs, net of recoveries ( 1,914 )
Balance at June 28, 2020 $ 17,694
The additions to the allowance for credit losses for the first half of 2020 include a $ 5.0 million adjustment to address the COVID-19-related collectability risk primarily for our on-premise customers.
4. Segments
The Company evaluates segment reporting in accordance with the FASB 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 revenues and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.”
The Company’s segment results are as follows:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Net sales:
Nonalcoholic Beverages $ 1,195,524 $ 1,238,885 $ 2,338,105 $ 2,311,112
All Other 80,329 94,942 161,630 182,857
Eliminations (1)
( 48,638 ) ( 60,168 ) ( 99,499 ) ( 117,398 )
Consolidated net sales $ 1,227,215 $ 1,273,659 $ 2,400,236 $ 2,376,571
Income from operations:
Nonalcoholic Beverages $ 83,907 $ 57,724 $ 119,524 $ 72,365
All Other ( 789 ) 9,490 ( 3,585 ) 15,003
Consolidated income from operations $ 83,118 $ 67,214 $ 115,939 $ 87,368
Depreciation and amortization:
Nonalcoholic Beverages $ 39,909 $ 42,568 $ 80,667 $ 85,919
All Other 2,928 2,488 5,729 4,909
Consolidated depreciation and amortization $ 42,837 $ 45,056 $ 86,396 $ 90,828
(1) The entire net sales elimination for each period presented 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 .
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5. Net Income Per Share
The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method:
Second Quarter First Half
(in thousands, except per share data) 2020 2019 2020 2019
Numerator for basic and diluted net income per Common Stock and Class B Common Stock share:
Net income attributable to Coca-Cola Consolidated, Inc. $ 39,569 $ 15,370 $ 54,231 $ 8,539
Less dividends:
Common Stock 1,785 1,785 3,571 3,570
Class B Common Stock 557 558 1,115 1,112
Total undistributed earnings $ 37,227 $ 13,027 $ 49,545 $ 3,857
Common Stock undistributed earnings – basic $ 28,362 $ 9,925 $ 37,747 $ 2,941
Class B Common Stock undistributed earnings – basic 8,865 3,102 11,798 916
Total undistributed earnings – basic $ 37,227 $ 13,027 $ 49,545 $ 3,857
Common Stock undistributed earnings – diluted $ 28,161 $ 9,874 $ 37,479 $ 2,925
Class B Common Stock undistributed earnings – diluted 9,066 3,153 12,066 932
Total undistributed earnings – diluted $ 37,227 $ 13,027 $ 49,545 $ 3,857
Numerator for basic net income per Common Stock share:
Dividends on Common Stock $ 1,785 $ 1,785 $ 3,571 $ 3,570
Common Stock undistributed earnings – basic 28,362 9,925 37,747 2,941
Numerator for basic net income per Common Stock share $ 30,147 $ 11,710 $ 41,318 $ 6,511
Numerator for basic net income per Class B Common Stock share:
Dividends on Class B Common Stock $ 557 $ 558 $ 1,115 $ 1,112
Class B Common Stock undistributed earnings – basic 8,865 3,102 11,798 916
Numerator for basic net income per Class B Common Stock share $ 9,422 $ 3,660 $ 12,913 $ 2,028
Numerator for diluted net income per Common Stock share:
Dividends on Common Stock $ 1,785 $ 1,785 $ 3,571 $ 3,570
Dividends on Class B Common Stock assumed converted to Common Stock 557 558 1,115 1,112
Common Stock undistributed earnings – diluted 37,227 13,027 49,545 3,857
Numerator for diluted net income per Common Stock share $ 39,569 $ 15,370 $ 54,231 $ 8,539
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Second Quarter First Half
(in thousands, except per share data) 2020 2019 2020 2019
Numerator for diluted net income per Class B Common Stock share:
Dividends on Class B Common Stock $ 557 $ 558 $ 1,115 $ 1,112
Class B Common Stock undistributed earnings – diluted 9,066 3,153 12,066 932
Numerator for diluted net income per Class B Common Stock share $ 9,623 $ 3,711 $ 13,181 $ 2,044
Denominator for basic net income per Common Stock and Class B Common Stock share:
Common Stock weighted average shares outstanding – basic 7,141 7,141 7,141 7,141
Class B Common Stock weighted average shares outstanding – basic 2,232 2,232 2,232 2,225
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) 9,440 9,421 9,440 9,415
Class B Common Stock weighted average shares outstanding – diluted 2,299 2,280 2,299 2,274
Basic net income per share:
Common Stock $ 4.23 $ 1.64 $ 5.79 $ 0.91
Class B Common Stock $ 4.23 $ 1.64 $ 5.79 $ 0.91
Diluted net income per share:
Common Stock $ 4.19 $ 1.64 $ 5.74 $ 0.91
Class B Common Stock $ 4.18 $ 1.63 $ 5.73 $ 0.90
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, 100 % 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 included 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 performance units granted pursuant to the Long-Term Performance Equity Plan are excluded from the calculation of diluted net loss per share, as the effect of these awards would be 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 for the calculation of diluted net income per share.
(5) The Company did no t have anti-dilutive shares for any periods presented.
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6. Inventories
Inventories consisted of the following:
(in thousands)
June 28, 2020 December 29, 2019
Finished products
$ 134,731 $ 142,363
Manufacturing materials
40,436 45,267
Plastic shells, plastic pallets and other inventories
35,961 38,296
Total inventories
$ 211,128 $ 225,926
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
(in thousands) June 28, 2020 December 29, 2019
Repair parts $ 28,994 $ 28,967
Prepaid software 6,494 5,850
Prepaid marketing 6,314 5,658
Prepaid taxes 5,138 4,359
Prepayments for sponsorship contracts 3,412 8,696
Other prepaid expenses and other current assets 21,818 15,931
Total prepaid expenses and other current assets $ 72,170 $ 69,461
8. Property, Plant and Equipment, Net
The principal categories and estimated useful lives of property, plant and equipment, net were as follows:
(in thousands) June 28, 2020 December 29, 2019 Estimated Useful Lives
Land $ 83,168 $ 76,860
Buildings 225,665 223,500 8 - 50 years
Machinery and equipment 357,535 355,575 5 - 20 years
Transportation equipment 421,858 417,532 4 - 20 years
Furniture and fixtures 94,918 92,059 3 - 10 years
Cold drink dispensing equipment 479,272 489,050 5 - 17 years
Leasehold and land improvements 148,204 145,341 5 - 20 years
Software for internal use 129,646 128,792 3 - 10 years
Construction in progress 46,850 29,369
Total property, plant and equipment, at cost 1,987,116 1,958,078
Less: Accumulated depreciation and amortization 1,001,938 960,675
Property, plant and equipment, net $ 985,178 $ 997,403
9. Leases
The Company leases office and warehouse space, machinery and other equipment under noncancelable operating lease agreements and also leases certain warehouse space under financing lease agreements. The Company uses the following policies and assumptions to evaluate its population of leases:
• Determining a lease: The Company assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys the Company’s right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets and associated liabilities are recognized at the commencement date and initially measured based on the present value of lease payments over the defined lease term.
• Allocating lease and non-lease components: The Company has elected the practical expedient to not separate lease and non-lease components for certain classes of underlying assets. The Company has equipment and vehicle lease
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agreements, which generally have the lease and associated non-lease components accounted for as a single lease component. The Company has real estate lease agreements with lease and non-lease components, which are generally accounted for separately where applicable.
• Calculating the discount rate: The Company calculates the discount rate based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company calculates an incremental borrowing rate using a portfolio approach. The incremental borrowing rate is calculated using the contractual lease term and the Company’s borrowing rate.
• Recognizing leases: The Company does not recognize leases with a contractual term of less than 12 months on its condensed consolidated balance sheets. Lease expense for these short-term leases is expensed on a straight-line basis over the lease term.
• Including rent increases or escalation clauses: Certain leases contain scheduled rent increases or escalation clauses, which can be based on the Consumer Price Index or other rates. The Company assesses each contract individually and applies the appropriate variable payments based on the terms of the agreement.
• Including renewal options and/or purchase options: Certain leases include renewal options to extend the lease term and/or purchase options to purchase the leased asset. The Company assesses these options using a threshold of reasonably certain, which is a high threshold and, therefore, the majority of the Company’s leases do not include renewal periods or purchase options for the measurement of the right-of-use asset and the associated lease liability. For leases the Company is reasonably certain to renew or purchase, those options are included within the lease term and, therefore, included in the measurement of the right-of-use asset and the associated lease liability.
• Including options to terminate: Certain leases include the option to terminate the lease prior to its scheduled expiration. This allows a contractually bound party to terminate its obligation under the lease contract, typically in return for an agreed-upon financial consideration. The terms and conditions of the termination options vary by contract.
• Including residual value guarantees, restrictions or covenants: The Company’s lease agreements do not contain residual value guarantees, restrictions or covenants.
Following is a summary of the weighted average remaining lease term and weighted average discount rate for the Company’s population of leases:
June 28, 2020 December 29, 2019
Weighted average remaining lease term:
Operating leases 10.0 years 10.2 years
Financing leases 5.8 years 4.8 years
Weighted average discount rate:
Operating leases 4.1 % 4.1 %
Financing leases 5.5 % 5.7 %
During the first quarter of 2020, the Company entered into a lease agreement, effective January 1, 2020, with Beacon to continue to lease its headquarters office facility and an adjacent office facility in Charlotte, North Carolina. The new lease has a 10 -year term and expires on December 31, 2029. This lease is classified as an operating lease and the additional lease liability associated with this lease was $ 31.8 million as of June 28, 2020. This lease replaced the previous lease agreement, which was classified as a financing lease and was scheduled to expire on December 31, 2021, and had a $ 6.8 million principal balance outstanding as of December 29, 2019.
As of June 28, 2020, the Company had two real estate lease commitments that had not yet commenced. The Company amended an existing lease agreement, effective July 6, 2020, to continue to lease its warehouse in North Charleston, South Carolina. The amendment extended the term of the original lease agreement by three years from April 5, 2027 through April 5, 2030. This lease will continue to be classified as an operating lease and the additional lease liability associated with this lease commitment is expected to be $ 0.8 million. The Company amended an existing lease agreement, effective June 30, 2020, with HLP to continue to lease its production facility in Charlotte, North Carolina. The amendment extended the term of the original lease agreement by 15 years from December 31, 2020 through December 31, 2035. This lease will continue to be classified as a financing lease and the additional lease liability associated with this lease commitment is $ 60.1 million.
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Following is a summary of balances related to the Company’s lease portfolio within the condensed consolidated statements of operations:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Cost of sales impact:
Operating lease costs $ 1,385 $ 1,342 $ 2,770 $ 2,683
Short-term and variable leases 3,057 2,317 5,657 4,579
Depreciation expense from financing leases 353 354 707 707
Total cost of sales impact $ 4,795 $ 4,013 $ 9,134 $ 7,969
SD&A expenses impact:
Operating lease costs $ 4,710 $ 3,026 $ 9,379 $ 5,922
Short-term and variable leases 451 779 1,341 1,838
Depreciation expense from financing leases 571 1,137 1,142 2,276
Total SD&A expenses impact $ 5,732 $ 4,942 $ 11,862 $ 10,036
Interest expense, net impact:
Interest expense on financing lease obligations $ 241 $ 715 $ 507 $ 1,417
Total interest expense, net impact $ 241 $ 715 $ 507 $ 1,417
Total lease cost $ 10,768 $ 9,670 $ 21,503 $ 19,422
The future minimum lease payments related to the Company’s lease portfolio include renewal options the Company has determined to be reasonably certain and exclude payments to landlords for real estate taxes and common area maintenance. Following is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of June 28, 2020 :
(in thousands) Operating
Leases Financing
Leases Total
Remainder of 2020 $ 11,371 $ 3,518 $ 14,889
2021 21,017 2,628 23,645
2022 18,264 2,694 20,958
2023 15,971 2,750 18,721
2024 15,326 2,808 18,134
Thereafter 90,229 5,407 95,636
Total minimum lease payments including interest $ 172,178 $ 19,805 $ 191,983
Less: Amounts representing interest 32,523 2,786 35,309
Present value of minimum lease principal payments 139,655 17,019 156,674
Less: Current portion of lease liabilities - operating and financing leases 17,602 4,070 21,672
Noncurrent portion of lease liabilities - operating and financing leases $ 122,053 $ 12,949 $ 135,002
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Following is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of December 29, 2019:
(in thousands) Operating
Leases Financing
Leases Total
2020 $ 19,236 $ 10,611 $ 29,847
2021 16,815 6,215 23,030
2022 14,016 2,694 16,710
2023 11,704 2,750 14,454
2024 10,989 2,808 13,797
Thereafter 67,556 5,406 72,962
Total minimum lease payments including interest $ 140,316 $ 30,484 $ 170,800
Less: Amounts representing interest 27,527 3,678 31,205
Present value of minimum lease principal payments 112,789 26,806 139,595
Less: Current portion of lease liabilities - operating and financing leases 15,024 9,403 24,427
Noncurrent portion of lease liabilities - operating and financing leases $ 97,765 $ 17,403 $ 115,168
Following is a summary of balances related to the Company’s lease portfolio within the condensed consolidated statements of cash flows:
First Half
(in thousands) 2020 2019
Cash flows from operating activities impact:
Operating leases $ 8,633 $ 8,515
Interest payments on financing lease obligations 507 1,417
Total cash flows from operating activities impact $ 9,140 $ 9,932
Cash flows from financing activities impact:
Principal payments on financing lease obligations $ 3,001 $ 4,261
Total cash flows from financing activities impact $ 3,001 $ 4,261
10. Distribution Agreements, Net
Distribution agreements, net, which are amortized on a straight-line basis and have an estimated useful life of 10 to 40 years, consisted of the following:
(in thousands)
June 28, 2020 December 29, 2019
Distribution agreements at cost
$ 950,549 $ 950,549
Less: Accumulated amortization
86,595 74,453
Distribution agreements, net
$ 863,954 $ 876,096
11. Customer Lists and Other Identifiable Intangible Assets, Net
Customer lists and other identifiable intangible assets, net, which are amortized on a straight-line basis and have an estimated useful life of 5 to 12 years, consisted of the following:
(in thousands)
June 28, 2020 December 29, 2019
Customer lists and other identifiable intangible assets at cost
$ 25,288 $ 25,288
Less: Accumulated amortization
11,564 10,645
Customer lists and other identifiable intangible assets, net
$ 13,724 $ 14,643
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12. Other Accrued Liabilities
Other accrued liabilities consisted of the following:
(in thousands) June 28, 2020 December 29, 2019
Accrued insurance costs $ 47,629 $ 44,584
Current portion of acquisition related contingent consideration 34,388 41,087
Accrued marketing costs 34,346 34,947
Employee and retiree benefit plan accruals 29,752 33,699
Accrued taxes (other than income taxes) 10,061 6,366
Commodity hedges at fair market value 2,918 1,174
Checks and transfers yet to be presented for payment from zero balance cash accounts 2,412 20,199
Current deferred proceeds from Territory Conversion Fee 2,286 2,286
Federal income taxes — 1,651
All other accrued expenses 26,226 22,841
Total other accrued liabilities $ 190,018 $ 208,834
13. Derivative Financial Instruments
The Company is subject to the risk of increased costs arising from adverse changes in certain commodity prices. In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivative instruments. The Company does not use derivative instruments for trading or speculative purposes. All derivative instruments are recorded at fair value as either assets or liabilities in the condensed consolidated balance sheets. These derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. Derivative instruments held are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. Settlements of derivative agreements are included in cash flows from operating activities in the condensed consolidated statements of cash flows.
The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company would be exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these parties.
The following table summarizes pre-tax changes in the fair value of the Company’s commodity derivative financial instruments and the classification of such changes in the condensed consolidated statements of operations:
Second Quarter First Half
(in thousands) Classification of Gain (Loss) 2020 2019 2020 2019
Commodity hedges Cost of sales $ 1,266 $ ( 4,874 ) $ ( 270 ) $ ( 969 )
Commodity hedges Selling, delivery and administrative expenses 805 ( 66 ) ( 1,524 ) 2,649
Total gain (loss) $ 2,071 $ ( 4,940 ) $ ( 1,794 ) $ 1,680
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The following table summarizes the fair values and classification in the condensed consolidated balance sheets of derivative instruments held by the Company:
(in thousands) Balance Sheet Classification June 28, 2020 December 29, 2019
Assets:
Commodity hedges at fair market value Prepaid expenses and other current assets $ 823 $ 1,007
Total assets $ 823 $ 1,007
Liabilities:
Commodity hedges at fair market value Other accrued liabilities $ 2,918 $ 1,174
Total liabilities $ 2,918 $ 1,174
The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions. Accordingly, the net amounts of derivative assets are recognized in either prepaid expenses and other current assets or other assets in the condensed consolidated balance sheets and the net amounts of derivative liabilities are recognized in other accrued liabilities or other liabilities in the condensed consolidated balance sheets.
The following table summarizes the Company’s gross derivative assets and gross derivative liabilities in the condensed consolidated balance sheets:
(in thousands) June 28, 2020 December 29, 2019
Gross derivative assets $ 904 $ 3,298
Gross derivative liabilities 2,999 3,465
The following table summarizes the Company’s outstanding commodity derivative agreements:
(in thousands) June 28, 2020 December 29, 2019
Notional amount of outstanding commodity derivative agreements $ 123,428 $ 171,699
Latest maturity date of outstanding commodity derivative agreements December 2020 December 2020
14. Fair Values of Financial Instruments
GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:
• Level 1: Quoted market prices in active markets for identical assets or liabilities.
• Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
• Level 3: Unobservable inputs that are not corroborated by market data.
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The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were no transfers of assets or liabilities between levels in any period presented.
Financial Instrument
Fair Value
Level
Methods and Assumptions
Deferred compensation plan assets and liabilities Level 1 The fair value of the Company’s non-qualified deferred compensation plan for certain executives and other highly compensated employees is based on the fair values of associated assets and liabilities, which are held in mutual funds and are based on the quoted market value of the securities held within the mutual funds.
Commodity hedging agreements Level 2 The fair values of the Company’s commodity hedging agreements are based on current settlement values at each balance sheet date. The fair values of the commodity hedging agreements at each balance sheet date represent the estimated amounts the Company would have received or paid upon termination of these agreements. The Company’s credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair values of derivative financial instruments.
Nonpublic variable rate debt Level 2 The carrying amounts of the Company’s nonpublic variable rate debt approximate their fair values due to variable interest rates with short reset periods.
Nonpublic fixed rate debt Level 2 The fair values of the Company’s nonpublic fixed rate debt are based on estimated current market prices.
Public debt securities Level 2 The fair values of the Company’s public debt securities are based on estimated current market prices.
Acquisition related contingent consideration Level 3 The fair values of acquisition related contingent consideration are based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data.
The following tables summarize, by assets and liabilities, the carrying amounts and fair values by level of the Company’s deferred compensation plan, commodity hedging agreements, debt and acquisition related contingent consideration:
June 28, 2020
(in thousands) Carrying
Amount
Total
Fair Value
Fair Value
Level 1
Fair Value
Level 2
Fair Value
Level 3
Assets:
Deferred compensation plan assets $ 43,904 $ 43,904 $ 43,904 $ — $ —
Commodity hedging agreements 823 823 — 823 —
Liabilities:
Deferred compensation plan liabilities 43,904 43,904 43,904 — —
Commodity hedging agreements 2,918 2,918 — 2,918 —
Nonpublic variable rate debt 247,338 247,500 — 247,500 —
Nonpublic fixed rate debt 374,734 391,700 — 391,700 —
Public debt securities 348,102 385,000 — 385,000 —
Acquisition related contingent consideration 441,113 441,113 — — 441,113
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December 29, 2019
(in thousands) Carrying
Amount
Total
Fair Value
Fair Value
Level 1
Fair Value
Level 2
Fair Value
Level 3
Assets:
Deferred compensation plan assets $ 42,543 $ 42,543 $ 42,543 $ — $ —
Commodity hedging agreements 1,007 1,007 — 1,007 —
Liabilities:
Deferred compensation plan liabilities 42,543 42,543 42,543 — —
Commodity hedging agreements 1,174 1,174 — 1,174 —
Nonpublic variable rate debt 307,250 307,500 — 307,500 —
Nonpublic fixed rate debt 374,723 383,900 — 383,900 —
Public debt securities 347,947 367,300 — 367,300 —
Acquisition related contingent consideration 446,684 446,684 — — 446,684
The acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC.
The future expected sub-bottling payments extend through the life of the applicable distribution assets acquired from CCR, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the amounts that will be paid in the future under the CBA, and current sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration and could materially impact the amount of non-cash income or expense recorded each reporting period.
The acquisition related contingent consideration liability is the Company’s only Level 3 asset or liability. A reconciliation of the Level 3 activity is as follows:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Beginning balance - Level 3 liability $ 437,094 $ 393,007 $ 446,684 $ 382,898
Payments of acquisition related contingent consideration ( 10,079 ) ( 6,599 ) ( 20,531 ) ( 12,836 )
Reclassification to current payables ( 450 ) ( 3,180 ) ( 300 ) ( 880 )
Increase in fair value 14,548 29,222 15,260 43,268
Ending balance - Level 3 liability $ 441,113 $ 412,450 $ 441,113 $ 412,450
The increase in the fair value of the acquisition related contingent consideration liability during the first half of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees, partially offset by an increase in the discount rate used to calculate the fair values. The increase in the fair value of the acquisition related contingent consideration liability during the first half of 2019 was primarily driven by a decrease in the discount rate and changes in future cash flow projections of the distribution territories subject to sub-bottling fees. These fair value adjustments were recorded in other expense, net in the condensed consolidated statements of operations.
The anticipated amount the Company could pay annually under acquisition related contingent consideration arrangements is expected to be in the range of $ 28 million to $ 52 million.
15. Income Taxes
The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 26.1 % for the first half of 2020 and 27.0 % for the first half of 2019. The decrease in the effective income tax rate was primarily driven by improved financial results and the extension of certain tax credits in 2020.
The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 27.5 % for the first half of 2020 and 32.8 % for the first half of 2019.
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The Company had uncertain tax positions, including accrued interest, of $ 3.4 million on June 28, 2020 and $ 2.5 million on December 29, 2019, 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 significant impact on the condensed consolidated financial statements.
Prior tax years beginning in year 2002 remain open to examination by the Internal Revenue Service, and various tax years beginning in year 1998 remain open to examination by certain state taxing authorities.
16. Pension and Postretirement Benefit Obligations
Pension Plans
There are two Company-sponsored pension plans. The primary Company-sponsored pension plan was frozen as of June 30, 2006 and no benefits accrued to participants after this date. The second Company-sponsored pension plan (the “Bargaining Plan”) is for certain employees under collective bargaining agreements. Benefits under the Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes.
The components of net periodic pension cost were as follows:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Service cost $ 1,658 $ 1,206 $ 3,317 $ 2,413
Interest cost 2,760 3,062 5,520 6,125
Expected return on plan assets ( 3,383 ) ( 2,574 ) ( 6,766 ) ( 5,148 )
Recognized net actuarial loss 1,190 900 2,379 1,801
Amortization of prior service cost 4 7 9 12
Net periodic pension cost $ 2,229 $ 2,601 $ 4,459 $ 5,203
The Company did no t make any contributions to the two Company-sponsored pension plans during the first half of 2020. Contributions to the two Company-sponsored pension plans are expected to be in the range of $ 8 million to $ 12 million for the remainder of 2020.
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 pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.
The components of net periodic postretirement benefit cost were as follows:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Service cost $ 376 $ 389 $ 752 $ 778
Interest cost 504 693 1,007 1,386
Recognized net actuarial loss 87 195 175 391
Amortization of prior service cost — ( 322 ) — ( 646 )
Net periodic postretirement benefit cost $ 967 $ 955 $ 1,934 $ 1,909
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17. Other Liabilities
Other liabilities consisted of the following:
(in thousands) June 28, 2020 December 29, 2019
Noncurrent portion of acquisition related contingent consideration
$ 406,725 $ 405,597
Accruals for executive benefit plans 135,001 141,380
Noncurrent deferred proceeds from Territory Conversion Fee
81,733 82,877
Noncurrent deferred proceeds from Legacy Facilities Credit
29,170 29,569
Deferral of payroll taxes under CARES Act 13,128 —
Other 8,912 9,143
Total other liabilities
$ 674,669 $ 668,566
18. Debt
Following is a summary of the Company’s debt:
(in thousands) Maturity
Date Interest
Rate Interest
Paid Public or
Nonpublic June 28,
2020 December 29,
2019
Term loan facility (1)
6/7/2021 Variable Varies Nonpublic $ 247,500 $ 262,500
Senior notes 2/27/2023 3.28 % Semi-annually Nonpublic 125,000 125,000
Revolving credit facility (2)
6/8/2023 Variable Varies Nonpublic — 45,000
Senior notes 11/25/2025 3.80 % Semi-annually Public 350,000 350,000
Senior notes 10/10/2026 3.93 % Quarterly Nonpublic 100,000 100,000
Senior notes 3/21/2030 3.96 % Quarterly Nonpublic 150,000 150,000
Unamortized discount on senior notes (3)
11/25/2025 ( 48 ) ( 52 )
Debt issuance costs ( 2,278 ) ( 2,528 )
Long-term debt $ 970,174 $ 1,029,920
(1) The Company intends to refinance principal payments due in the next 12 months under the term loan facility, and has the capacity to do so under its revolving credit facility, which is classified as long-term debt. As such, any amounts due in the next 12 months were classified as noncurrent.
(2) The Company’s revolving credit facility has an aggregate maximum borrowing capacity of $ 500 million, which may be increased at the Company’s option to $ 750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. The Company currently believes all banks participating in the revolving credit facility have the ability to and will meet any funding requests from the Company.
(3) The senior notes due in 2025 were issued at 99.975 % 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.
In 2019, the Company entered into a $ 100 million fixed rate swap maturing June 7, 2021 , to hedge a portion of the interest rate risk on the Company’s term loan facility. This interest rate swap is designated as a cash flow hedging instrument and changes in its fair value are not expected to be material to the condensed consolidated balance sheets. Changes in the fair value of this interest rate swap were classified as accumulated other comprehensive loss on the condensed consolidated balance sheets and included in the condensed consolidated statements of comprehensive income.
The indentures under which the Company’s public debt was issued do not include financial covenants but do limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The agreements under which the Company’s nonpublic debt 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 agreements. The Company was in compliance with these covenants as of June 28, 2020. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.
All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s debt.
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19. Commitments and Contingencies
Manufacturing Cooperatives
The Company is obligated to purchase at least 80 % of its requirements of plastic bottles for certain designated territories from Southeastern. The Company is also obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. The Company purchased 15.1 million cases and 14.3 million cases of finished product from SAC in the first half of 2020 and the first half of 2019, respectively.
The following table summarizes the Company’s purchases from these manufacturing cooperatives:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Purchases from Southeastern $ 32,611 $ 36,614 $ 63,639 $ 70,940
Purchases from SAC 40,385 39,993 82,219 77,439
Total purchases from manufacturing cooperatives $ 72,996 $ 76,607 $ 145,858 $ 148,379
The Company guarantees a portion of SAC’s debt, which expires at various dates through 2024. The amount guaranteed was $ 14.7 million on both June 28, 2020 and December 29, 2019. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee.
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 was identified and the Company determined it to be other than temporary. No impairment of the Company’s investment in SAC was identified as of June 28, 2020, and there was no impairment identified in 2019.
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 $ 37.6 million on June 28, 2020 and $ 35.6 million on December 29, 2019.
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of June 28, 2020, the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $ 178.1 million.
The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes that the ultimate disposition of these matters will not have a material adverse effect on the financial condition, 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.
20. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (“AOCI(L)”) is comprised of adjustments relative to the Company’s pension and postretirement medical benefit plans and foreign currency translation adjustments required for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.
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A summary of AOCI(L) for the second quarter of 2020 and the second quarter of 2019 is as follows:
(in thousands) March 29, 2020 Pre-tax Activity Tax Effect June 28, 2020
Net pension activity:
Actuarial loss $ ( 92,278 ) $ 1,190 $ ( 293 ) $ ( 91,381 )
Prior service costs ( 3 ) 4 ( 1 ) —
Net postretirement benefits activity:
Actuarial loss ( 1,125 ) 87 ( 21 ) ( 1,059 )
Prior service costs ( 624 ) — — ( 624 )
Interest rate swap ( 1,285 ) 3 ( 1 ) ( 1,283 )
Foreign currency translation adjustment ( 17 ) 4 ( 1 ) ( 14 )
Reclassification of stranded tax effects ( 19,720 ) — — ( 19,720 )
Total AOCI(L) $ ( 115,052 ) $ 1,288 $ ( 317 ) $ ( 114,081 )
(in thousands) March 31, 2019 Pre-tax Activity Tax Effect June 30, 2019
Net pension activity:
Actuarial loss $ ( 72,011 ) $ 900 $ ( 221 ) $ ( 71,332 )
Prior service costs ( 20 ) 7 ( 2 ) ( 15 )
Net postretirement benefits activity:
Actuarial loss ( 4,754 ) 195 ( 48 ) ( 4,607 )
Prior service costs 107 ( 322 ) 79 ( 136 )
Foreign currency translation adjustment ( 9 ) 7 ( 2 ) ( 4 )
Reclassification of stranded tax effects ( 19,720 ) — — ( 19,720 )
Total AOCI(L) $ ( 96,407 ) $ 787 $ ( 194 ) $ ( 95,814 )
A summary of AOCI(L) for the first half of 2020 and the first half of 2019 is as follows:
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(in thousands) December 29, 2019 Pre-tax Activity Tax Effect June 28, 2020
Net pension activity:
Actuarial loss $ ( 93,174 ) $ 2,379 $ ( 586 ) $ ( 91,381 )
Prior service costs ( 7 ) 9 ( 2 ) —
Net postretirement benefits activity:
Actuarial loss ( 1,191 ) 175 ( 43 ) ( 1,059 )
Prior service costs ( 624 ) — — ( 624 )
Interest rate swap ( 270 ) ( 1,344 ) 331 ( 1,283 )
Foreign currency translation adjustment ( 16 ) 3 ( 1 ) ( 14 )
Reclassification of stranded tax effects ( 19,720 ) — — ( 19,720 )
Total AOCI(L) $ ( 115,002 ) $ 1,222 $ ( 301 ) $ ( 114,081 )
(in thousands) December 30, 2018 Pre-tax Activity Tax Effect June 30, 2019
Net pension activity:
Actuarial loss $ ( 72,690 ) $ 1,801 $ ( 443 ) $ ( 71,332 )
Prior service costs ( 24 ) 12 ( 3 ) ( 15 )
Net postretirement benefits activity:
Actuarial loss ( 4,902 ) 391 ( 96 ) ( 4,607 )
Prior service costs 351 ( 646 ) 159 ( 136 )
Foreign currency translation adjustment — ( 3 ) ( 1 ) ( 4 )
Reclassification of stranded tax effects — — ( 19,720 ) ( 19,720 )
Total AOCI(L) $ ( 77,265 ) $ 1,555 $ ( 20,104 ) $ ( 95,814 )
A summary of the impact of AOCI(L) on certain statements of operations line items is as follows:
Second Quarter 2020
(in thousands) Net Pension Activity Net
Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales $ 360 $ 57 $ — $ — $ 417
Selling, delivery and administrative expenses 834 30 3 4 871
Subtotal pre-tax 1,194 87 3 4 1,288
Income tax expense 294 21 1 1 317
Total after tax effect $ 900 $ 66 $ 2 $ 3 $ 971
Second Quarter 2019
(in thousands)
Net Pension Activity Net
Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales
$ 266 $ ( 66 ) $ — $ — $ 200
Selling, delivery and administrative expenses
641 ( 61 ) — 7 587
Subtotal pre-tax
907 ( 127 ) — 7 787
Income tax expense (benefit) 223 ( 31 ) — 2 194
Total after tax effect
$ 684 $ ( 96 ) $ — $ 5 $ 593
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First Half 2020
(in thousands) Net Pension Activity Net
Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales $ 694 $ 105 $ — $ — $ 799
Selling, delivery and administrative expenses 1,694 70 ( 1,344 ) 3 423
Subtotal pre-tax 2,388 175 ( 1,344 ) 3 1,222
Income tax expense (benefit) 588 43 ( 331 ) 1 301
Total after tax effect $ 1,800 $ 132 $ ( 1,013 ) $ 2 $ 921
First Half 2019
(in thousands)
Net Pension Activity Net
Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales
$ 529 $ ( 133 ) $ — $ — $ 396
Selling, delivery and administrative expenses
1,284 ( 122 ) — ( 3 ) 1,159
Subtotal pre-tax
1,813 ( 255 ) — ( 3 ) 1,555
Income tax expense (benefit) 446 ( 63 ) — 1 384
Total after tax effect
$ 1,367 $ ( 192 ) $ — $ ( 4 ) $ 1,171
21. Supplemental Disclosures of Cash Flow Information
Changes in current assets and current liabilities affecting cash flows were as follows:
First Half
(in thousands) 2020 2019
Accounts receivable, trade, net $ ( 30,948 ) $ ( 20,374 )
Accounts receivable from The Coca-Cola Company 14,319 ( 23,273 )
Accounts receivable, other 3,676 ( 8,199 )
Inventories 14,798 ( 20,865 )
Prepaid expenses and other current assets ( 2,709 ) ( 2,408 )
Accounts payable, trade 37,015 32,761
Accounts payable to The Coca-Cola Company 31,081 28,237
Other accrued liabilities ( 20,160 ) ( 52,688 )
Accrued compensation ( 25,645 ) ( 10,256 )
Accrued interest payable ( 492 ) ( 1,777 )
Change in current assets less current liabilities $ 20,935 $ ( 78,842 )
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.