What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-10 compared with 2021-05-11 · 264 added, 144 removed, 286 unchanged (59% of the section changed)

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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 financial position as of July 2, 2021 and December 31, 2020.

• The results of operations and comprehensive income for the three-month periods ended July 2, 2021 (the “second quarter” of fiscal 2021 (“2021”)) and June 28, 2020 (the “second quarter” of fiscal 2020 (“2020”)) and the six-month periods ended July 2, 2021 (the “first half” of 2021) and June 28, 2020 (the “first half” of 2020).

• The changes in cash flows and equity for the first half of 2021 and the first half of 2020.

The condensed consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries.

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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.

Still beverages include energy products and noncarbonated beverages such as bottled water, ready to drink tea, ready to drink coffee, enhanced water, juices and sports drinks.

Our sales are divided into two main categories:

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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.

Physical case volume increased 5.9% in the second quarter of 2021.

Sparkling volume remained flat in the second quarter of 2021, while Still volume increased 20.9%.

The Still category growth accelerated due to the re-openings of certain small stores and accounts where our products are consumed on-premise.

The Still growth was driven primarily by BodyArmor, AHA and Monster brands.

Sales of multi-serve packages in larger retail stores remained very strong, while single-serve sales improved in small stores and other immediate consumption channels.

Physical case volume in the first half of 2021 increased 5.3%.

Revenue increased 16.8% in the second quarter of 2021 driven by the significant increase in sales of Still beverages, which generally carry a higher selling price per case than Sparkling beverages.

The re-opening of certain small store and other immediate consumption channels helped drive the growth in Still beverages as these channels have a higher mix of Still beverages than take-home outlets.

In addition, the increase in revenue was driven 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.

Sales growth in on-premise channels is now outpacing take-home channels, but we continue to see strong demand for future consumption packages.

Revenue from fountain syrup, which is primarily sold through restaurants, convenience stores, amusement parks, and other on-premise outlets, increased $20.8 million, or 92.4%, during the second quarter of 2021 as these outlets began to operate at higher levels of capacity.

For the first half of 2021, revenue increased $302.7 million, or 12.6%.

Gross profit in the second quarter of 2021 increased $65.6 million, or 15.3%, while gross margin decreased 50 basis points to 34.5%.

The improvement in gross profit was primarily due to strong volume growth in our Still category and price realization within our Sparkling category.

The decline in gross margin was driven primarily by the increased mix of Still beverages, which generally carry lower gross margins than Sparkling packages.

In the first half of 2021, we experienced increases in our major input costs, including aluminum, PET resin and high fructose corn syrup, and we expect elevated prices to continue through the balance of the year.

We currently plan to pass along price increases to our customers in the third quarter of this year in an effort to offset this cost pressure.

Gross profit in the first half of 2021 increased $109.0 million, or 13.1%.

Selling, delivery and administrative (“SD&A”) expenses in the second quarter of 2021 increased $27.9 million, or 8.1%.

SD&A expenses as a percentage of net sales decreased 210 basis points in the second quarter of 2021.

The increase in SD&A expenses related primarily to an increase in labor costs as compared to the second quarter of 2020.

As channels of business and local economies have re-opened compared to the prior year period, our labor expenses have increased.

SD&A expenses in the first half of 2021 increased $9.9 million, or 1.4%.

SD&A expenses as a percentage of net sales in the first half of 2021 decreased 290 basis points as compared to the first half of 2020.

Income from operations in the second quarter of 2021 was $120.9 million, compared to $83.1 million in the second quarter of 2020, an increase of 45.4%.

On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, income from operations in the second quarter of 2021 was $120.7 million, an increase of 47.8%.

For the first half of 2021, income from operations increased $99.1 million to $215.0 million.

Net income in the second quarter of 2021 was $48.2 million, compared to $39.6 million in the second quarter of 2020, an improvement of $8.6 million.

Net income in the second 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.

Fair value adjustments to this liability are routine and non-cash in nature.

Income tax expense in the second quarter of 2021 was $17.3 million, compared to $15.2 million in the second quarter of 2020.

Net income increased $47.3 million in the first half of 2021 to $101.5 million as compared to the first half of 2020.

Cash flows provided by operations for the first half of 2021 were $271.4 million, compared to $229.0 million for the first half of 2020.

The significant increase in operating cash flows for the first half of 2021 was a result of our strong operating performance.

The Company reduced outstanding indebtedness by $162 million during the first half of 2021.

We remain focused on the effective management of our working capital and continue to invest in long-term strategic projects to optimize our supply chain and better serve our customers.

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;

Such actions include following prescribed Company and other accepted health and safety standards and protocols, including those adopted by the Centers for Disease Control and Prevention (the “CDC”) and local health authorities, and working closely with local health departments and appropriate agencies to manage and monitor teammate cases and exposures.

Risk mitigation and safety activities continue;

examples include adhering to sanitation protocols and promoting hygiene practices recommended by the CDC;

implementing work-from-home routines for teammates whose work duties permit it;

offering supplemental sick time for non-exempt teammates;

and modifying our health, welfare and retirement plans for COVID-19-related events.

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.

We will continue to monitor the impact of the COVID-19 pandemic on our business and make adjustments as needed.

Areas of Emphasis

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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.

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.

During the second 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

its West Memphis, Arkansas operations, which is expected to greatly expand its West Memphis production capabilities and to reduce its overall production costs.

In addition, the Company integrated its Memphis, Tennessee manufacturing plant with 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.

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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

Second Quarter Results

The Company’s results of operations for the second quarter of 2021 and the second quarter of 2020 are highlighted in the table below and discussed in the following paragraphs.

Second Quarter

(in thousands) 2021 2020 Change

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$ 48,180 $ 39,569 $ 8,611

Other comprehensive income (loss), net of tax 1,332 (50) 1,382

Other comprehensive income, net of tax 1,324 971 353

Comprehensive income attributable to Coca‑Cola Consolidated, Inc.

$ 49,504 $ 40,540 $ 8,964

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.

Net sales increased $205.9 million, or 16.8%, to $1.43 billion in the second quarter of 2021, as compared to $1.23 billion in the second quarter of 2020.

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

First Quarter 2021

Second 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

$ 96.5 Increase in net sales related to product mix and price increases.

Approximately 60% of this increase was related to the shift in product mix to higher revenue still products in order to meet consumer preferences, while approximately 40% was driven by an increase in average bottle/can sales price per unit charged to retail customers.

77.2 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

22.2 Increase in net sales related to the increase in fountain syrup and other related sales mainly sold in on-premise locations

8.6 Increase in net sales related to increased sales volume to other Coca-Cola bottlers

1.4 Increase in net sales related to increased volume of external freight revenue to external customers (other than nonalcoholic beverages)

$ 205.9 Total increase in net sales

Net sales by product category were as follows:

First Quarter

Second Quarter

(in thousands) 2021 2020 % Change

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Bottle/Can Sales Volume

First Quarter Bottle/Can Sales

Product Category 2021 2020 Volume % Change

Second Quarter Bottle/Can Sales Volume

Product Category 2021 2020 % Change

Sparkling beverages 68.0 % 72.0 % 0.0 %

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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

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

Wal-Mart Stores, Inc.

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.

The Kroger Company 9 % 9 %

Total approximate percent of the Company’s total net sales 23 % 23 %

Cost of Sales

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Raw material costs represent approximately 20% of total cost of sales on an annual basis.

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.

Cost of sales increased $140.2 million, or 17.6%, to $938.1 million in the second quarter of 2021, as compared to $797.9 million in the second quarter of 2020.

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

First Quarter 2021

Second Quarter 2021

Attributable to:

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49.8 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

16.2 Increase in cost of sales related to the increase in fountain syrup sales mainly sold in on-premise locations

9.1 Increase in cost of sales related to increased sales volume to other Coca-Cola bottlers

4.1 Increase in cost of sales related to increased volume of external freight revenue to external customers (other than nonalcoholic beverages)

$ 140.2 Total increase in cost of sales

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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.

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

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 $35.7 million in the second quarter of 2021 and $26.3 million in the second quarter of 2020.

Selling, Delivery and Administrative Expenses

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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

SD&A expenses increased by $27.9 million, or 8.1%, to $374.1 million in the second quarter of 2021, as compared to $346.2 million in the second quarter of 2020.

SD&A expenses as a percentage of net sales decreased to 26.1% in the second quarter of 2021 from 28.2% in the second quarter of 2020.

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

Second 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

$ (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.

$ 24.2 Increase in labor costs as channels of business and local economies have re-opened compared to the prior year.

In addition, investments were made in the second quarter to attract, reward and retain front-line employees in this challenging labor environment.

$ 27.9 Total increase in SD&A expenses

Shipping and handling costs included in SD&A expenses were $169.1 million in the second quarter of 2021 and $149.1 million in the second 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.

Interest expense, net decreased $0.8 million, or 8.9%, to $8.4 million in the second quarter of 2021, as compared to $9.2 million in the second quarter of 2020.

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

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A summary of other expense, net is as follows:

First Quarter

Second Quarter

(in thousands) 2021 2020

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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.

The increase in the fair value of the acquisition related contingent consideration liability in the second quarter of 2021 as compared to the second quarter of 2020 was primarily driven by higher projections of future cash flows in the distribution territories subject to sub-bottling fees.

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.

The Company’s effective income tax rate was 26.4% for the second quarter of 2021 and 26.3% for the second quarter of 2020.

The Company’s income tax expense increased $2.1 million, or 13.7%, to $17.3 million for the second quarter of 2021, as compared to $15.2 million for the second quarter of 2020.

The increase in income tax expense was primarily attributable to improved financial results during the second quarter of 2021 compared to the second quarter of 2020.

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.

The Company recorded net income attributable to noncontrolling interest of $3.0 million in the second 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, Net of Tax

Other comprehensive income, net of tax was $1.3 million in the second quarter of 2021 and $1.0 million in the second quarter of 2020.

The improvement was primarily related to the Company’s interest rate swap on the 2016 Term Loan Facility (as defined below), which matured on June 7, 2021.

First Half Results

Our results of operations for the first half of 2021 and the first half of 2020 are highlighted in the table below and discussed in the following paragraphs.

(in thousands)

2021 2020 Change

Net sales $ 2,702,943 $ 2,400,236 $ 302,707

Cost of sales 1,759,300 1,565,640 193,660

Gross profit 943,643 834,596 109,047

Selling, delivery and administrative expenses 728,598 718,657 9,941

Income from operations 215,045 115,939 99,106

Interest expense, net 17,111 18,745 (1,634)

Other expense, net 59,096 18,432 40,664

Income before income taxes 138,838 78,762 60,076

Income tax expense 37,295 20,548 16,747

Net income 101,543 58,214 43,329

Net income attributable to noncontrolling interest — 3,983 (3,983)

Net income attributable to Coca‑Cola Consolidated, Inc.

$ 101,543 $ 54,231 $ 47,312

Other comprehensive income, net of tax 2,656 921 1,735

Comprehensive income attributable to Coca‑Cola Consolidated, Inc.

$ 104,199 $ 55,152 $ 49,047

Net sales increased $302.7 million, or 12.6%, to $2.70 billion in the first half of 2021, as compared to $2.40 billion in the first half of 2020.

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

First Half 2021

Attributable to:

$ 147.5 Increase in net sales related to price increases and product mix.

Approximately 55% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers, while approximately 45% was related to the shift in product mix to higher revenue still products in order to meet consumer preferences.

131.4 Increase in net sales related to increased sales volume

13.3 Increase in net sales related to the increase in fountain syrup and other related sales mainly sold in on-premise locations

5.5 Increase in net sales related to increased volume of external freight revenue to external customers (other than nonalcoholic beverages)

5.0 Increase in net sales related to increased sales volume to other Coca-Cola bottlers

$ 302.7 Total increase in net sales

Net sales by product category were as follows:

(in thousands) 2021 2020 % Change

Bottle/can sales:

Sparkling beverages $ 1,448,489 $ 1,324,854 9.3 %

Still beverages 919,070 769,849 19.4 %

Total bottle/can sales 2,367,559 2,094,703 13.0 %

Sales to other Coca‑Cola bottlers 170,153 165,143 3.0 %

Post-mix and other 165,231 140,390 17.7 %

Total other sales 335,384 305,533 9.8 %

Total net sales $ 2,702,943 $ 2,400,236 12.6 %

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 Half Bottle/Can Sales Volume

Product Category 2021 2020 % Change

Sparkling beverages 69.0 % 71.3 % 1.9 %

Still beverages 31.0 % 28.7 % 13.9 %

Total bottle/can sales volume 100.0 % 100.0 % 5.3 %

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.

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

Wal-Mart Stores, Inc.

The Kroger Company 13 % 14 %

Total approximate percent of the Company’s total bottle/can sales volume 33 % 34 %

Approximate percent of the Company’s total net sales:

Wal-Mart Stores, Inc.

The Kroger Company 9 % 10 %

Total approximate percent of the Company’s total net sales 23 % 24 %

Cost of Sales

Cost of sales increased $193.7 million, or 12.4%, to $1.76 billion in the first half of 2021, as compared to $1.57 billion in the first half of 2020.

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

First Half 2021 Attributable to:

$ 92.7 Increase in cost of sales primarily related to increased input costs and the change in product mix to meet consumer preferences

82.5 Increase in cost of sales related to increased sales volume

6.8 Increase in cost of sales related to increased volume of external freight revenue to external customers (other than nonalcoholic beverages)

6.6 Increase in cost of sales related to the increase in fountain syrup sales mainly sold in on-premise locations

5.1 Increase in cost of sales related to increased sales volume to other Coca-Cola bottlers

$ 193.7 Total increase in cost of sales

Total marketing funding support from The Coca‑Cola Company and other beverage companies was $65.7 million in the first half of 2021, as compared to $56.6 million in the first half of 2020.

Selling, Delivery and Administrative Expenses

SD&A expenses increased by $9.9 million, or 1.4%, to $728.6 million in the first half of 2021, as compared to $718.7 million in the first half of 2020.

SD&A expenses as a percentage of net sales decreased to 27.0% in the first half of 2021 from 29.9% in the first half of 2020.

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

First Half 2021 Attributable to:

$ 16.2 Increase in labor costs as channels of business and local economies have re-opened compared to the prior year.

In addition, investments were made in the second quarter to attract, reward and retain front-line employees in this challenging labor environment.

(4.4) Decrease in fleet-related repair expenses

$ 9.9 Total increase in SD&A expenses

Shipping and handling costs included in SD&A expenses were $326.5 million in the first half of 2021 and $309.2 million in the first half of 2020.

Interest Expense, Net

Interest expense, net decreased $1.6 million, or 8.7%, to $17.1 million in the first half of 2021, as compared to $18.7 million in the first half of 2020.

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

Other Expense, Net

A summary of other expense, net is as follows:

(in thousands) 2021 2020

Increase in the fair value of the acquisition related contingent consideration liability $ 56,981 $ 15,260

Non-service cost component of net periodic benefit cost 2,115 3,172

Total other expense, net $ 59,096 $ 18,432

The increase in the fair value of the acquisition related contingent consideration liability in the first half of 2021 as compared to the first half of 2020 was primarily driven by higher projections of future cash flows in the distribution territories subject to sub-bottling fees.

Income Tax Expense

The Company’s effective income tax rate was 26.9% for the first half of 2021 and 26.1% for the first half of 2020.

The Company’s income tax expense increased $16.7 million, or 81.5%, to $37.3 million for the first half of 2021, as compared to

$20.5 million for the first half of 2020.

The increase in income tax expense was primarily attributable to improved financial results during the first half of 2021 compared to the first half of 2020.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $4.0 million in the first half 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, Net of Tax

Other comprehensive income, net of tax was $2.7 million in the first half of 2021 and $0.9 million in the first half of 2020.

The improvement was primarily related to the Company’s interest rate swap on the 2016 Term Loan Facility, which matured on June 7, 2021.

Segment Operating Results

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The Company’s segment results are as follows:

First Quarter

Second Quarter First Half

(in thousands) 2021 2020 2021 2020

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

First Quarter 2021

Second Quarter 2021

(in thousands, except per share data) Gross

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Adjusted results (non-GAAP) $ 494,640 $ 373,932 $ 120,708 $ 111,285 $ 82,552 $ 8.80

First Quarter 2020

Second Quarter 2020

(in thousands, except per share data) Gross

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Adjusted results (non-GAAP) $ 428,706 $ 347,018 $ 81,688 $ 70,918 $ 49,435 $ 5.27

First Half 2021

(in thousands, except per share data) Gross

expenses Income from

operations Income before

income taxes Net

income Basic net income

Reported results (GAAP) $ 943,643 $ 728,598 $ 215,045 $ 138,838 $ 101,543 $ 10.83

Fair value adjustment of acquisition related contingent consideration (1)

— — — 56,981 42,736 4.56

Fair value adjustments for commodity derivative instruments (2)

(2,416) 1,065 (3,481) (3,481) (2,611) (0.28)

Supply chain optimization (3)

2,104 (758) 2,862 2,862 2,147 0.23

Total reconciling items (312) 307 (619) 56,362 42,272 4.51

Adjusted results (non-GAAP) $ 943,331 $ 728,905 $ 214,426 $ 195,200 $ 143,815 $ 15.34

First Half 2020

(in thousands, except per share data) Gross

expenses Income from

operations Income before

income taxes Net

income Basic net income

Reported results (GAAP) $ 834,596 $ 718,657 $ 115,939 $ 78,762 $ 54,231 $ 5.79

Fair value adjustment of acquisition related contingent consideration (1)

— — — 15,260 11,476 1.22

Fair value adjustments for commodity derivative instruments (2)

270 (1,524) 1,794 1,794 1,349 0.14

Supply chain optimization (3)

1,319 601 718 718 540 0.06

Total reconciling items 1,589 (923) 2,512 17,772 13,365 1.42

Adjusted results (non-GAAP) $ 836,185 $ 717,734 $ 118,451 $ 96,534 $ 67,596 $ 7.21

Following is an explanation of non-GAAP adjustments:

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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.

Total assets were $3.28 billion as of July 2, 2021, which was an increase of $59.8 million from December 31, 2020.

Net working capital, defined as current assets less current liabilities, was $182.9 million as of July 2, 2021, which was a decrease of $21.3 million from December 31, 2020.

Significant changes in net working capital as of July 2, 2021 as compared to December 31, 2020 were as follows:

• An increase in accounts receivable of $56.6 million, driven primarily by increased sales volume and the timing of cash receipts.

• An increase in accounts payable, trade of $65.9 million due to the extension of payment terms for certain vendors and the timing of cash payments.

• An increase in accounts payable to The Coca‑Cola Company of $32.6 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.

• An increase in other accrued liabilities of $17.9 million, driven primarily by the non-cash increase in the fair value of the current portion of the acquisition related contingent consideration liability.

• A decrease in other accrued compensation of $19.8 million, primarily as a result of the timing of bonus and incentive payments in the first quarter of 2021 and 2020.

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.

As of July 2, 2021, the Company had $54.2 million in 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.

Management believes the Company has sufficient sources of capital available to 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

The Company’s long-term debt as of July 2, 2021 and December 31, 2020 was as follows:

(in thousands) Maturity Date July 2, 2021 December 31, 2020

2016 Term Loan Facility (1)

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Long-term debt $ 778,236 $ 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.

(1) At the end of fiscal 2020, the Company intended to refinance outstanding principal payments due in the next 12 months under the 2016 Term Loan Facility using the 2018 Revolving Credit Facility (as defined below), which was classified as long-term debt, and the Company was not restricted by any subjective acceleration clause within the agreement for the 2018 Revolving Credit Facility.

As such, the 2016 Term Loan Facility balance was classified as long term as of December 31, 2020.

(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.

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.

On June 7, 2021, the Company used a combination of cash on hand and borrowings under its revolving credit facility (the “2018 Revolving Credit Facility”) to repay the remaining balance of the term loan facility (the “2016 Term Loan Facility”) that matured on that date.

Subsequent to the end of the second quarter of 2021, on July 9, 2021, the Company entered into an agreement (the “2021 Revolving Credit Facility Agreement”) providing for a five-year unsecured revolving credit facility with an aggregate maximum borrowing capacity of $500 million (the “2021 Revolving Credit Facility”), maturing on July 9, 2026.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2021 Revolving Credit Facility Agreement, at the Company’s option, additional incremental revolving commitments of up to $250 million may be established under the 2021 Revolving Credit Facility to increase the aggregate revolving commitments under the 2021 Revolving Credit Facility to up to $750 million.

The Company currently believes all banks participating in the 2021 Revolving Credit Facility have the ability to and will meet any funding requests from the Company.

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 2021 Revolving Credit Facility Agreement replaced the 2018 Revolving Credit Facility.

Also subsequent to the end of the second quarter of 2021, on July 9, 2021, the Company entered into a three-year term loan agreement (the “2021 Term Loan Facility Agreement”) for a senior unsecured term loan facility in the aggregate principal amount of $70 million (the “2021 Term Loan Facility”), maturing on July 9, 2024.

Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2021 Term Loan Facility Agreement, at the Company’s option, additional incremental term loans of up to $50 million may be established under the 2021 Term Loan Facility to increase the aggregate principal amount of term loans under the 2021 Term Loan Facility to up t o $120 million.

The entire amount of the 2021 Term Loan Facility was fully drawn on July 9, 2021.

The Company used approximately $55 million of the proceeds to repay outstanding indebtedness under the 2018 Revolving Credit Facility and used the remaining proceeds for general corporate purposes.

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.

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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.

The Company was in compliance with these covenants as of July 2, 2021.

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

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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

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.

As of July 2, 2021, the Company’s credit ratings and outlook for its long-term debt were as follows:

Credit Rating Rating Outlook

Standard & Poor’s BBB Positive

Moody’s Baa1 Stable

The Company is subject to interest rate risk on its variable rate debt, including the 2018 Revolving Credit 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 July 2, 2021, interest expense for the next 12 months would increase by approximately $0.6 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:

First Quarter

Second Quarter First Half

(in thousands) 2021 2020 2021 2020

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A summary of cash-based activity is as follows:

First Quarter

(in thousands) 2021 2020

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$ 271,385 $ 229,003

Proceeds from the sale of property, plant and equipment 74 1,658

Borrowings under revolving credit facility 55,000 235,000

Proceeds from the sale of property, plant and equipment 1,678 1,764

Total cash sources $ 328,063 $ 465,767

Additions to property, plant and equipment $ 37,204 $ 33,093

Payments on term loan facility $ 217,500 $ 15,000

Additions to property, plant and equipment 80,308 72,886

Payments of acquisition related contingent consideration 19,920 20,531

Cash dividends paid 4,687 4,686

Other distribution agreements 1,998 —

Payments on financing lease obligations 2,368 3,001

Other distribution agreements 1,998 —

Payments on revolving credit facility — 280,000

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Net increase (decrease) in cash during period $ (589) $ 67,936

(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.

(1) Net cash provided by operating activities included net income tax payments of $29.4 million in the first half of 2021 and $2.9 million in the first half 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.

During the first half of 2021, cash provided by operating activities was $271.4 million, which was an increase of $42.4 million as compared to the first half of 2020.

The increase was primarily the result of strong operating performance.

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.

During the first half of 2021, cash used in investing activities was $82.4 million, which was an increase of $9.6 million as compared to the first half of 2020.

The increase was primarily a result of additions to property, plant and equipment, which were $80.3 million during the first half of 2021 and $72.9 million during the first half of 2020.

There were $16.7 million and $11.9 million of additions to property, plant and equipment accrued in accounts payable, trade as of July 2, 2021 and June 28, 2020, respectively.

The Company anticipates additions to property, plant and equipment for the full year 2021 to be in the range of $180 million to $200 million, with remaining anticipated expenditures in the second half of 2021 of $100 million to $120 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.

During the first half of 2021, cash used in financing activities was $189.6 million, which was an increase of $101.3 million as compared to the first half of 2020.

The increase was primarily a result of the repayment of $217.5 million on the 2016 Term Loan Facility during the first half of 2021, partially offset by borrowings of $55 million under the 2018 Revolving Credit Facility.

The Company had cash payments for acquisition related contingent consideration of $19.9 million during the first half of 2021 and $20.5 million during the first half 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 $31 million to $57 million.

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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.

As of July 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.

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

First Quarter

Second Quarter First Half

(in thousands) 2021 2020 2021 2020

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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-

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.

In evaluating forward-looking statements, these risks and uncertainties should be considered, together with the other risks described from time to time in the Company’s other reports and documents filed with the United States Securities and Exchange Commission.

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