What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-03 compared with 2020-08-04 · 231 added, 253 removed, 367 unchanged (57% of the section changed)

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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.

All comparisons are to the corresponding period in the prior year unless specified otherwise.

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

The condensed consolidated financial statements presented are:

• 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.

All comparisons are to the corresponding period in the prior year unless specified otherwise.

• The financial position as of September 27, 2020 and December 29, 2019.

• The results of operations and comprehensive income for the 13-week periods ended September 27, 2020 (the “third quarter” of fiscal 2020 (“2020”)) and September 29, 2019 (the “third quarter” of fiscal 2019 (“2019”)), and the 39-week periods ended September 27, 2020 (the “first nine months” of 2020) and September 29, 2019 (the “first nine months” of 2019).

• The changes in cash flows and equity for the first nine months of 2020 and the first nine months of 2019.

The condensed consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries, including Piedmont Coca‑Cola Bottling Partnership (“Piedmont”), the Company’s only subsidiary with a significant noncontrolling interest.

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(“Dr Pepper”) and Monster Energy Company.

Our purpose is to honor God, to serve others, to pursue excellence and to grow profitably.

Our purpose is to honor God in all we do, serve others, pursue excellence and grow profitably.

Our stock is traded on the NASDAQ Global Select Market under the symbol “COKE.”

We offer a range of nonalcoholic beverage products and flavors designed to meet the demands of our consumers, including both sparkling and still beverages.

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.

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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.

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’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” accounts, 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.

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Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

COVID-19 Impact on Customer, Teammate and Community Safety

The Company continues to diligently monitor the impact of the COVID-19 pandemic on all aspects of its business, including the impact on its customers, teammates, suppliers and distribution network.

Executive Summary

Physical case volume increased 3.9% in the third quarter of 2020, as sales of multi-serve packages in larger retail stores remained strong and single-serve sales began to gradually improve in small stores and accounts where our products are consumed on-premise.

Sparkling category volume increased 3.6% in the third quarter of 2020, while Still beverages grew 4.5%.

Still beverage sales are more tied to smaller outlets than our Sparkling category, and sales of Still products improved as certain government-imposed restrictions were eased or lifted during the third quarter.

While volume growth was strong for the third quarter of 2020, sales volume softened in the last two months of the quarter.

Revenue increased 4.5% in the third quarter of 2020.

Revenue from our bottle/can Sparkling beverages increased 7.0% in the third quarter of 2020, driven primarily by volume growth and price realization within this category.

Sales of multi-serve PET packages were especially strong in the quarter as we adjusted our commercial plans to emphasize PET packages and limit product assortment in cans as demand for aluminum cans has exceeded supply this year.

Revenue from our Still beverages increased 6.0% in the third quarter of 2020 as a result of higher sales volume in small stores and on-premise outlets.

Revenue from fountain syrup, which is primarily sold through restaurants, convenience stores, amusement parks, and other on-premise outlets, declined $19.5 million, or 35.2%, during the third quarter of 2020.

While the decline in fountain syrup revenue was significant, we are experiencing gradual improvement within this revenue stream as compared to the second quarter of 2020, as traffic continues to increase at our on-premise outlets.

For the first nine months of 2020, revenue increased $81.1 million, or 2.2%.

While sales within our Sparkling and Still categories grew 5.8% and 3.2% for the first nine months of 2020, respectively, fountain syrup sales decreased 33.8%.

Gross profit increased $40.2 million, or 9.3%, in the third quarter of 2020, while gross margin increased 160 basis points to 35.6%.

On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, gross profit increased $39.0 million, or 9.0%, in the third quarter of 2020.

The improvement in gross profit and gross margin was primarily due to price realization within our Sparkling category, favorable input costs, and lower manufacturing costs.

Gross profit in the first nine months of 2020 increased $49.7 million, or 4.0%, while gross margin increased 60 basis points to 35.1%.

On an adjusted basis, gross profit increased $47.9 million compared to the first nine months of 2019.

Selling, delivery and administrative (“SD&A”) expenses in the third quarter of 2020 decreased $9.8 million, or 2.6%.

SD&A expenses as a percentage of net sales decreased 210 basis points in the third quarter of 2020.

Adjusted SD&A expenses in the third quarter of 2020 decreased $7.4 million, or 2.0%.

The decrease in SD&A expenses related to lower labor and benefits costs as a result of adjustments we made to our operating model earlier in the year in response to COVID-19-related impacts on our business.

Additionally, we generated favorable results in a number of expense categories due to the diligent management of our variable operating expenses.

SD&A expenses in the first nine months of 2020 decreased $28.8 million, or 2.6%.

SD&A expenses as a percentage of net sales decreased 140 basis points in the first nine months of 2020 as compared to the first nine months of 2019.

Income from operations in the third quarter of 2020 was $103.8 million, compared to $53.8 million in the third quarter of 2019, an increase of 92.9%.

Adjusted income from operations in the third quarter of 2020 was $105.2 million, an increase of 79.1%.

For the first nine months of 2020, income from operations increased $78.6 million to $219.8 million.

Adjusted income from operations in the first nine months of 2020 was $223.6 million, an increase of $66.6 million, or 42.4%, compared to the first nine months of 2019.

Net income in the third quarter of 2020 was $51.9 million, compared to $13.0 million in the third quarter of 2019, an improvement of $38.9 million.

Net income in the third quarter of 2020 was adversely impacted by fair value adjustments to our acquisition related contingent consideration liability, driven by changes in future cash flow projections.

Fair value adjustments to this liability are non-cash in nature and a routine part of our quarterly financial closing process.

Net income increased $84.6 million for the first nine months of 2020 to $106.1 million, as compared to the first nine months of 2019.

Cash flows provided by operations for the first nine months of 2020 were $376.4 million, compared to $204.6 million for the first nine months of 2019.

The significant increase in operating cash flows for the first nine months of 2020 was primarily a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory, the timing of accounts payable and the deferral of payroll taxes permitted under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

COVID-19 Impact on Consumer, Customer, Teammate and Community Safety

The Company continues to diligently monitor the impact of the COVID-19 pandemic on all aspects of its business, including the impact on its consumers, customers, teammates, suppliers and distribution network.

Our business has been recognized by the United States Department of Homeland Security and state and local governments in the communities in which we operate as “essential,” as all of our teammates support beverage manufacturing and distribution.

The Company has taken the following actions to protect our customers, teammates and communities, while it continues to manufacture and distribute its products:

The Company has taken the following actions to protect its consumers, customers, teammates and communities, while it continues to manufacture and distribute products:

• We continue to execute our Infectious Disease Response Plan and Incident Management Crisis Response Protocols as the macro environment moves through the Response, Reopen and Recovery phases of the COVID-19 pandemic.

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In addition, a subset of leaders from the Health & Wellness Task Force conducts case management activities that follow prescribed company and other accepted standards (e.g., Centers for Disease Control and Prevention (“CDC”) and local health authorities).

• We have established a process for the reporting of COVID-19 symptoms, exposures, and positive test results of teammates and of incidents in our customer accounts that our teammates have serviced.

This reporting process enables the Company to follow appropriate quarantine protocols and to communicate to our workforce in a timely and appropriate manner.

• We have increased our communications with our teammates through podcasts, meetings, videos and emails about safety protocols, Personal Protective Equipment (“PPE”), such as disposable gloves and masks, and CDC requirements and recommendations.

• We have increased our sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations.

• We have established a process for the reporting of COVID-19 symptoms, exposures and positive test results of teammates and of incidents in customer accounts that our teammates have serviced.

This reporting process enables the Company to follow appropriate quarantine protocols and to communicate to its workforce in a timely and appropriate manner.

• We have increased our communications with teammates through podcasts, meetings, videos and emails about safety protocols, Personal Protective Equipment (“PPE”), such as disposable gloves and masks, and CDC requirements and recommendations.

• We have increased sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations.

• We have promoted hygiene practices recommended by the CDC, including social distancing requiring six or more feet between teammates where possible, and staggered work start and stop times and lunch breaks.

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• We have restricted access to our facilities for non-essential visitors, vendors and contractors.

For essential visitors, vendors and contractors we require health and wellness certifications to be completed and the use of PPE as the Company deems appropriate.

• We have restricted business travel to “essential travel” to curtail exposure risks for all teammates.

• We have provided sanitation solution and supplies for our front-line teammates who interact with our products, customers, communities and office environments.

For essential visitors, vendors and contractors, we require health and wellness certifications to be completed and the use of PPE as the Company determines appropriate.

• We have restricted business travel to “essential travel” to curtail exposure risk for all teammates.

• We have provided sanitation solution and supplies for our front-line teammates who interact with our products, customers and communities.

• We have implemented work-from-home routines for teammates whose work duties permit it and are utilizing virtual technology to replace many of our in-person meetings.

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• We have worked with state and local elected officials in order to quickly implement newly enacted state and local government regulatory safety requirements and guidelines.

Executive Summary for the Second Quarter of 2020

Physical case volume increased 0.6% in the second quarter of 2020.

COVID-19-related stay-at-home orders resulted in extreme volatility in our revenue and physical case sales during the quarter as the shift towards multi-serve packages sold in larger retail

stores caused by the closure of on-premise outlets that started during March continued during the second quarter of 2020.

Volume was strong in our Sparkling category, increasing 3.7% in the second quarter of 2020.

Still beverage volume declined 6.6%, as convenience retail and on-premise outlets were negatively impacted by less consumer traffic.

Our Still beverage portfolio relies more heavily on single serve sales in our small stores and accounts where our products are consumed on-premise.

Consumer demand was highly volatile during the quarter but improved sequentially as stay-at-home orders were lifted and local economies re-opened.

Our bottle/can physical case sales volume monthly growth/(decline) compared to the same month of 2019 was (6.1)%, 1.9% and 4.7% for April, May and June 2020, respectively.

We don't expect the demand experienced in June to sustain itself in future months, but we are encouraged by the volume growth generated in the second quarter of 2020.

Revenue decreased 3.6% in the second quarter of 2020.

Revenue from our bottle/can Sparkling beverages increased 4.4% in the second quarter of 2020, driven primarily by volume growth and price realization within this category.

Revenue from our Still beverages declined 4.7% in the second quarter of 2020 as a result of lower sales volume in small store and on-premise outlets.

Revenue from fountain syrup, which is primarily sold through restaurants, convenience stores, amusement parks and other on-premise outlets, declined $29.3 million, or 56.6%, during the second quarter of 2020.

The significant decline in fountain syrup revenue is a direct result of the previously mentioned stay-at-home orders.

For the first half of 2020, revenue increased $23.7 million, or 1.0%.

While sales within our Sparkling and Still categories grew 5.1% and 2.2% for the first half of 2020, respectively, fountain syrup sales decreased 32.8%.

Gross profit decreased $6.5 million, or 1.5%, in the second quarter of 2020, while gross margin increased 80 basis points to 35.0%, primarily driven by a shift in our product mix to Sparkling take home packages which generally carry a lower per case gross profit than immediate consumption packages.

The negative mix impact was partially offset by commodity price favorability and favorable manufacturing costs.

On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, gross profit declined $13.2 million, or 3.0%, in the second quarter of 2020.

Adjusted gross margin increased 20 basis points to 34.9% primarily as a result of favorable commodity prices.

Gross profit for the first half of 2020 increased $9.5 million, or 1.2%.

On an adjusted basis, gross profit increased $8.8 million compared to the first half of 2019,while adjusted gross margin was 34.8%, consistent with the prior year period.

Selling, delivery and administrative (“SD&A”) expenses in the second quarter of 2020 decreased $22.4 million, or 6.1%.

SD&A expenses as a percentage of net sales decreased 70 basis points in the second quarter of 2020.

Adjusted SD&A expenses in the second quarter of 2020 decreased $17.4 million, or 4.8%.

The decrease in SD&A expenses relates to lower labor costs as a result of adjustmen ts we made to our operating model in response to COVID-19-related impacts on our business.

In April, we furloughed approximately 700 employees, most of whom returned to work in mid-June.

We estimate these furloughs resulted in approximately $6.0 million of payroll savings for the second quarter of 2020.

Additionally, we generated favorable results in a number of expense categories due to reductions in local market activity and diligent management of our variable operating expenses.

SD&A expenses in the first half of 2020 decreased $19.1 million or 2.6%.

SD&A expenses as a percentage of net sales decreased 110 basis points in the first half of 2020 as compared to the first half of 2019.

Income from operations in the second quarter of 2020 was $83.1 million, compared to $67.2 million in the second quarter of 2019, an increase of 23.7%.

Adjusted income from operations in the second quarter of 2020 was $81.7 million, an increase of 5.4% For the first half of 2020, income from operations increased $28.6 million to $115.9 million.

Adjusted income from operations in the first half of 2020 was $118.5 million, an increase of $20.2 million, or 20.5% compared to the first half of 2019.

Net income in the second quarter of 2020 was $39.6 million, compared to $15.4 million in the second quarter of 2019, an improvement of $24.2 million.

Net income for the second quarter of 2020 was adversely impacted by fair value adjustments to our acquisition related contingent consideration liability, driven by changes in future cash flow projections.

Fair value adjustments to this liability are non-cash in nature and a routine part of our quarterly financial closing process.

Net income increased $45.7 million for the first half of 2020 to $54.2 million as compared to the first half of 2019.

Cash flows provided by operations for the first half of 2020 were $229.0 million, compared to $88.6 million for the first half of 2019.

The significant increase in operating cash flows for the first half of 2020 was primarily a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory related to the June sales trends, the timing of accounts payable and the deferral of payroll taxes permitted under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

Expected COVID-19 Impact on the Company

We do not currently expect the COVID-19 pandemic to materially impact our liquidity position or access to capital in the short term.

Our revolving credit facility matures on June 8, 2023 and 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.

We had no borrowings under the revolving credit facility as of June 28, 2020.

Our supply chain is dependent on several key raw materials, including aluminum, PET resin and high-fructose corn syrup.

As overall beverage consumption continues to shift from restaurants and on-premise locations to homes during the COVID-19 pandemic, the supply of aluminum cans has tightened.

Further, many new product offerings within the beverage industry, both alcoholic and non-alcoholic, are coming to the market in cans.

During the pandemic, consumers appear to be favoring the portability and storability of cans as they spend more time at home.

We have made changes to our typical sourcing model and product offerings to address the supply constraints for can production.

Specifically, we have sourced cans from international locations and have limited our can product package offerings.

We will continue to monitor and react as needed to the limited supply of cans in the marketplace.

We do not expect any material impairments or adjustments to the fair value of our assets as a result of the COVID-19 pandemic.

Through the normal course of business, we have assessed the collectability of our receivables and have recorded any expected losses as of June 28, 2020.

During the second quarter of 2020, we recorded a $3.5 million reserve against our accounts receivable balance to address the COVID-19-related collectability risk for primarily our on-premise customers.

The charge related to this additional reserve is included in SD&A expenses for the second quarter of 2020.

Further, there have been no triggering events identified during the second quarter of 2020 that would indicate an impairment of our goodwill, intangible assets and long-lived assets.

As of September 27, 2020, we had $164.8 million of cash and cash equivalents.

In addition, our revolving credit facility matures in 2023 and 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.

We had no outstanding borrowings under the revolving credit facility as of September 27, 2020.

Our supply chain is dependent on aluminum as a key raw material in the production of aluminum cans, which are used to package many of our products.

During the COVID-19 pandemic, beverage consumption has shifted from “on-premise” accounts, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, to homes and consumers have favored the portability and storability of aluminum cans as they spend more time at home.

Additionally, the alcoholic and nonalcoholic beverage industries continue to introduce many new canned product offerings, further increasing the demand for aluminum cans.

These factors have impacted the supply of aluminum cans.

We have made changes to our typical sourcing model and product offerings to address constraints in the supply of aluminum cans, including sourcing aluminum cans from international locations and limiting our canned product package offerings.

We will continue to monitor and react as needed to the limited supply of aluminum cans in the marketplace.

We do not expect any material impairments or adjustments to the fair values of our assets as a result of the COVID-19 pandemic.

Through the normal course of business, we have assessed the collectability of our receivables, including COVID-19-related collectability risk, and have recorded any expected losses.

Further, there have been no triggering events identified in the first nine months of 2020 that would indicate an impairment of our long-lived assets, goodwill or other intangible assets.

We will continue to monitor the valuation of our assets and the collectability of our receivables and record any adjustments as necessary.

We have assessed the COVID-19-related circumstances around work routines, including remote work arrangements, and their impact on our internal controls over financial reporting.

We have assessed COVID-19-related circumstances around work routines, including remote work arrangements, and the impact on our internal controls over financial reporting.

We do not anticipate any material impact to our control procedures that would materially affect our internal controls over financial reporting.

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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 goods procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur.

We are focused on execution at every step in our supply chain, including raw material and finished products procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur.

We are investing in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and drive value in our business for the long term.

Revenue Management :

Our revenue management strategy focuses on the optimal pricing of our brands and packages within product categories and channels, creating effective working relationships with our customers, and disciplined fact-based decision-making.

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.

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We are focused on optimizing our supply chain as we continue to integrate the acquired territories and facilities into our operations.

We are in the process of integrating our Memphis, Tennessee production center with our West Memphis, Arkansas operations, which is expected to greatly expand our West Memphis production capabilities and to reduce our overall production costs.

Additionally, we are planning to consolidate our Anderson, Bloomington, Lafayette, Shelbyville and Speedway, Indiana warehousing and distribution operations into a new facility in Whitestown, Indiana by the spring of 2021.

This increased space and capacity will allow us to expand our operations and better serve our customers and consumers in Indiana and the surrounding areas.

We are in the process of integrating our Memphis, Tennessee manufacturing plant with our West Memphis, Arkansas operations, which is expected to greatly expand our West Memphis production capabilities and to reduce our overall production costs.

Additionally, we are planning to open a new, automated distribution center in Whitestown, Indiana by the spring of 2021, which will allow us to consolidate our Anderson, Bloomington, Lafayette, Shelbyville and Speedway, Indiana warehousing and distribution operations into this one new facility.

The increased capacity and automation in Whitestown will allow us to optimize our supply chain and to better serve our customers and consumers in Indiana and the surrounding areas.

We will continue to look for opportunities to invest in our supply chain to optimize our costs.

Cash Flow Generation :

Cash flow generation continues to be a key focus area for us.

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 2020 and the second quarter of 2019 are summarized in the table below and discussed in the following paragraphs.

Second Quarter

Third Quarter Results

The Company’s results of operations for the third quarter of 2020 and the third quarter of 2019 are highlighted in the table below and discussed in the following paragraphs.

Third Quarter

(in thousands) 2020 2019 Change

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$ 53,164 $ 13,202 $ 39,962

Items Impacting Operations and Financial Condition

Second Quarter 2020

• $14.5 million recorded in other expense, net as a result of an increase in the fair value of the Company’s acquisition related contingent consideration liability;

• $2.1 million in pre-tax unfavorable mark-to-market adjustments related to the Company’s commodity hedging program;

• $0.6 million of net expense related to the impairment and accelerated depreciation of property, plant and equipment as the Company continues to optimize the efficiency of its supply chain.

Second Quarter 2019

• $29.2 million recorded in other expense, net as a result of an increase in the fair value of the Company’s acquisition related contingent consideration liability;

• $4.9 million in pre-tax favorable mark-to-market adjustments related to the Company’s commodity hedging program;

• $2.2 million of expenses related to the System Transformation transactions, the majority of which were information technology-related costs;

• $1.9 million adjustment to reflect the prospective change of increasing the capitalization thresholds on certain low-cost, short-lived assets.

Net sales decreased $46.4 million, or 3.6%, to $1.23 billion in the second quarter of 2020, as compared to $1.27 billion in the second quarter of 2019.

The decrease in net sales was primarily attributable to the following (in millions):

Second Quarter 2020

Net sales increased $57.5 million, or 4.5%, to $1.33 billion in the third quarter of 2020, as compared to $1.27 billion in the third quarter of 2019.

The increase in net sales was primarily attributable to the following (in millions):

Third Quarter 2020

Attributable to:

$ (34.2) Decrease in net sales primarily driven by a decrease in fountain syrup sales mainly sold in on-premise outlets impacted by COVID-19-related stay-at-home orders and closures

(9.4) Decrease in sales volume to other Coca-Cola bottlers

$ (46.4) Total decrease in net sales

$ 53.9 Increase in net sales related to increased sales volume

34.4 Increase in net sales primarily related to an increase in average bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences

(30.8) Decrease in net sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19

$ 57.5 Total increase in net sales

Net sales by product category were as follows:

Second Quarter

Third Quarter

(in thousands) 2020 2019 % Change

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Bottle/Can Sales Volume

Second Quarter

Bottle/Can Sales

Third Quarter Bottle/Can Sales

Product Category 2020 2019 Volume % Change

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(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 goods from manufacturing facilities to distribution centers, amortization expense of distribution rights, distribution fees of certain products and marketing credits from brand companies.

In addition, cost of sales includes shipping, handling and fuel costs related to the movement of finished products from manufacturing facilities 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.

Cost of sales decreased $40.0 million, or 4.8%, to $797.9 million in the second quarter of 2020, as compared to $837.9 million in the second quarter of 2019.

The decrease in cost of sales was primarily attributable to the following (in millions):

Second Quarter 2020

Cost of sales increased $17.2 million, or 2.1%, to $856.0 million in the third quarter of 2020, as compared to $838.8 million in the third quarter of 2019.

The increase in cost of sales was primarily attributable to the following (in millions):

Third Quarter 2020

Attributable to:

$ (26.0) Decrease in cost of sales primarily driven by a decrease in fountain syrup sales mainly sold in on-premise outlets impacted by COVID-19-related stay-at-home orders and closures, a favorable commodity environment and lower manufacturing costs

(9.8) Decrease in sales volume to other Coca-Cola bottlers

(6.1) Decrease in cost of sales due to changes in the fair value adjustments on commodity hedges

$ (40.0) Total decrease in cost of sales

The Company relies extensively on advertising and sales promotion in the marketing of its products.

$ (24.3) Decrease in cost of sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19

22.5 Increase in cost of sales related to increased sales volume

12.8 Increase in cost of sales primarily related to the change in product mix to meet consumer preferences

$ 17.2 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 to promote sales in the Company’s territories.

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The Company also benefits from national advertising programs conducted by The Coca‑Cola Company and other beverage companies.

Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $26.3 million in the second quarter of 2020, as compared to $34.7 million in the second quarter of 2019.

The Company’s cost of sales may not be comparable to other peer companies, as some peer companies include all costs related to their distribution network in cost of sales.

The Company includes a portion of these costs in SD&A expenses, as described below.

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 $33.8 million in the third quarter of 2020, as compared to $34.8 million in the third quarter of 2019.

Shipping and handling costs related to the movement of finished products from manufacturing facilities to distribution centers are included in cost of sales.

The Company’s cost of sales may not be comparable to other peer companies, as some peer companies include all costs related to distribution networks in cost of sales.

Shipping and handling costs related to the movement of finished products from distribution centers to customer locations, including distribution center warehousing costs, are included in SD&A expenses.

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 intangibles and administrative support labor and operating costs.

SD&A expenses decreased by $22.4 million, or 6.1%, to $346.2 million in the second quarter of 2020, as compared to $368.6 million in the second quarter of 2019.

SD&A expenses as a percentage of net sales decreased to 28.2% in the second quarter of 2020 from 28.9% in the second quarter of 2019.

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 decreased by $9.8 million, or 2.6%, to $368.6 million in the third quarter of 2020, as compared to $378.4 million in the third quarter of 2019.

SD&A expenses as a percentage of net sales decreased to 27.7% in the third quarter of 2020 from 29.8% in the third quarter of 2019.

The decrease in SD&A expenses was primarily attributable to the following (in millions):

Second Quarter 2020

Third Quarter 2020

Attributable to:

$ (13.1) Decrease in payroll costs and employee benefits including bonuses and incentives, primarily as a result of the furloughs of 700 teammates during the majority of the second quarter of 2020 and structural changes made to certain portions of our business

(8.6) Decrease in a number of expense categories due to reductions in discretionary spending, including travel and entertainment and local marketing activities

(2.2) Decrease in System Transformation transaction expenses

$ (7.9) Decrease in payroll and employee benefit costs, primarily as a result of the elimination of certain field-based positions and reduced overtime hours

$ (9.8) Total decrease in SD&A expenses

The Company has three primary delivery systems:

(i) bulk delivery for large supermarkets, mass merchandisers and club stores, (ii) advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premise accounts and (iii) full-service delivery for its full-service vending customers.

Shipping and handling costs related to the movement of finished goods from manufacturing locations to distribution centers are included in cost of sales.

Shipping and handling costs related to the movement of finished goods from distribution centers to customer locations, including distribution center warehousing costs, totaled $149.1 million in the second quarter of 2020 and $155.8 million in the second quarter of 2019.

Shipping and handling costs included in SD&A expenses were $155.8 million in the third quarter of 2020 and $161.0 million in the third quarter of 2019.

Interest Expense, Net

Interest expense, net decreased $2.8 million, or 23.4%, to $9.2 million in the second quarter of 2020, as compared to $12.0 million in the second quarter of 2019.

Interest expense, net decreased $1.9 million, or 17.6%, to $9.0 million in the third quarter of 2020, as compared to $11.0 million in the third quarter of 2019.

The decrease was primarily a result of lower average interest rates and lower average debt balances.

1 unchanged sentence

A summary of other expense, net is as follows:

Second Quarter

Third Quarter

(in thousands) 2020 2019

2 unchanged sentences

Total other expense, net $ 21,394 $ 20,711

Each reporting period, the Company adjusts its contingent consideration liability related to the distribution territories subject to sub-bottling fees to fair value.

The fair value is determined by discounting future expected sub-bottling payments required under the Company’s comprehensive beverage agreement, 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 projections of future cash flows.

Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to sub-bottling fees to fair value.

The life of these distribution assets is generally 40 years.

The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.

The increase in the fair value of the acquisition related contingent consideration liability during the second quarter of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees.

The increase in the fair value of the acquisition related contingent consideration liability during the second quarter 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.

The increase in the fair value of the acquisition related contingent consideration liability during the third quarter of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees.

The increase in the fair value of the acquisition related contingent consideration liability during the third quarter of 2019 was primarily driven by a decrease in the discount rate used to calculate the fair value.

Income Tax Expense

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 26.3% for the second quarter of 2020 and 29.9% for the second quarter of 2019.

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 25.0% for the third quarter of 2020 and 29.9% for the third quarter of 2019.

The decrease in the effective income tax rate was primarily driven by improved financial results.

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 27.7% for the second quarter of 2020 and 31.8% for the second quarter of 2019.

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 26.1% for the third quarter of 2020 and 33.7% for the third quarter of 2019.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $3.0 million in the second quarter of 2020 and $1.5 million in the second quarter of 2019, each related to the portion of Piedmont owned by The Coca-Cola Company.

The Company recorded net income attributable to noncontrolling interest of $3.2 million in the third quarter of 2020 and $2.5 million in the third quarter of 2019, each related to the portion of Piedmont owned by The Coca‑Cola Company.

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $1.0 million in the second quarter of 2020 and $0.6 million in the second quarter of 2019.

First Half Results

Our results of operations for the first half of 2020 and the first half of 2019 are highlighted in the table below and discussed in the following paragraphs.

Other comprehensive income, net of tax was $1.3 million in the third quarter of 2020 and $0.2 million in the third quarter of 2019.

First Nine Months Results

Our results of operations for the first nine months of 2020 and the first nine months of 2019 are highlighted in the table below and discussed in the following paragraphs.

First Nine Months

(in thousands)

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$ 108,316 $ 22,912 $ 85,404

Items Impacting Operations and Financial Condition

First Half 2020

• $15.3 million recorded in other expense, net as a result of an increase in the fair value of the Company’s acquisition related contingent consideration liability;

• $1.8 million in pre-tax favorable mark-to-market adjustments related to the Company’s commodity hedging program;

• $0.7 million of net expense related to the impairment and accelerated depreciation of property, plant and equipment as the Company continues to optimize the efficiency of its supply chain.

First Half 2019

• $43.3 million recorded in other expense, net as a result of an increase in the fair value of the Company’s acquisition related contingent consideration liability;

• $6.9 million of expenses related to the System Transformation transactions, the majority of which were information technology-related costs;

• $4.4 million adjustment to reflect the prospective change of increasing the capitalization thresholds on certain low-cost, short-lived assets;

• $1.7 million in pre-tax unfavorable mark-to-market adjustments related to the Company’s commodity hedging program.

Net sales increased $23.7 million, or 1.0%, to $2.40 billion in the first half of 2020, as compared to $2.38 billion in the first half of 2019.

Net sales increased $81.1 million, or 2.2%, to $3.73 billion in the first nine months of 2020, as compared to $3.65 billion in the first nine months of 2019.

The increase in net sales was primarily attributable to the following (in millions):

First Half 2020

First Nine Months 2020

Attributable to:

$ 32.4 Increase in net sales primarily driven by an increase in bottle/can sales volume partially offset by a decrease in fountain syrup sales mainly sold in on-premise outlets impacted by COVID-19-related stay-at-home orders and closures

(5.8) Decrease in sales volume to other Coca-Cola bottlers

$ 104.7 Increase in net sales related to increased sales volume

(55.2) Decrease in net sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19

38.5 Increase in net sales primarily related to an increase in average bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences

$ 81.1 Total increase in net sales

Net sales by product category were as follows:

First Nine Months

(in thousands) 2020 2019 % Change

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Bottle/Can Sales Volume

First Half Bottle/Can Sales

First Nine Months Bottle/Can Sales

Product Category 2020 2019 Volume % Change

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

First Nine Months

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

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Cost of Sales

Cost of sales increased $14.2 million, or 0.9%, to $1.57 billion in the first half of 2020, as compared to $1.55 billion in the first half of 2019.

Cost of sales increased $31.4 million, or 1.3%, to $2.42 billion in the first nine months of 2020, as compared to $2.39 billion in the first nine months of 2019.

The increase in cost of sales was primarily attributable to the following (in millions):

First Half 2020 Attributable to:

$ 15.7 Increase in cost of sales primarily driven by an increase in bottle/can sales volume partially offset by a decrease in fountain syrup sales mainly sold in on-premise outlets impacted by COVID-19-related stay-at-home orders and closures

(6.5) Decrease in sales volume to other Coca-Cola bottlers

First Nine Months 2020 Attributable to:

$ 50.4 Increase in cost of sales related to increased sales volume

(42.1) Decrease in cost of sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19

17.7 Increase in cost of sales primarily related to the change in product mix to meet consumer preferences

$ 31.4 Total increase in cost of sales

Total marketing funding support from The Coca-Cola Company and other beverage companies was $56.6 million in the first half of 2020, as compared to $66.0 million in the first half of 2019.

Total marketing funding support from The Coca‑Cola Company and other beverage companies was $90.4 million in the first nine months of 2020, as compared to $100.8 million in the first nine months of 2019.

Selling, Delivery and Administrative Expenses

SD&A expenses decreased by $19.1 million, or 2.6%, to $718.7 million in the first half of 2020, as compared to $737.7 million in the first half of 2019.

SD&A expenses as a percentage of net sales decreased to 29.9% in the first half of 2020 from 31.0% in the first half of 2019.

SD&A expenses decreased by $28.8 million, or 2.6%, to $1.09 billion in the first nine months of 2020, as compared to $1.12 billion in the first nine months of 2019.

SD&A expenses as a percentage of net sales decreased to 29.2% in the first nine

months of 2020 from 30.6% in the first nine months of 2019.

The decrease in SD&A expenses was primarily attributable to the following (in millions):

First Half 2020 Attributable to:

$ (8.8) Decrease in payroll costs and employee benefits including bonuses and incentives, primarily as a result of the furloughs of 700 teammates during the majority of the second quarter of 2020 and structural changes made to certain portions of our business

(6.9) Decrease in System Transformation transaction expenses

First Nine Months 2020 Attributable to:

$ (16.7) Decrease in payroll, employee benefit costs and incentive compensation, primarily as a result of the elimination of certain field-based positions and reduced overtime hours

(13.8) Decrease in a number of expense categories due to reductions in discretionary spending, including travel and entertainment

$ (28.8) Total decrease in SD&A expenses

Shipping and handling costs related to the movement of finished goods from distribution centers to customer locations, including distribution center warehousing costs, totaled $309.2 million in the first half of 2020 and $304.7 million in the first half of 2019.

Shipping and handling costs included in SD&A expenses were $465.0 million in the first nine months of 2020 and $465.7 million in the first nine months of 2019.

Interest Expense, Net

Interest expense, net decreased $6.1 million, or 24.7%, to $18.7 million in the first half of 2020, as compared to $24.9 million in the first half of 2019.

Interest expense, net decreased $8.1 million, or 22.5%, to $27.8 million in the first nine months of 2020, as compared to $35.8 million in the first nine months of 2019.

The decrease was primarily a result of lower average interest rates and lower average debt balances.

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A summary of other expense, net is as follows:

First Nine Months

(in thousands) 2020 2019

3 unchanged sentences

Total other expense, net $ 39,826 $ 67,743

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.

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.

The increase in the fair value of the acquisition related contingent consideration liability during the first nine months 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 value.

The increase in the fair value of the acquisition related contingent consideration liability during the first nine months of 2019 was primarily driven by a decrease in the discount rate used to calculate the fair value and changes in future cash flow projections of the distribution territories subject to sub-bottling fees.

Income Tax Expense

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.

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 25.6% for the first nine months of 2020 and 28.7% for the first nine months of 2019.

The decrease in the effective income tax rate was primarily driven by improved financial results.

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 26.8% for the first nine months of 2020 and 33.4% for the first nine months of 2019.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $4.0 million in the first half of 2020 and $2.7 million in the first half of 2019, each related to the portion of Piedmont owned by The Coca-Cola Company.

The Company recorded net income attributable to noncontrolling interest of $7.2 million in the first nine months of 2020 and $5.3 million in the first nine months of 2019, each related to the portion of Piedmont owned by The Coca‑Cola Company.

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $0.9 million in the first half of 2020 and $1.2 million in the first half of 2019.

Other comprehensive income, net of tax was $2.2 million in the first nine months of 2020 and $1.4 million in the first nine months of 2019.

Segment Operating Results

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The Company believes three operating segments exist.

Nonalcoholic Beverages represents the vast majority of the Company’s consolidated revenues and income from operations.

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.”

The Company’s segment results are as follows:

Second Quarter First Half

Third Quarter First Nine Months

(in thousands) 2020 2019 2020 2019

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Consolidated income from operations $ 103,844 $ 53,846 $ 219,783 $ 141,214

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.

(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 .

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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 with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance.

However, management believes certain non-GAAP financial measures provide users 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.

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The following tables reconcile reported results (GAAP) to adjusted results (non-GAAP):

Second Quarter 2020

Third Quarter 2020

(in thousands, except per share data)

Gross profit SD&A expenses Income from operations Income before income taxes Net income Basic net income per share

expenses Income from

operations Income before

income taxes Net

income Basic net income

Reported results (GAAP) $ 472,438 $ 368,594 $ 103,844 $ 73,417 $ 51,884 $ 5.53

1 unchanged sentence

— — — 19,808 14,895 1.59

Fair value adjustments for commodity hedges (2)

Fair value adjustments for commodity derivative instruments (2)

(1,194) 575 (1,769) (1,769) (1,330) (0.14)

Supply chain optimization and consolidation (3)

Supply chain and asset optimization (3)

3,122 — 3,122 3,122 2,348 0.25

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Adjusted results (non-GAAP) $ 474,366 $ 369,169 $ 105,197 $ 94,578 $ 67,376 $ 7.19

Second Quarter 2019

Third Quarter 2019

(in thousands, except per share data)

Gross profit SD&A expenses Income from

expenses Income from

operations Income before

income taxes Net income Basic net income per share

income taxes Net

income Basic net income

Reported results (GAAP) $ 432,224 $ 378,378 $ 53,846 $ 22,170 $ 13,006 $ 1.39

System Transformation transaction expenses (5)

— (2,185) 2,185 2,185 1,643 0.18

Fair value adjustment of acquisition related contingent consideration (1)

— — — 18,749 14,099 1.51

Fair value adjustments for commodity hedges (2)

Fair value adjustments for commodity derivative instruments (2)

(487) (74) (413) (413) (311) (0.04)

Capitalization threshold change for certain assets (6)

Supply chain and asset optimization (3)

3,581 — 3,581 3,581 2,693 0.29

Supply chain optimization and consolidation (3)

Capitalization threshold change for certain assets (5)

— (1,732) 1,732 1,732 1,302 0.14

3 unchanged sentences

Adjusted results (non-GAAP) $ 435,318 $ 376,572 $ 58,746 $ 45,819 $ 32,271 $ 3.44

First Half 2020

First Nine Months 2020

(in thousands, except per share data)

Gross profit SD&A expenses Income from

expenses Income from

operations Income before

income taxes Net income Basic net

income taxes Net

income Basic net income

Reported results (GAAP) $ 1,307,034 $ 1,087,251 $ 219,783 $ 152,179 $ 106,115 $ 11.32

1 unchanged sentence

— — — 35,068 26,371 2.81

Fair value adjustments for commodity hedges (2)

Fair value adjustments for commodity derivative instruments (2)

(924) (949) 25 25 19 —

Supply chain optimization and consolidation (3)

Supply chain and asset optimization (3)

4,441 601 3,840 3,840 2,888 0.31

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Adjusted results (non-GAAP) $ 1,310,551 $ 1,086,903 $ 223,648 $ 191,112 $ 134,290 $ 14.33

First Half 2019

First Nine Months 2019

(in thousands, except per share data)

Gross profit SD&A expenses Income from

expenses Income from

operations Income before

income taxes Net income Basic net

income taxes Net

income Basic net income

Reported results (GAAP) $ 1,257,311 $ 1,116,097 $ 141,214 $ 37,625 $ 21,545 $ 2.30

System Transformation transaction expenses (5)

— (6,915) 6,915 6,915 5,200 0.56

Fair value adjustment of acquisition related contingent consideration (1)

— — — 62,017 46,637 4.98

Fair value adjustments for commodity hedges (2)

Fair value adjustments for commodity derivative instruments (2)

482 2,575 (2,093) (2,093) (1,574) (0.17)

Supply chain and asset optimization (3)

4,875 — 4,875 4,875 3,666 0.39

Capitalization threshold change for certain assets (5)

— (6,111) 6,111 6,111 4,595 0.49

Supply chain optimization and consolidation (3)

System Transformation expenses (6)

— (6,915) 6,915 6,915 5,200 0.56

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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 projections of future cash flows of distribution territories subject to sub-bottling fees.

(2) The Company enters into 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 risk.

The Company accounts for its commodity hedges on a mark-to-market basis.

(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 sub-bottling fees.

(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 risk.

The Company accounts for its commodity derivative instruments on a mark-to-market basis.

(3) Adjustment reflects expenses within the Nonalcoholic Beverages segment related to the impairment and accelerated depreciation of property, plant and equipment as the Company continues to optimize efficiency opportunities across its business.

(4) Adjustment reflects the impact from the reconciling items to reported results on the annualized adjusted effective income tax rate.

(5) Adjustment reflects expenses incurred during the applicable period of 2019 related to the System Transformation transactions, which primarily includes information technology system conversions.

(6) Adjustment reflects the prospective change of increasing the capitalization thresholds during the applicable period of 2019 on certain low-cost, short-lived assets.

(4) Adjustment reflects the impact from reconciling items to reported results on the annualized adjusted effective income tax rate.

(5) Adjustment reflects additional expense for the prospective change of increasing the capitalization thresholds in 2019 on certain low-cost, short-lived assets.

(6) Adjustment reflects expenses incurred during the applicable period of 2019 related to the System Transformation, which primarily includes information technology system conversions.

Financial Condition

Total assets were $3.18 billion on June 28, 2020, which was an increase of $57.7 million from December 29, 2019.

Net working capital, defined as current assets less current liabilities, was $265.9 million on June 28, 2020, which was an increase of $57.8 million from December 29, 2019.

Significant changes in net working capital on June 28, 2020 from December 29, 2019 were as follows:

• An increase in cash and cash equivalents of $67.9 million as a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory related to the June sales trends, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act.

• An increase in accounts receivable, trade of $38.4 million driven primarily by an increase in average daily sales in June 2020, as compared to December 2019.

• A decrease in accounts receivable from The Coca-Cola Company of $14.3 million, primarily as a result of the timing of cash receipts.

• A decrease in inventory of $14.8 million, primarily as a result of higher than anticipated sales volume in June that resulted in lower inventory levels.

Total assets were $3.31 billion as of September 27, 2020, which was an increase of $186.0 million from December 29, 2019.

Net working capital, defined as current assets less current liabilities, was $292.9 million as of September 27, 2020, which was an increase of $84.8 million from December 29, 2019.

Significant changes in net working capital as of September 27, 2020 as compared to December 29, 2019 were as follows:

• An increase in cash and cash equivalents of $155.2 million primarily as a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act.

• A decrease in inventory of $18.2 million, primarily as a result of higher than expected sales volume and a shift in product offerings during the COVID-19 pandemic.

• An increase in accounts payable, trade of $47.2 million and an increase in accounts payable to The Coca‑Cola Company of $27.0 million, both primarily as a result of the timing of cash payments.

• A decrease in other accrued compensation of $25.6 million, primarily as a result of the timing of bonus and incentive payments in the first quarter of 2020.

• A decrease in other accrued compensation of $13.0 million, primarily as a result of the timing of bonus and incentive payments during the first quarter of each fiscal year.

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 September 27, 2020, the Company had $164.8 million of cash and cash equivalents.

The Company has obtained its long-term debt from public markets, private placements and bank facilities.

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At this time, the Company does not expect the COVID-19 pandemic to have a material impact on its liquidity or sources of capital.

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 total debt as of June 28, 2020 and December 29, 2019 was as follows:

(in thousands) Maturity Date June 28, 2020 December 29, 2019

The Company’s long-term debt as of September 27, 2020 and December 29, 2019 was as follows:

(in thousands) Maturity Date September 27, 2020 December 29, 2019

Term loan facility (1)

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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.

As discussed below under “Cash Flows From Financing Activities,” in the first quarter of 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its affiliates.

As discussed below under “Cash Flows From Financing Activities,” in 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its affiliates.

The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to $200 million.

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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.

As of June 28, 2020, the Company had no outstanding borrowings under the revolving credit facility, and, therefore, had $500 million borrowing capacity available .

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.

As of September 27, 2020, the Company had no outstanding borrowings under the revolving credit facility, and, therefore, had $500 million borrowing capacity available .

The indenture under which the Company’s public debt was 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 agreements.

The Company was in compliance with these covenants as of June 28, 2020.

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 September 27, 2020.

These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

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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 Class B Common Stock each quarter since 1994.

The Company’s credit ratings are reviewed periodically by certain nationally recognized rating agencies.

3 unchanged sentences

Moody’s rating outlook for the Company is stable.

As of June 28, 2020, the Company’s credit ratings were as follows:

As of September 27, 2020, the Company’s credit ratings were as follows:

Long-Term Debt

1 unchanged sentence

The Company is subject to interest rate risk on its variable rate debt, including its revolving credit facility and term loan facility.

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 June 28, 2020, interest expense for the next 12 months would increase by approximately $1.5 million.

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 September 27, 2020, interest expense for the next 12 months would increase by approximately $1.4 million.

The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability.

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Following is a summary of the Level 3 activity:

Second Quarter First Half

Third Quarter First Nine Months

(in thousands) 2020 2019 2020 2019

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A summary of cash-based activity is as follows:

First Nine Months

(in thousands) 2020 2019

Cash Sources:

Borrowings under revolving credit facility $ 235,000 $ 206,339

Proceeds from issuance of senior notes — 100,000

Net cash provided by operating activities (1)

$ 376,401 $ 204,583

Borrowings under revolving credit facility 235,000 331,339

Proceeds from issuance of senior notes — 100,000

Proceeds from the sale of property, plant and equipment 2,397 1,028

10 unchanged sentences

Net increase (decrease) in cash during period $ 155,209 $ (7,559)

(1) Net cash provided by operating activities in the first half of 2020 included net income tax payments of $2.9 million and net cash provided by operating activities in the first half of 2019 included net income tax payments of $0.1 million.

(1) Net cash provided by operating activities in the first nine months of 2020 included net income tax payments of $36.9 million and pension plan contributions of $16.3 million.

Net cash provided by operating activities in the first nine months of 2019 included net income tax payments of $5.5 million and pension plan contributions of $4.9 million.

Cash Flows From Operating Activities

During the first half of 2020, cash provided by operating activities was $229.0 million, which was an increase of $140.4 million as compared to the first half of 2019.

The increase was primarily a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory related to the June sales trends, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act.

During the first nine months of 2020, cash provided by operating activities was $376.4 million, which was an increase of $171.8 million as compared to the first nine months of 2019.

The increase was primarily a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act.

The Company has taken advantage of certain provisions of the CARES Act, which allow an employer to defer the deposit and payment of the employer’s portion of social security taxes that would otherwise be 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.

Cash Flows From Investing Activities

During the first half of 2020, cash used in investing activities was $72.7 million, which was an increase of $10.8 million as compared to the first half of 2019.

Additions to property, plant and equipment were $72.9 million during the first half of 2020.

As of June 28, 2020, $11.9 million of additions to property, plant and equipment were accrued in accounts payable, trade.

Additions to property, plant and equipment were $57.6 million during the first half of 2019.

As of June 30, 2019, $10.3 million of additions to property, plant and equipment were accrued in accounts payable, trade.

During the first nine months of 2020, cash used in investing activities was $110.1 million, which was an increase of $8.0 million as compared to the first nine months of 2019.

The increase was primarily a result of additions to property, plant and equipment,

which were $110.7 million during the first nine months of 2020 and $96.7 million during the first nine months of 2019.

There were $25.5 million and $8.9 million of additions to property, plant and equipment accrued in accounts payable, trade as of September 27, 2020 and September 29, 2019, respectively.

The Company anticipates additions to property, plant and equipment for the full year 2020 will be $180 million to $200 million, with remaining anticipated expenditures in the fourth quarter of 2020 of $70 million to $90 million.

Cash Flows From Financing Activities

During the first half of 2020, cash used in financing activities was $88.4 million, which was an increase of $53.8 million as compared to the first half of 2019.

The change was primarily driven by an increase in cash flows from operating activities as noted above which enabled the Company to repay debt of $59.7 million.

The Company had cash payments for acquisition related contingent consideration of $20.5 million during the first half of 2020 and $12.8 million during the first half of 2019.

The Company anticipates that the amount it could pay annually under the

acquisition related contingent consideration arrangements for the distribution territories subject to sub-bottling fees will be in the range of $28 million to $52 million.

In the first quarter of 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife and certain of its affiliates pursuant to a note purchase and private shelf agreement, dated January 23, 2019, between the Company, MetLife and the other parties thereto.

During the first nine months of 2020, cash used in financing activities was $111.1 million, which was an increase of $1.0 million as compared to the first nine months of 2019.

The Company repaid $67.5 million of debt during the first nine months of 2020.

The Company had cash payments for acquisition related contingent consideration of $32.0 million during the first nine months of 2020 and $18.8 million during the first nine months of 2019.

The Company anticipates the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to sub-bottling fees will be in the range of $28 million to $53 million.

In 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife and certain of its affiliates pursuant to a note purchase and private shelf agreement, dated January 23, 2019, between the Company, MetLife and the other parties thereto.

These notes bear interest at 3.93%, payable quarterly in arrears, and will mature on October 10, 2026, unless earlier redeemed by the Company.

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All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights.

As of June 28, 2020, the Company had guaranteed $14.7 million of SAC’s debt.

As of September 27, 2020, the Company had guaranteed $14.7 million of SAC’s debt.

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.

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Hedging Activities

The Company uses derivative financial instruments to manage its exposure to movements in certain commodity prices.

Fees paid by the Company for derivative instruments are amortized over the corresponding period of the instrument.

The Company accounts for its commodity hedges on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or SD&A expenses.

The Company uses commodity derivative instruments to manage its exposure to fluctuation 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.

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk.

The Company has master agreements with the counterparties to its derivative financial agreements that provide for net settlement of derivative transactions.

The net impact of the commodity hedges on the condensed consolidated statements of operations was as follows:

Second Quarter First Half

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:

Third Quarter First Nine Months

(in thousands) 2020 2019 2020 2019

Increase in cost of sales $ 378 $ 7,784 $ 2,592 $ 5,795

Increase (decrease) in cost of sales $ (814) $ 2,984 $ 1,778 $ 8,779

Increase (decrease) in SD&A expenses 296 582 3,291 (1,403)

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Certain statements contained in this report, or in other public filings, press releases, or other written or oral communications made by the Company or its representatives, which are not historical facts, are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements address, among other things, Company plans, activities or events which the Company expects will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance, including, but not limited to, the state of the economy, capital investment and financing plans, net sales, cost of sales, SD&A expenses, gross profit, income tax rates, earnings per diluted share, dividends, pension plan contributions and estimated acquisition related contingent consideration payments; statements regarding the outcome or impact of certain recent accounting pronouncements and pending or threatened litigation;

These forward-looking statements address, among other things, Company plans, activities or events which the Company expects will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance, including, but not limited to, the state of the economy, capital investment and financing plans, net sales, cost of sales, SD&A expenses, gross profit, income tax rates, net income per diluted share, dividends, pension plan contributions and estimated acquisition related contingent consideration payments; statements regarding the outcome or impact of certain recent accounting pronouncements and pending or threatened litigation;

or statements regarding the impact of the COVID-19 pandemic on the Company’s business, financial condition, results of operations or cash flows.

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis