Coca-Cola Consolidated, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Consolidated, Inc., a Delaware corporation (together with its majority-owned subsidiaries, the “Company,” “we,” “us” or “our”), should be read in conjunction with the condensed consolidated financial statements of the Company and the accompanying notes to the condensed consolidated financial statements. All comparisons are to the corresponding period in the prior year unless specified otherwise. Each of the Company’s quarters, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The Company’s fourth quarter and fiscal year end on December 31 regardless of the day of the week on which December 31 falls. The condensed consolidated financial statements presented are: • The financial position as of April 2, 2021 and December 31, 2020. • The results of operations and comprehensive income for the three-month periods ended April 2, 2021 (the “first quarter” of fiscal 2021 (“2021”)) and March 29, 2020 (the “first quarter” of fiscal 2020 (“2020”)). • The changes in cash flows and equity for the first quarter of 2021 and the first quarter of 2020. The condensed consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries. During 2020, Piedmont Coca-Cola Bottling Partnership (“Piedmont”) was the Company’s only subsidiary that had a significant noncontrolling interest. On December 9, 2020, an indirect wholly owned subsidiary of the Company purchased the remaining 22.7% general partnership interest in Piedmont from an indirect wholly owned subsidiary of The Coca‑Cola Company, and Piedmont became an indirect wholly owned subsidiary of the Company. Our Business and the Nonalcoholic Beverage Industry We distribute, market and manufacture nonalcoholic beverages in territories spanning 14 states and the District of Columbia. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest Coca‑Cola bottler in the United States. Approximately 83% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage companies, including BA Sports Nutrition, LLC (“BodyArmor”), Keurig Dr Pepper Inc. (“Dr Pepper”) and Monster Energy Company (“Monster Energy”). Our purpose is to honor God in all we do, serve others, pursue excellence and grow profitably. Our stock is traded on the NASDAQ Global Select Market under the symbol COKE. We offer a range of nonalcoholic beverage products and flavors, including both sparkling and still beverages, designed to meet the demands of our consumers. Sparkling beverages are carbonated beverages and the Company’s principal sparkling beverage is Coca‑Cola. Still beverages include energy products and noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks. Our sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, “post-mix” products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses. The Company’s products are sold and distributed in the United States through various channels, which include selling directly to customers, including grocery stores, mass merchandise stores, club stores, convenience stores and drug stores, selling to on-premise locations, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, and selling through other channels such as vending machine outlets. The nonalcoholic beverage industry is highly competitive for both sparkling and still beverages. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of PepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper products. 24 The principal methods of competition in the nonalcoholic beverage industry are new brand and product introductions, point-of-sale merchandising, new vending and dispensing equipment, packaging changes, pricing, sales promotions, product quality, retail space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition. Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters of the fiscal year, as sales of our products are typically correlated with warmer weather. We believe that we and other manufacturers from whom we purchase finished products have adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality. Executive Summary Physical case volume increased 4.8% in the first quarter of 2021. Sparkling beverages maintained steady growth and certain Still brands, including BodyArmor, AHA and Monster, also performed well versus prior year. Sparkling category volume increased 4.5% in the first quarter of 2021, while Still beverage volume increased 5.5%. Sales of multi-serve packages in larger retail stores remained very strong, while single-serve sales improved in small stores and accounts where our products are consumed on-premise. Our first quarter of 2021 included one additional selling day compared to the first quarter of 2020 and we estimate it impacted our physical case growth rates by approximately 1%. Revenue increased 8.3% in the first quarter of 2021. The increase in revenue from our bottle/can Sparkling beverages was driven primarily by price realization on most Sparkling packages. Sales of multi-serve PET packages were especially strong in the quarter as we adjusted our commercial plans to emphasize these packages to complement our assortment of multi-serve can products in take-home outlets. Sales in take-home channels continue to outpace other channels, but we are seeing improvement in on-premise selling channels as COVID-related restrictions are being lifted throughout our territory. Gross profit increased $43.4 million, or 10.7%, while gross margin increased 70 basis points to 35.3%. The improvement in gross profit and gross margin was primarily due to price realization within our Sparkling category. In addition, favorable product mix, including the shift within Sparkling to multi-serve PET packages, helped to expand margins. We expect our major input costs, including aluminum, PET and high fructose corn syrup, to rise through the balance of the year which will put pressure on our gross margins. We currently plan to pass along price increases to our customers later this year in an effort to offset this expected cost pressure. Selling, delivery and administrative (“SD&A”) expenses in the first quarter of 2021 decreased $18.0 million, or 4.8%. SD&A expenses as a percentage of net sales decreased 390 basis points in the first quarter of 2021. The decrease in SD&A expenses related primarily to lower labor costs as a result of adjustments we made to our operating model during the second quarter of 2020. Additionally, we generated favorable results in a number of expense categories due to the diligent management of our variable operating expenses, including delivery, marketing, and travel and entertainment expenses. As we progress through the year, we expect our operating expenses to increase as business channels reopen and we service our full portfolio of customers. Income from operations in the first quarter of 2021 was $94.2 million, compared to $32.8 million in the first quarter of 2020, an increase of 187%. On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, income from operations in the first quarter of 2021 was $93.7 million, an increase of 155%. Net income in the first quarter of 2021 was $53.4 million, compared to $14.7 million in the first quarter of 2020, an improvement of $38.7 million. Net income in the first quarter of 2021 was adversely impacted by fair value adjustments to our acquisition related contingent consideration liability, driven primarily by changes in future cash flow projections, offset by an increase in the discount rate used to value the liability. Fair value adjustments to this liability are non-cash in nature and a routine part of our quarterly financial closing process. Income tax expense for the first quarter of 2021 was $20.0 million, compared to $5.4 million in the first quarter of 2020. The increase was the result of higher pre-tax income. Cash flows provided by operations for the first quarter of 2021 were $81.9 million, compared to $32.3 million for the first quarter of 2020. The significant increase in operating cash flows for the first quarter of 2021 was a result of our strong operating performance led by our top line growth, expanded gross margins and effective management of operating expenses. We also remained focused on the effective management of our working capital. This strong cash flow generation and working capital management has allowed us to reduce our long-term debt balance by more than $170 million since the end of the first quarter of 2020. Additionally, we continue to invest in long-term strategic projects to optimize our supply chain and better serve our customers, including the opening of our new automated warehouse facility in Whitestown, Indiana in April 2021. 25 COVID-19 Impact The Company continues to diligently monitor and manage through the impact of the ongoing COVID-19 pandemic on all aspects of its business, including the impact on its teammates and customers. Our industry and business have been designated by the United States Department of Homeland Security and state and local governments in the communities in which we operate as “essential,” as all our teammates support beverage manufacturing and distribution. The Company continues to implement its COVID-19 Response Program, including numerous actions to protect and promote the health and safety of its consumers, customers, teammates and communities, while it continues to manufacture and distribute products. Such actions include engaging in increased communication to inform our teammates about the current status of government orders responding to the pandemic and the deployment of vaccines across our territory; following prescribed Company and other accepted health and safety standards and protocols, including those adopted by the Centers for Disease Control and Prevention (the “CDC”) and local health authorities; working closely with local health departments and appropriate agencies to manage and monitor teammate cases and exposures, risk mitigation and safety activities; implementing sanitation protocols and promoting hygiene practices recommended by the CDC; implementing work-from-home routines for teammates whose work duties permit it, restricting business travel to “essential travel” and restricting access to our facilities for non-essential visitors, vendors and contractors; offering supplemental sick time for non-exempt teammates; and modifying our health, welfare and retirement plans for COVID-19-related events. As the U.S. COVID-19 vaccine program continues to be implemented, we will continue to support awareness and communication of vaccination guidance to our teammates. As the authorities in the communities we serve respond to changes in current conditions and begin lifting the restrictions put in place in response to the pandemic, we will respond accordingly and strive to serve our customers and communities in the safest ways possible. At this time and based on current trends, we do not currently expect the COVID-19 pandemic to materially impact our liquidity position or access to capital in 2021. We also have not experienced, and do not expect, any material impairments or adjustments to the fair values of our assets or the collectability of our receivables as a result of the COVID-19 pandemic. Additionally, during 2020, we made changes to our typical sourcing model and product offerings to address COVID-19-related constraints in the supply of aluminum cans, including sourcing aluminum cans from international manufacturers and limiting our canned product package offerings. We will continue to monitor all of these factors and make adjustments as needed. 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 have not identified, and do not anticipate, any material impact to our control procedures that would materially affect our internal controls over financial reporting. Areas of Emphasis Key priorities for the Company include commercial execution, revenue management, supply chain optimization and cash flow generation. Commercial Execution : Our success is dependent on our ability to execute our commercial strategy within our customers’ stores. Our ability to obtain shelf space within stores and remain in-stock across our portfolio of brands and packages in a profitable manner will have a significant impact on our results. We are focused on execution at every step in our supply chain, including raw material and finished product procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur. We continue to invest in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and drive long-term value in our business. Revenue Management : Our revenue management strategy focuses on pricing our brands and packages optimally within product categories and channels, creating effective working relationships with our customers and making disciplined fact-based decisions. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs, the roles certain brands play in our product portfolio and other market conditions. Supply Chain Optimization : In fiscal 2017, we completed a multi-year series of transactions through which we acquired and exchanged distribution territories and manufacturing plants. We are focused on optimizing our supply chain as we continue to integrate the acquired territories and facilities into our operations. Subsequent to the end of the first quarter of 2021, we opened a new, automated distribution center in Whitestown, Indiana, which allowed the Company to consolidate certain nearby warehousing and distribution operations into this one new facility. We believe the increased capacity and automation in Whitestown will allow the Company to optimize its supply chain and to better serve its customers and consumers in Indiana and the surrounding areas. In addition, the Company is in the process of integrating its Memphis, Tennessee manufacturing plant with 26 its West Memphis, Arkansas operations, which is expected to greatly expand its West Memphis production capabilities and to reduce its overall production costs. We will continue to look for opportunities to invest in our supply chain to optimize our costs. Cash Flow Generation : We have several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures, as we continue to prioritize debt repayment and to focus on strengthening our balance sheet. Results of Operations First Quarter Results The Company’s results of operations for the first quarter of 2021 and the first quarter of 2020 are highlighted in the table below and discussed in the following paragraphs. First Quarter (in thousands) 2021 2020 Change Net sales $ 1,269,857 $ 1,173,021 $ 96,836 Cost of sales 821,154 767,726 53,428 Gross profit 448,703 405,295 43,408 Selling, delivery and administrative expenses 354,519 372,474 (17,955) Income from operations 94,184 32,821 61,363 Interest expense, net 8,746 9,561 (815) Other expense, net 12,055 2,298 9,757 Income before income taxes 73,383 20,962 52,421 Income tax expense 20,020 5,361 14,659 Net income 53,363 15,601 37,762 Less: Net income attributable to noncontrolling interest — 939 (939) Net income attributable to Coca‑Cola Consolidated, Inc. $ 53,363 $ 14,662 $ 38,701 Other comprehensive income (loss), net of tax 1,332 (50) 1,382 Comprehensive income attributable to Coca‑Cola Consolidated, Inc. $ 54,695 $ 14,612 $ 40,083 Net Sales Net sales increased $96.8 million, or 8.3%, to $1.27 billion in the first quarter of 2021, as compared to $1.17 billion in the first quarter of 2020. The increase in net sales was primarily attributable to the following (in millions): First Quarter 2021 Attributable to: $ 55.6 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 50.6 Increase in net sales related to increased sales volume (9.4) Decrease in net sales related to the decrease in fountain syrup sales mainly sold in on-premise locations, which have been impacted by the COVID-19 pandemic $ 96.8 Total increase in net sales 27 Net sales by product category were as follows: First Quarter (in thousands) 2021 2020 % Change Bottle/can sales: Sparkling beverages $ 694,179 $ 634,722 9.4 % Still beverages 420,056 373,142 12.6 % Total bottle/can sales 1,114,235 1,007,864 10.6 % Other sales: Sales to other Coca‑Cola bottlers 81,658 85,239 (4.2) % Post-mix and other 73,964 79,918 (7.5) % Total other sales 155,622 165,157 (5.8) % Total net sales $ 1,269,857 $ 1,173,021 8.3 % Product category sales volume of physical cases as a percentage of total bottle/can sales volume and the percentage change by product category were as follows: Bottle/Can Sales Volume First Quarter Bottle/Can Sales Product Category 2021 2020 Volume % Change Sparkling beverages 70.3 % 70.5 % 4.5 % Still beverages 29.7 % 29.5 % 5.5 % Total bottle/can sales volume 100.0 % 100.0 % 4.8 % As the Company introduces new products, it reassesses the category assigned to its products at the SKU level, therefore categorization could differ from previously presented results to conform with current period categorization. Any differences are not material. 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 Quarter 2021 2020 Approximate percent of the Company’s total bottle/can sales volume: Wal-Mart Stores, Inc. 20 % 20 % The Kroger Company 13 % 13 % Total approximate percent of the Company’s total bottle/can sales volume 33 % 33 % Approximate percent of the Company’s total net sales: Wal-Mart Stores, Inc. 14 % 14 % The Kroger Company 9 % 9 % Total approximate percent of the Company’s total net sales 23 % 23 % Cost of Sales Inputs representing a substantial portion of the Company’s cost of sales include: (i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles and sweetener, (iii) concentrate costs and (iv) manufacturing costs, including labor, overhead and warehouse costs. In addition, cost of sales includes shipping, handling and fuel costs related to the movement of finished products from manufacturing plants to distribution centers, amortization expense of distribution rights, distribution fees of certain products and marketing credits from brand companies. Raw material costs represent approximately 20% of total cost of sales on an annual basis. 28 Cost of sales increased $53.4 million, or 7.0%, to $821.2 million in the first quarter of 2021, as compared to $767.7 million in the first quarter of 2020. The increase in cost of sales was primarily attributable to the following (in millions): First Quarter 2021 Attributable to: $ 35.8 Increase in cost of sales primarily related to increased input costs and the change in product mix to meet consumer preferences 27.2 Increase in cost of sales related to increased sales volume (9.6) Decrease in cost of sales related to the decrease in fountain syrup sales mainly sold in on-premise locations, which have been impacted by the COVID-19 pandemic $ 53.4 Total increase in cost of sales The Company relies extensively on advertising and sales promotions in the marketing of its products. The Coca‑Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to develop their brand identities and promote sales in the Company’s territories. Certain of the marketing expenditures by The Coca‑Cola Company and other beverage companies are made pursuant to annual arrangements. The Company also benefits from national advertising programs conducted by The Coca‑Cola Company and other beverage companies. Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $30.0 million in the first quarter of 2021 and $30.3 million in the first quarter of 2020. Shipping and handling costs related to the movement of finished products from manufacturing plants to distribution centers are included 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. As a result, 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. Selling, Delivery and Administrative Expenses SD&A expenses include the following: sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution center warehousing costs, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangible assets and administrative support labor and operating costs. SD&A expenses decreased by $18.0 million, or 4.8%, to $354.5 million in the first quarter of 2021, as compared to $372.5 million in the first quarter of 2020. SD&A expenses as a percentage of net sales decreased to 27.9% in the first quarter of 2021 from 31.8% in the first quarter of 2020. The decrease in SD&A expenses was primarily attributable to the following (in millions): First Quarter 2021 Attributable to: $ (10.2) Decrease in payroll costs, primarily as a result of structural changes made to certain portions of our business in the second quarter of 2020 (6.2) Decrease in fleet-related expenses, including fuel costs and repairs (1.6) Other $ (18.0) Total decrease in SD&A expenses Shipping and handling costs included in SD&A expenses were $157.4 million in the first quarter of 2021 and $160.1 million in the first quarter of 2020. Interest Expense, Net Interest expense, net decreased $0.8 million, or 8.5%, to $8.7 million in the first quarter of 2021, as compared to $9.6 million in the first quarter of 2020. The decrease was primarily a result of lower average debt balances. 29 Other Expense, Net A summary of other expense, net is as follows: First Quarter (in thousands) 2021 2020 Increase in the fair value of the acquisition related contingent consideration liability $ 10,998 $ 712 Non-service cost component of net periodic benefit cost 1,057 1,586 Total other expense, net $ 12,055 $ 2,298 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 fair value is determined by discounting future expected sub-bottling payments required under the Company’s comprehensive beverage agreements, which extend through the life of the applicable distribution assets, using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates and future cash flow projections. The life of these distribution assets is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis. As of April 2, 2021 and March 29, 2020, discount rates of 7.9% and 7.4%, respectively, were utilized in the valuation of the Company’s acquisition related contingent consideration liability. The increase in the fair value of the acquisition related contingent consideration liability in the first quarter of 2021 and the first quarter of 2020 was primarily driven by higher projections of future cash flows in the distribution territories subject to sub-bottling fees, partially offset by an increase in the discount rate used to calculate fair value. Income Tax Expense The Company’s effective income tax rate was 27.3% for the first quarter of 2021 and 25.6% for the first quarter of 2020. The increase in the effective income tax rate was primarily driven by the favorable tax benefit attributable to an income tax credit recorded during the first quarter of 2020, which did not reoccur in the first quarter of 2021. Noncontrolling Interest The Company recorded net income attributable to noncontrolling interest of $0.9 million in the first quarter of 2020 related to the portion of Piedmont owned by The Coca‑Cola Company prior to the purchase by an indirect wholly owned subsidiary of the Company of the remaining 22.7% general partnership interest in Piedmont on December 9, 2020. Other Comprehensive Income (Loss), Net of Tax Other comprehensive income, net of tax was $1.3 million in the first quarter of 2021 and other comprehensive loss, net of tax was $0.1 million in the first quarter of 2020. The improvement was primarily a result of fluctuation in the fair value of the Company’s interest rate swap on its term loan facility. Segment Operating Results The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operating Decision Maker (the “CODM”). The Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM. The Company believes three operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.” 30 The Company’s segment results are as follows: First Quarter (in thousands) 2021 2020 Net sales: Nonalcoholic Beverages $ 1,235,090 $ 1,142,581 All Other 89,949 81,301 Eliminations (1) (55,182) (50,861) Consolidated net sales $ 1,269,857 $ 1,173,021 Income from operations: Nonalcoholic Beverages $ 95,042 $ 35,617 All Other (858) (2,796) Consolidated income from operations $ 94,184 $ 32,821 (1) The entire net sales elimination represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction. Adjusted Non-GAAP Results The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). However, management believes certain non-GAAP financial measures provide users of the financial statements with additional, meaningful financial information that should be considered when assessing the Company’s ongoing performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting. The following tables reconcile reported results (GAAP) to adjusted results (non-GAAP): First Quarter 2021 (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 Reported results (GAAP) $ 448,703 $ 354,519 $ 94,184 $ 73,383 $ 53,363 $ 5.69 Fair value adjustment of acquisition related contingent consideration (1) — — — 10,998 8,249 0.89 Fair value adjustments for commodity derivative instruments (2) (288) 560 (848) (848) (636) (0.07) Supply chain optimization (3) 276 (106) 382 382 287 0.03 Total reconciling items (12) 454 (466) 10,532 7,900 0.85 Adjusted results (non-GAAP) $ 448,691 $ 354,973 $ 93,718 $ 83,915 $ 61,263 $ 6.54 First 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 Reported results (GAAP) $ 405,295 $ 372,474 $ 32,821 $ 20,962 $ 14,662 $ 1.56 Fair value adjustment of acquisition related contingent consideration (1) — — — 712 535 0.06 Fair value adjustments for commodity derivative instruments (2) 1,536 (2,329) 3,865 3,865 2,906 0.31 Supply chain optimization (3) 648 571 77 77 58 0.01 Total reconciling items 2,184 (1,758) 3,942 4,654 3,499 0.38 Adjusted results (non-GAAP) $ 407,479 $ 370,716 $ 36,763 $ 25,616 $ 18,161 $ 1.94 31 Following is an explanation of non-GAAP adjustments: (1) This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates and future cash flow projections of the distribution territories subject to 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 as the Company continues to optimize efficiency opportunities across its business. Financial Condition Total assets were $3.28 billion as of April 2, 2021, which was an increase of $62.4 million from December 31, 2020. Net working capital, defined as current assets less current liabilities, was $242.9 million as of April 2, 2021, which was an increase of $38.8 million from December 31, 2020. Significant changes in net working capital as of April 2, 2021 as compared to December 31, 2020 were as follows: • An increase in accounts receivable, trade of $34.6 million, primarily as a result of a seasonal increase in sales volume at the end of the first quarter of 2021 and the timing of cash receipts. • An increase in inventory of $31.6 million, primarily as a result of seasonal builds of inventory. • An increase in accounts payable to The Coca‑Cola Company of $35.1 million, primarily as a result of the timing of cash payments. • A decrease in other accrued compensation of $25.1 million, primarily as a result of the timing of bonus and incentive payments in the first quarter of 2021. 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 April 2, 2021, the Company had $51.8 million of cash and cash equivalents. The Company has obtained its long-term debt from public markets, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of the condensed consolidated financial statements. At this time, the Company does not expect the COVID-19 pandemic to have a material impact on its liquidity or access to capital. The Company’s long-term debt as of April 2, 2021 and December 31, 2020 was as follows: (in thousands) Maturity Date April 2, 2021 December 31, 2020 Term loan facility (1) 6/7/2021 $ 186,250 $ 217,500 Senior notes 2/27/2023 125,000 125,000 Revolving credit facility 6/8/2023 — — Senior bonds and unamortized discount on senior bonds (2) 11/25/2025 349,956 349,957 Senior notes 10/10/2026 100,000 100,000 Senior notes 3/21/2030 150,000 150,000 Debt issuance costs (1,902) (1,992) Long-term debt $ 909,304 $ 940,465 (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 using its revolving credit facility, which is classified as long-term debt, and the Company is not restricted by any subjective acceleration clause within the revolving credit agreement. As such, any amounts due in the next 12 months were classified as long term. (2) The senior bonds due in 2025 were issued at 99.975% of par. The Company’s term loan facility matures on June 7, 2021. The original aggregate principal amount borrowed by the Company under the facility was $300 million and repayment of principal amounts outstanding began in 2018. The Company may request additional term loans under the term loan facility, provided the Company’s aggregate borrowings under the facility do not exceed $500 million. 32 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 Company’s 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 revolving 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. As of April 2, 2021, the Company had no borrowings outstanding under the revolving credit facility, and therefore had $500 million borrowing capacity available under the revolving credit facility. The indenture under which the Company’s senior bonds were issued does not include financial covenants but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The agreements under which the Company’s nonpublic debt was issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreement. The Company was in compliance with these covenants as of April 2, 2021. 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. The Company’s Board of Directors has declared, and the Company has paid, dividends on the Common Stock and Class B Common Stock and each class of common stock has participated equally in all dividends each quarter for more than 25 years. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future. The Company’s credit ratings are reviewed periodically by certain nationally recognized rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material adverse impact on the Company’s operating results or financial position. Both Standard & Poor’s and Moody’s have a stable rating outlook for the Company. As of April 2, 2021, the Company’s credit ratings were as follows: Long-Term Debt Standard & Poor’s BBB Moody’s Baa2 Subsequent to quarter end, on April 30, 2021, Moody’s upgraded the Company’s credit rating to Baa1 with a stable outlook. 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 April 2, 2021, interest expense for the next 12 months would increase by approximately $0.9 million. The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability. There were no transfers from Level 1 or Level 2 in any period presented. Fair value adjustments were non-cash, and therefore did not impact the Company’s liquidity or capital resources. Following is a summary of the Level 3 activity: First Quarter (in thousands) 2021 2020 Beginning balance - Level 3 liability $ 434,694 $ 446,684 Payments of acquisition related contingent consideration (10,046) (10,452) Reclassification to current payables 100 150 Increase in fair value 10,998 712 Ending balance - Level 3 liability $ 435,746 $ 437,094 33 Cash Sources and Uses A summary of cash-based activity is as follows: First Quarter (in thousands) 2021 2020 Cash Sources: Net cash provided by operating activities (1) $ 81,910 $ 32,289 Proceeds from the sale of property, plant and equipment 74 1,658 Borrowings under revolving credit facility — 185,000 Total cash sources $ 81,984 $ 218,947 Cash Uses: Additions to property, plant and equipment $ 37,204 $ 33,093 Payments on term loan facility 31,250 7,500 Payments of acquisition related contingent consideration 10,046 10,452 Cash dividends paid 2,343 2,344 Other distribution agreements 1,998 — Payments on financing lease obligations 1,447 1,485 Payments on revolving credit facility — 125,000 Other 661 939 Total cash uses $ 84,949 $ 180,813 Net increase (decrease) in cash during period $ (2,965) $ 38,134 (1) Net cash provided by operating activities included net income tax payments of $0.6 million in the first quarter of 2021 and $2.0 million in the first quarter of 2020. Cash Flows From Operating Activities During the first quarter of 2021, cash provided by operating activities was $81.9 million, which was an increase of $49.6 million as compared to the first quarter of 2020. The increase was a result of strong operating performance led by top line growth, expanded gross margins and effective management of operating expenses. Cash Flows From Investing Activities During the first quarter of 2021, cash used in investing activities was $39.6 million, which was an increase of $7.3 million as compared to the first quarter of 2020. The increase was primarily a result of additions to property, plant and equipment, which were $37.2 million during the first quarter of 2021 and $33.1 million during the first quarter of 2020. There were $16.2 million and $12.7 million of additions to property, plant and equipment accrued in accounts payable, trade as of April 2, 2021 and March 29, 2020, respectively. The Company anticipates additions to property, plant and equipment in 2021 to be in the range of $170 million to $200 million. Cash Flows From Financing Activities Cash used in financing activities was $45.2 million in the first quarter of 2021 and cash provided by financing activities was $38.2 million in the first quarter of 2020. The Company repaid $31.3 million of debt and did not have any borrowings or repayments on its revolving credit facility during the first quarter of 2021. The Company had cash payments for acquisition related contingent consideration of $10.0 million during the first quarter of 2021 and $10.5 million during the first quarter of 2020. 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 $30 million to $54 million. Critical Accounting Policies See Note 1 to the condensed consolidated financial statements for information on the Company’s critical accounting policies. 34 Off-Balance Sheet Arrangements The Company is a shareholder of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative located in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights. As of April 2, 2021, 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. 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. See Note 20 to the condensed consolidated financial statements for additional information. Hedging Activities The Company uses commodity derivative instruments to manage its exposure to fluctuations in certain commodity prices. Fees paid by the Company for commodity derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity derivative instruments on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or SD&A expenses, consistent with the expense classification of the underlying hedged item. The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its commodity derivative instruments that provide for net settlement of derivative transactions. The net impact of the commodity derivative instruments on the condensed consolidated statements of operations was as follows: First Quarter (in thousands) 2021 2020 Increase (decrease) in cost of sales $ (962) $ 2,214 Increase (decrease) in SD&A expenses (844) 2,776 Net impact $ (1,806) $ 4,990 Cautionary Information Regarding Forward-Looking Statements Certain statements contained in this report, or in other public filings, press releases, or other written or oral communications made by 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, 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. These forward-looking statements may be identified by the use of the words “will,” “may,” “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” “could,” “strive” and other similar terms and expressions. Various factors, risks and uncertainties may cause the Company’s actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, risks and uncertainties that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for 2020, as well as other factors discussed throughout this report, including, without limitation, the factors described under “Critical Accounting Policies” in Note 1 to the condensed consolidated financial statements, or in other filings or statements made by the Company. All of the forward-looking statements in this report and other documents or statements are qualified by these and other factors, risks and uncertainties. Caution should be taken not to place undue reliance on the forward-looking statements included in this report. The Company assumes no obligation to update any forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward- 35 looking statements, these risks and uncertainties should be considered, together with the other risks described from time to time in the Company’s other reports and documents filed with the United States Securities and Exchange Commission.