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 October 1, 2021 and December 31, 2020. • The results of operations, comprehensive income and changes in equity for the three-month periods ended October 1, 2021 (the “third quarter” of fiscal 2021 (“2021”)) and September 27, 2020 (the “third quarter” of fiscal 2020 (“2020”)) and the nine-month periods ended October 1, 2021 (the “first nine months” of 2021) and September 27, 2020 (the “first nine months” of 2020). • The changes in cash flows for the first nine months of 2021 and the first nine months 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 82% 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, ready to drink tea, ready to drink coffee, enhanced water, juices and sports drinks. Our sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, post-mix products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses. The Company’s products are sold and distributed in the United States through various channels, which include selling directly to customers, including grocery stores, mass merchandise stores, club stores, convenience stores and drug stores, selling to on-premise locations, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, and selling through other channels such as vending machine outlets. The nonalcoholic beverage industry is highly competitive for both sparkling and still beverages. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of PepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper products. 25 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 Net sales increased 10% to $1.46 billion in the third quarter, while physical case volume decreased 0.6%. The increase in net sales was driven primarily by pricing actions taken throughout the third quarter of 2021 on most of our Sparkling and Still beverages. These pricing actions were taken to help offset increases to our major input costs including aluminum, PET resin and transportation costs. Sparkling volume decreased 0.6% in the third quarter of 2021, outperforming the price elasticity historically associated with higher pricing. Still volume decreased 0.7%, while net sales increased 8%. We experienced significant supply chain challenges with several of our Still beverage brands during the third quarter of 2021, which negatively impacted our growth trend in the Still beverage category. Physical case volume and net sales increased 3.3% and 12%, respectively, for the first nine months of 2021. Gross profit in the third quarter of 2021 increased $45.3 million, or 10%, while gross margin decreased 10 basis points to 35.5%. The improvement in gross profit was primarily due to the pricing actions taken throughout the third quarter of 2021. As we anticipated, the benefit of increased selling prices was partially offset by higher input costs, which resulted in relatively stable gross margin when compared to the third quarter of 2020. We expect higher input costs to continue in the fourth quarter of 2021 as commodity markets continue to be volatile and supply chains continue to be challenged. Gross profit in the first nine months of 2021 increased $154.3 million, or 12%. Selling, delivery and administrative (“SD&A”) expenses in the third quarter of 2021 increased $12.1 million, or 3%. SD&A expenses as a percentage of net sales decreased 160 basis points in the third quarter of 2021. The increase in SD&A expenses related primarily to an increase in labor costs as compared to the third quarter of 2020. During the third quarter of 2021, we provided incentives to attract, reward and retain our front-line teammates and we increased the base pay in certain competitive markets. We also experienced higher overtime in the quarter as the labor pool for our front-line positions continues to be challenging. SD&A expenses in the first nine months of 2021 increased $22.0 million, or 2%. SD&A expenses as a percentage of net sales in the first nine months of 2021 decreased 250 basis points as compared to the first nine months of 2020. Income from operations in the third quarter of 2021 was $137.0 million, compared to $103.8 million in the third quarter of 2020, an increase of 32%. On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, income from operations in the third quarter of 2021 was $137.2 million, an increase of 30%. For the first nine months of 2021, income from operations increased $132.3 million to $352.1 million. Net income in the third quarter of 2021 was $68.9 million, compared to $51.9 million in the third quarter of 2020, an improvement of $17.0 million. Net income in the third 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 third quarter of 2021 was $25.0 million, compared to $18.4 million in the third quarter of 2020. Net income increased $64.4 million in the first nine months of 2021 to $170.5 million as compared to the first nine months of 2020. Cash flows provided by operations for the first nine months of 2021 were $439.9 million, compared to $376.4 million for the first nine months of 2020. The significant increase in operating cash flows for the first nine months of 2021 was a result of our strong operating performance. The Company reduced outstanding indebtedness by $147.3 million during the first nine months 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. 26 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. 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 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. The Company is actively monitoring announced and potential regulations concerning vaccination for COVID-19 and the impact that such regulations may have on its workforce. If a significant number of our teammates are negatively impacted by regulations requiring vaccination or periodic testing of unvaccinated teammates, it may result in teammate attrition and our business operations may be adversely effected. 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. 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 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. This optimization includes identifying nearby warehousing and distribution operations that can be consolidated into new facilities, which is expected to increase capacity, expand production capabilities, reduce overall production costs and add automation to allow the Company to better serve its customers and consumers. Cash Flow Generation : We have several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures, as we continue to prioritize debt repayment and to focus on strengthening our balance sheet. 27 Results of Operations Third Quarter Results The Company’s results of operations for the third quarter of 2021 and the third quarter of 2020 are highlighted in the table below and discussed in the following paragraphs. Third Quarter (in thousands) 2021 2020 Change Net sales $ 1,457,432 $ 1,328,484 $ 128,948 Cost of sales 939,720 856,046 83,674 Gross profit 517,712 472,438 45,274 Selling, delivery and administrative expenses 380,681 368,594 12,087 Income from operations 137,031 103,844 33,187 Interest expense, net 8,097 9,033 (936) Other expense, net 34,982 21,394 13,588 Income before income taxes 93,952 73,417 20,535 Income tax expense 25,022 18,363 6,659 Net income 68,930 55,054 13,876 Less: Net income attributable to noncontrolling interest — 3,170 (3,170) Net income attributable to Coca‑Cola Consolidated, Inc. $ 68,930 $ 51,884 $ 17,046 Other comprehensive income, net of tax 1,051 1,280 (229) Comprehensive income attributable to Coca‑Cola Consolidated, Inc. $ 69,981 $ 53,164 $ 16,817 Net Sales Net sales increased $128.9 million, or 9.7%, to $1.46 billion in the third quarter of 2021, as compared to $1.33 billion in the third quarter of 2020. The increase in net sales was primarily attributable to the following (in millions): Third Quarter 2021 Attributable to: $ 115.3 Increase in net sales related to price increases and the shift in product mix. Approximately 75% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers, while approximately 25% was related to the shift in product mix to higher revenue still products in order to meet consumer preferences. 9.4 The increase in fountain syrup and other related sales mainly sold in on-premise locations 4.2 Other $ 128.9 Total increase in net sales Net sales by product category were as follows: Third Quarter (in thousands) 2021 2020 % Change Bottle/can sales: Sparkling beverages $ 773,489 $ 703,549 9.9 % Still beverages 503,990 464,921 8.4 % Total bottle/can sales 1,277,479 1,168,470 9.3 % Other sales: Sales to other Coca‑Cola bottlers 89,618 84,852 5.6 % Post-mix and other 90,335 75,162 20.2 % Total other sales 179,953 160,014 12.5 % Total net sales $ 1,457,432 $ 1,328,484 9.7 % 28 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 Third Quarter Bottle/Can Sales Volume Product Category 2021 2020 % Change Sparkling beverages 67.5 % 67.5 % (0.6) % Still beverages 32.5 % 32.5 % (0.7) % Total bottle/can sales volume 100.0 % 100.0 % (0.6) % 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. 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. Cost of sales increased $83.7 million, or 9.8%, to $939.7 million in the third quarter of 2021, as compared to $856.0 million in the third quarter of 2020. The increase in cost of sales was primarily attributable to the following (in millions): Third Quarter 2021 Attributable to: $ 69.7 Increased input costs, including aluminum, PET resin and transportation costs, and the shift in product mix to meet consumer preferences 6.6 The increase in fountain syrup and other related sales mainly sold in on-premise locations 7.4 Other $ 83.7 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 $36.4 million in the third quarter of 2021 and $33.8 million in the third quarter of 2020. Selling, Delivery and Administrative Expenses SD&A expenses include the following: sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution center warehousing costs, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangible assets and administrative support labor and operating costs. SD&A expenses increased by $12.1 million, or 3.3%, to $380.7 million in the third quarter of 2021, as compared to $368.6 million in the third quarter of 2020. SD&A expenses as a percentage of net sales decreased to 26.1% in the third quarter of 29 2021 from 27.7% in the third quarter of 2020. The increase in SD&A expenses was primarily attributable to the following (in millions): Third Quarter 2021 Attributable to: $ 9.5 Increase in labor costs as channels of business and local economies have re-opened compared to the prior year. In addition, investments were made to attract, reward and retain front-line employees in this challenging labor environment. 2.6 Other $ 12.1 Total increase in SD&A expenses Shipping and handling costs included in SD&A expenses were $176.2 million in the third quarter of 2021 and $155.8 million in the third quarter of 2020. Interest Expense, Net Interest expense, net decreased $0.9 million, or 10.4%, to $8.1 million in the third quarter of 2021, as compared to $9.0 million in the third quarter 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: Third Quarter (in thousands) 2021 2020 Increase in the fair value of the acquisition related contingent consideration liability $ 33,924 $ 19,808 Non-service cost component of net periodic benefit cost 1,058 1,586 Total other expense, net $ 34,982 $ 21,394 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. The increase in the fair value of the acquisition related contingent consideration liability in the third quarter of 2021 as compared to the third 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 26.6% for the third quarter of 2021 and 25.0% for the third quarter of 2020. The Company’s income tax expense increased $6.7 million, or 36.3%, to $25.0 million for the third quarter of 2021, as compared to $18.4 million for the third quarter of 2020. The increase in income tax expense was primarily attributable to improved financial results during the third quarter of 2021 compared to the third quarter of 2020. Noncontrolling Interest The Company recorded net income attributable to noncontrolling interest of $3.2 million in the third 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 $1.1 million in the third quarter of 2021 and $1.3 million in the third quarter of 2020. 30 First Nine Months Results Our results of operations for the first nine months of 2021 and the first nine months of 2020 are highlighted in the table below and discussed in the following paragraphs. First Nine Months (in thousands) 2021 2020 Change Net sales $ 4,160,375 $ 3,728,720 $ 431,655 Cost of sales 2,699,020 2,421,686 277,334 Gross profit 1,461,355 1,307,034 154,321 Selling, delivery and administrative expenses 1,109,279 1,087,251 22,028 Income from operations 352,076 219,783 132,293 Interest expense, net 25,208 27,778 (2,570) Other expense, net 94,078 39,826 54,252 Income before income taxes 232,790 152,179 80,611 Income tax expense 62,317 38,911 23,406 Net income 170,473 113,268 57,205 Less: Net income attributable to noncontrolling interest — 7,153 (7,153) Net income attributable to Coca‑Cola Consolidated, Inc. $ 170,473 $ 106,115 $ 64,358 Other comprehensive income, net of tax 3,707 2,201 1,506 Comprehensive income attributable to Coca‑Cola Consolidated, Inc. $ 174,180 $ 108,316 $ 65,864 Net Sales Net sales increased $431.7 million, or 11.6%, to $4.16 billion in the first nine months of 2021, as compared to $3.73 billion in the first nine months of 2020. The increase in net sales was primarily attributable to the following (in millions): First Nine Months 2021 Attributable to: $ 262.4 Increase in net sales related to price increases and the shift in product mix. Approximately 65% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers, while approximately 35% was related to the shift in product mix to higher revenue still products in order to meet consumer preferences. 133.3 Increased sales volume 23.3 The increase in fountain syrup and other related sales mainly sold in on-premise locations 9.8 Increased sales volume to other Coca-Cola bottlers 2.9 Increased volume of external freight revenue to external customers (other than nonalcoholic beverages) $ 431.7 Total increase in net sales Net sales by product category were as follows: First Nine Months (in thousands) 2021 2020 % Change Bottle/can sales: Sparkling beverages $ 2,221,355 $ 2,040,139 8.9 % Still beverages 1,424,069 1,239,335 14.9 % Total bottle/can sales 3,645,424 3,279,474 11.2 % Other sales: Sales to other Coca‑Cola bottlers 259,771 249,994 3.9 % Post-mix and other 255,180 199,252 28.1 % Total other sales 514,951 449,246 14.6 % Total net sales $ 4,160,375 $ 3,728,720 11.6 % 31 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 Nine Months Bottle/Can Sales Volume Product Category 2021 2020 % Change Sparkling beverages 68.5 % 69.9 % 1.2 % Still beverages 31.5 % 30.1 % 8.1 % Total bottle/can sales volume 100.0 % 100.0 % 3.3 % 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. The following table summarizes the percentage of the Company’s total bottle/can sales volume to its largest customers, as well as the percentage of the Company’s total net sales that such volume represents: First Nine Months 2021 2020 Approximate percent of the Company’s total bottle/can sales volume: Wal-Mart Stores, Inc. 20 % 19 % The Kroger Company 13 % 13 % Total approximate percent of the Company’s total bottle/can sales volume 33 % 32 % Approximate percent of the Company’s total net sales: Wal-Mart Stores, Inc. 14 % 14 % The Kroger Company 9 % 10 % Total approximate percent of the Company’s total net sales 23 % 24 % Cost of Sales Cost of sales increased $277.3 million, or 11.5%, to $2.70 billion in the first nine months of 2021, as compared to $2.42 billion in the first nine months of 2020. The increase in cost of sales was primarily attributable to the following (in millions): First Nine Months 2021 Attributable to: $ 156.1 Increased input costs, including aluminum, PET resin and transportation costs, and the shift in product mix to meet consumer preferences 89.2 Increased sales volume 13.3 The increase in fountain syrup and other related sales mainly sold in on-premise locations 10.7 Increased sales volume to other Coca-Cola bottlers 8.0 Increased volume of external freight revenue to external customers (other than nonalcoholic beverages) $ 277.3 Total increase in cost of sales Total marketing funding support from The Coca‑Cola Company and other beverage companies was $102.1 million in the first nine months of 2021, as compared to $90.4 million in the first nine months of 2020. Selling, Delivery and Administrative Expenses SD&A expenses increased by $22.0 million, or 2.0%, to $1.11 billion in the first nine months of 2021, as compared to $1.09 billion in the first nine months of 2020. SD&A expenses as a percentage of net sales decreased to 26.7% in the first nine 32 months of 2021 from 29.2% in the first nine months of 2020. The increase in SD&A expenses was primarily attributable to the following (in millions): First Nine Months 2021 Attributable to: $ 25.7 Increase in labor costs as channels of business and local economies have re-opened compared to the prior year. In addition, investments were made to attract, reward and retain front-line employees in this challenging labor environment. (3.7) Other $ 22.0 Total increase in SD&A expenses Shipping and handling costs included in SD&A expenses were $502.7 million in the first nine months of 2021 and $465.0 million in the first nine months of 2020. Interest Expense, Net Interest expense, net decreased $2.6 million, or 9.3%, to $25.2 million in the first nine months of 2021, as compared to $27.8 million in the first nine months 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: First Nine Months (in thousands) 2021 2020 Increase in the fair value of the acquisition related contingent consideration liability $ 90,905 $ 35,068 Non-service cost component of net periodic benefit cost 3,173 4,758 Total other expense, net $ 94,078 $ 39,826 The increase in the fair value of the acquisition related contingent consideration liability in the first nine months of 2021 as compared to the first nine months 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 26.8% for the first nine months of 2021 and 25.6% for the first nine months of 2020. The Company’s income tax expense increased $23.4 million, or 60.2%, to $62.3 million for the first nine months of 2021, as compared to $38.9 million for the first nine months of 2020. The increase in income tax expense was primarily attributable to improved financial results during the first nine months of 2021 compared to the first nine months of 2020. Noncontrolling Interest The Company recorded net income attributable to noncontrolling interest of $7.2 million in the first nine months 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 $3.7 million in the first nine months of 2021 and $2.2 million in the first nine months 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 during the second quarter of 2021. 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. 33 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.” The Company’s segment results are as follows: Third Quarter First Nine Months (in thousands) 2021 2020 2021 2020 Net sales: Nonalcoholic Beverages $ 1,426,971 $ 1,295,271 $ 4,061,976 $ 3,633,376 All Other 88,991 84,776 272,132 246,406 Eliminations (1) (58,530) (51,563) (173,733) (151,062) Consolidated net sales $ 1,457,432 $ 1,328,484 $ 4,160,375 $ 3,728,720 Income from operations: Nonalcoholic Beverages $ 144,130 $ 108,035 $ 363,544 $ 227,559 All Other (7,099) (4,191) (11,468) (7,776) Consolidated income from operations $ 137,031 $ 103,844 $ 352,076 $ 219,783 (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): Third 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) $ 517,712 $ 380,681 $ 137,031 $ 93,952 $ 68,930 $ 7.36 Fair value adjustment of acquisition related contingent consideration (1) — — — 33,924 25,488 2.72 Fair value adjustments for commodity derivative instruments (2) (3,794) 426 (4,220) (4,220) (3,169) (0.34) Supply chain optimization (3) 4,360 (35) 4,395 4,395 3,299 0.35 Total reconciling items 566 391 175 34,099 25,618 2.73 Adjusted results (non-GAAP) $ 518,278 $ 381,072 $ 137,206 $ 128,051 $ 94,548 $ 10.09 34 Third Quarter 2020 (in thousands, except per share data) Gross profit SD&A expenses Income from operations Income before income taxes Net income Basic net income per share Reported results (GAAP) $ 472,438 $ 368,594 $ 103,844 $ 73,417 $ 51,884 $ 5.53 Fair value adjustment of acquisition related contingent consideration (1) — — — 19,808 14,895 1.60 Fair value adjustments for commodity derivative instruments (2) (1,194) 575 (1,769) (1,769) (1,330) (0.14) Supply chain optimization (3) 3,122 — 3,122 3,122 2,348 0.25 Total reconciling items 1,928 575 1,353 21,161 15,913 1.71 Adjusted results (non-GAAP) $ 474,366 $ 369,169 $ 105,197 $ 94,578 $ 67,797 $ 7.24 First Nine Months 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) $ 1,461,355 $ 1,109,279 $ 352,076 $ 232,790 $ 170,473 $ 18.19 Fair value adjustment of acquisition related contingent consideration (1) — — — 90,905 68,224 7.28 Fair value adjustments for commodity derivative instruments (2) (6,210) 1,491 (7,701) (7,701) (5,780) (0.62) Supply chain optimization (3) 6,464 (793) 7,257 7,257 5,446 0.58 Total reconciling items 254 698 (444) 90,461 67,890 7.24 Adjusted results (non-GAAP) $ 1,461,609 $ 1,109,977 $ 351,632 $ 323,251 $ 238,363 $ 25.43 First Nine Months 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) $ 1,307,034 $ 1,087,251 $ 219,783 $ 152,179 $ 106,115 $ 11.32 Fair value adjustment of acquisition related contingent consideration (1) — — — 35,068 26,371 2.82 Fair value adjustments for commodity derivative instruments (2) (924) (949) 25 25 19 — Supply chain optimization (3) 4,441 601 3,840 3,840 2,888 0.31 Total reconciling items 3,517 (348) 3,865 38,933 29,278 3.13 Adjusted results (non-GAAP) $ 1,310,551 $ 1,086,903 $ 223,648 $ 191,112 $ 135,393 $ 14.45 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 $3.42 billion as of October 1, 2021, which was an increase of $197.5 million from December 31, 2020. Net working capital, defined as current assets less current liabilities, was $303.3 million as of October 1, 2021, which was an increase of $99.1 million from December 31, 2020. 35 Significant changes in net working capital as of October 1, 2021 as compared to December 31, 2020 were as follows: • An increase in cash and cash equivalents of $132.1 million primarily as a result of our strong operating performance. • An increase in accounts receivable of $56.8 million, driven primarily by increased sales volume and the timing of cash receipts. • An increase in accounts payable, trade of $53.4 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 $46.5 million primarily as a result of the timing of cash payments. 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 October 1, 2021, the Company had $186.9 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 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 October 1, 2021 and December 31, 2020 was as follows: (in thousands) Maturity Date October 1, 2021 December 31, 2020 2016 Term Loan Facility (1) 6/7/2021 $ — $ 217,500 Senior notes 2/27/2023 125,000 125,000 2018 Revolving Credit Facility 6/8/2023 — — 2021 Term Loan Facility 7/9/2024 70,000 — Senior bonds and unamortized discount on senior bonds (2) 11/25/2025 349,964 349,957 2021 Revolving Credit Facility 7/9/2026 — — Senior notes 10/10/2026 100,000 100,000 Senior notes 3/21/2030 150,000 150,000 Debt issuance costs (1,787) (1,992) Total long-term debt $ 793,177 $ 940,465 (1) As of December 31, 2020, the 2016 Term Loan Facility (as defined below) balance was classified as long term as the Company intended to refinance outstanding principal payments due in the next 12 months 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. (2) The senior bonds due in 2025 were issued at 99.975% of par. On June 7, 2021, the Company used a combination of cash on hand and borrowings under its previous revolving credit facility (the “2018 Revolving Credit Facility”) to repay the remaining balance of its previous term loan facility (the “2016 Term Loan Facility”) that matured on that date. On July 9, 2021, the Company entered into a credit agreement, providing for a five-year unsecured revolving credit facility with an aggregate maximum borrowing capacity of $500 million (the “2021 Revolving Credit Facility”), maturing on July 9, 2026. 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. Borrowings under the 2021 Revolving Credit Facility bear interest at a base rate or adjusted LIBOR, at the Company’s option, plus an applicable rate, depending on the rating for the Company’s long-term senior unsecured, non-credit-enhanced debt (“Debt Rating”). In addition, the Company must pay a facility fee on the lenders’ aggregate commitments under the 2021 Revolving Credit Facility ranging from 0.060% to 0.175% per annum, depending on the Company’s Debt Rating. The Company currently believes all banks participating in the 2021 Revolving Credit Facility have the ability to and will meet any funding requests from the Company. The 2021 Revolving Credit Facility replaced the 2018 Revolving Credit Facility, which had a maturity date of June 8, 2023. 36 Also on July 9, 2021, the Company entered into a term loan agreement, providing for a three-year senior unsecured term loan facility in the aggregate principal amount of $70 million (the “2021 Term Loan Facility”), maturing on July 9, 2024. 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. Borrowings under the 2021 Term Loan Facility bear interest at a base rate or adjusted LIBOR, at the Company’s option, plus an applicable rate, depending on the Company’s Debt Rating. The entire amount of the 2021 Term Loan Facility was fully drawn on July 9, 2021. The Company used approximately $55 million of the proceeds of the 2021 Term Loan Facility to repay outstanding indebtedness under the 2018 Revolving Credit Facility and used the remaining proceeds for general corporate purposes. Subsequent to the end of the third quarter of 2021, the Company notified the lender of its intent to repay the $70 million of borrowings outstanding under the 2021 Term Loan Facility during the fourth quarter of 2021. 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 October 1, 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. As of October 1, 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’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: Third Quarter First Nine Months (in thousands) 2021 2020 2021 2020 Beginning balance - Level 3 liability $ 473,055 $ 441,113 $ 434,694 $ 446,684 Payments of acquisition related contingent consideration (8,720) (11,468) (28,640) (31,999) Reclassification to current payables (1,600) (800) (300) (1,100) Increase in fair value 33,924 19,808 90,905 35,068 Ending balance - Level 3 liability $ 496,659 $ 448,653 $ 496,659 $ 448,653 37 Cash Sources and Uses A summary of cash-based activity is as follows: First Nine Months (in thousands) 2021 2020 Cash Sources: Net cash provided by operating activities (1) $ 439,875 $ 376,401 Borrowings under term loan facility 70,000 — Borrowings under revolving credit facility 55,000 235,000 Proceeds from the sale of property, plant and equipment 4,215 2,397 Total cash sources $ 569,090 $ 613,798 Cash Uses: Payments on term loan facility $ 217,500 $ 22,500 Additions to property, plant and equipment 119,620 110,717 Payments on revolving credit facility 55,000 280,000 Payments of acquisition related contingent consideration 28,640 31,999 Cash dividends paid 7,030 7,030 Payments on financing lease obligations 3,567 4,428 Other distribution agreements 1,998 — Other 3,650 1,915 Total cash uses $ 437,005 $ 458,589 Net increase in cash during period $ 132,085 $ 155,209 (1) Net cash provided by operating activities in the first nine months of 2021 included net income tax payments of $45.6 million, payment of deferred payroll taxes under the CARES Act of $18.7 million and pension plan contributions of $6.8 million. Net cash provided by operating activities in the first nine months of 2020 included net income tax payments of $36.9 million, deferral of payroll taxes under the CARES Act of $24.6 million and pension plan contributions of $16.3 million. Cash Flows From Operating Activities During the first nine months of 2021, cash provided by operating activities was $439.9 million, which was an increase of $63.5 million as compared to the first nine months of 2020. The increase was primarily the result of strong operating performance. Cash Flows From Investing Activities During the first nine months of 2021, cash used in investing activities was $119.6 million, which was an increase of $9.5 million as compared to the first nine months of 2020. The increase was primarily a result of additions to property, plant and equipment, which were $119.6 million during the first nine months of 2021 and $110.7 million during the first nine months of 2020. There were $9.6 million and $25.5 million of additions to property, plant and equipment accrued in accounts payable, trade as of October 1, 2021 and September 27, 2020, respectively. The Company anticipates additions to property, plant and equipment for 2021 to be in the range of $170 million to $190 million, with remaining anticipated expenditures in the fourth quarter of 2021 of $50 million to $70 million. Cash Flows From Financing Activities During the first nine months of 2021, cash used in financing activities was $188.2 million, which was an increase of $77.1 million as compared to the first nine months of 2020. The increase was primarily a result of the repayment of $217.5 million on the 2016 Term Loan Facility during the first nine months of 2021, partially offset by borrowings of $70.0 million under the 2021 Term Loan Facility. The Company had cash payments for acquisition related contingent consideration of $28.6 million during the first nine months of 2021 and $32.0 million during the first nine months 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 $32 million to $59 million. 38 Critical Accounting Policies See Note 1 to the condensed consolidated financial statements for information on the Company’s critical accounting policies. 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 October 1, 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: Third Quarter First Nine Months (in thousands) 2021 2020 2021 2020 Increase (decrease) in cost of sales $ (5,923) $ (814) $ (12,576) $ 1,778 Increase (decrease) in SD&A expenses (965) 296 (2,876) 3,291 Net impact $ (6,888) $ (518) $ (15,452) $ 5,069 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 filings or statements are qualified by these and other factors, risks and uncertainties. 39 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-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.