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. The condensed consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries. 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 September 30, 2022 and December 31, 2021. • The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended September 30, 2022 (the “third quarter” of fiscal 2022 (“2022”)) and October 1, 2021 (the “third quarter” of fiscal 2021 (“2021”)) and the nine-month periods ended September 30, 2022 (the “first nine months” of 2022) and October 1, 2021 (the “first nine months” of 2021). • The changes in cash flows for the first nine months of 2022 and the first nine months of 2021. 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 86% 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 Keurig Dr Pepper Inc. (“Dr Pepper”) and Monster Energy Company. Our purpose is to honor God in all we do, serve others, pursue excellence and grow profitably. Our Common 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 sales, 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. 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. 25 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 12% to $1.63 billion in the third quarter of 2022, while physical case volume increased 0.6%. The increase in net sales was driven primarily by price increases taken on our Sparkling and Still beverages during the quarter and earlier this year. Sparkling beverage volume increased 0.8% in the quarter, outperforming the price elasticity we generally have experienced with higher pricing. Volume growth was particularly strong in our value, club and small store sales channels. We also experienced solid demand in our on‑premise sales channels, including restaurants, universities, sports venues, amusement parks and other immediate consumption outlets, as consumer traffic has increased compared to the prior year period. Still beverage volume increased 0.1% in the quarter, led by growth in Monster and smartwater. Net sales increased 11% and physical case volume increased 0.4% in the first nine months of 2022. Gross profit in the third quarter of 2022 increased $103.4 million, or 20%, while gross margin improved 260 basis points to 38.1%. The improvement in gross profit resulted from strong price realization and solid volume growth in our Sparkling category. Gross margins also benefited during the quarter from a pullback in certain commodity prices. Gross profit in the first nine months of 2022 increased $218.0 million, or 15%. Selling, delivery and administrative (“SD&A”) expenses in the third quarter of 2022 increased $50.5 million, or 13%. SD&A expenses as a percentage of net sales increased 40 basis points to 26.5%. The increase in SD&A expenses related primarily to an increase in labor costs as compared to the third quarter of 2021. Over the last year, we have made certain compensation adjustments across our workforce to remain competitive in a challenging labor market and to reward our teammates for their contributions in achieving strong operating results. In addition, we experienced broad inflationary increases across a number of SD&A categories. SD&A expenses in the first nine months of 2022 increased $101.9 million, or 9%. SD&A expenses as a percentage of net sales in the first nine months of 2022 decreased 50 basis points to 26.2% as compared to the first nine months of 2021. Income from operations in the third quarter of 2022 was $189.9 million, compared to $137.0 million in the third quarter of 2021, an increase of $52.9 million, or 39%. On an adjusted basis, as defined in the “Adjusted Results (Non-GAAP)” section, income from operations in the third quarter of 2022 was $193.9 million, an increase of 41%. For the first nine months of 2022, income from operations increased $116.1 million to $468.2 million. Net income in the third quarter of 2022 was $118.8 million, compared to $68.9 million in the third quarter of 2021, an improvement of $49.8 million. Net income in the third quarter of 2022 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. Net income increased $141.2 million in the first nine months of 2022 to $311.7 million as compared to the first nine months of 2021. Cash flows provided by operations for the first nine months of 2022 were $394.3 million, compared to $439.9 million for the first nine months of 2021. Cash flows from operations were impacted by the timing of certain working capital payments and receipts during the third quarter. We continue to invest in long‑term strategic projects to optimize our supply chain and reduce our debt obligations. During the third quarter, the Company repaid $125 million of senior notes prior to their stated maturity date of February 27, 2023. 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, communities and customers. The Company continues to implement its COVID-19 Response Program as dictated by current conditions, including numerous actions to protect and promote the health and safety of its consumers, customers, suppliers, teammates and communities. 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. Risk mitigation and safety activities continue; examples include adhering to sanitation protocols and promoting hygiene practices recommended by the CDC; 26 offering supplemental sick time for non-exempt teammates; providing access to personal protective equipment and educational resources; and modifying our health and welfare plans for COVID-19-related events. At this time and based on current trends, we do not expect the COVID-19 pandemic to materially impact our liquidity position or access to capital in 2022. 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. 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 : We are continually focused on optimizing our supply chain, which includes identifying nearby warehousing and distribution operations that can be consolidated into new facilities 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. Results of Operations Third Quarter Results The Company’s results of operations for the third quarter of 2022 and the third quarter of 2021 are highlighted in the table below and discussed in the following paragraphs. Third Quarter (in thousands) 2022 2021 Change Net sales $ 1,628,589 $ 1,457,432 $ 171,157 Cost of sales 1,007,482 939,720 67,762 Gross profit 621,107 517,712 103,395 Selling, delivery and administrative expenses 431,177 380,681 50,496 Income from operations 189,930 137,031 52,899 Interest expense, net 6,083 8,097 (2,014) Other expense, net 24,746 34,982 (10,236) Income before taxes 159,101 93,952 65,149 Income tax expense 40,340 25,022 15,318 Net income 118,761 68,930 49,831 Other comprehensive income, net of tax 815 1,051 (236) Comprehensive income $ 119,576 $ 69,981 $ 49,595 27 Net Sales Net sales increased $171.2 million, or 11.7%, to $1.63 billion in the third quarter of 2022, as compared to $1.46 billion in the third quarter of 2021. The increase in net sales was primarily attributable to the following (in millions): Third Quarter 2022 Attributable to: $ 180.9 Increase in net sales related to price increases and the shift in product mix. Approximately 90% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers. 4.9 Increased physical case volume (14.6) Other $ 171.2 Total increase in net sales Net sales by product category were as follows: Third Quarter (in thousands) 2022 2021 % Change Bottle/can sales: Sparkling beverages $ 917,162 $ 773,489 18.6 % Still beverages 548,333 503,990 8.8 % Total bottle/can sales 1,465,495 1,277,479 14.7 % Other sales: Sales to other Coca‑Cola bottlers 83,644 89,618 (6.7) % Post-mix sales and other 79,450 90,335 (12.0) % Total other sales 163,094 179,953 (9.4) % Total net sales $ 1,628,589 $ 1,457,432 11.7 % Product category sales volume of physical cases and the percentage change by product category were as follows: Third Quarter (in thousands) 2022 2021 % Change Bottle/can sales volume: Sparkling beverages 63,656 63,158 0.8 % Still beverages 30,412 30,368 0.1 % Total bottle/can sales volume 94,068 93,526 0.6 % 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 $67.8 million, or 7.2%, to $1.01 billion in the third quarter of 2022, as compared to $939.7 million in the third quarter of 2021. The increase in cost of sales was primarily attributable to the following (in millions): Third Quarter 2022 Attributable to: $ 91.3 Increased input costs, including aluminum, PET resin and transportation costs, partially due to the impacts of inflation and supply chain challenges, as well as the shift in product mix to meet consumer preferences 2.5 Increased physical case volume (26.0) Other $ 67.8 Total increase in cost of sales 28 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, including national advertising programs, to develop their brand identities and promote sales in the Company’s territories. Certain of these marketing and advertising expenditures are made pursuant to annual arrangements. 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 $39.6 million in the third quarter of 2022 and $36.4 million in the third quarter of 2021. 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 $50.5 million, or 13.3%, to $431.2 million in the third quarter of 2022, as compared to $380.7 million in the third quarter of 2021. SD&A expenses as a percentage of net sales increased to 26.5% in the third quarter of 2022 from 26.1% in the third quarter of 2021. The increase in SD&A expenses was primarily attributable to the following (in millions): Third Quarter 2022 Attributable to: $ 31.5 Increase in labor costs due to compensation adjustments across our workforce to remain competitive in a challenging labor market and to reward our teammates for their contributions in achieving strong operating results 8.3 Increase in fleet-related expenses, including fuel costs 1.9 Increase in commitments to various charities and donor-advised funds in light of the Company’s financial performance 8.8 Other $ 50.5 Total increase in SD&A expenses Shipping and handling costs included in SD&A expenses were $195.8 million in the third quarter of 2022 and $176.2 million in the third quarter of 2021. Interest Expense, Net Interest expense, net decreased $2.0 million, or 24.9%, to $6.1 million in the third quarter of 2022, as compared to $8.1 million in the third quarter of 2021. Other Expense, Net A summary of other expense, net is as follows: Third Quarter (in thousands) 2022 2021 Increase in the fair value of the acquisition related contingent consideration liability $ 22,568 $ 33,924 Non-service cost component of net periodic benefit cost 2,178 1,058 Total other expense, net $ 24,746 $ 34,982 Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to acquisition related sub-bottling payments to fair value. The fair value is determined by discounting future expected acquisition related 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 acquisition related sub-bottling payments on a quarterly basis. The change in the fair value of the acquisition related contingent consideration liability in the third quarter of 2022 as compared to the third quarter of 2021 was primarily driven by an increase in the discount rate used to calculate fair value, partially offset by higher projections of future cash flows in the distribution territories subject to acquisition related sub-bottling payments. 29 Income Tax Expense The Company’s effective income tax rate was 25.4% for the third quarter of 2022 and 26.6% for the third quarter of 2021. The Company’s income tax expense increased $15.3 million, or 61.2%, to $40.3 million for the third quarter of 2022, as compared to $25.0 million for the third quarter of 2021. The increase in income tax expense was primarily attributable to higher income before taxes during the third quarter of 2022 compared to the third quarter of 2021. Other Comprehensive Income, Net of Tax Other comprehensive income, net of tax was $0.8 million in the third quarter of 2022 and $1.1 million in the third quarter of 2021. First Nine Months Results Our results of operations for the first nine months of 2022 and the first nine months of 2021 are highlighted in the table below and discussed in the following paragraphs. First Nine Months (in thousands) 2022 2021 Change Net sales $ 4,628,162 $ 4,160,375 $ 467,787 Cost of sales 2,948,820 2,699,020 249,800 Gross profit 1,679,342 1,461,355 217,987 Selling, delivery and administrative expenses 1,211,134 1,109,279 101,855 Income from operations 468,208 352,076 116,132 Interest expense, net 20,928 25,208 (4,280) Other expense, net 27,666 94,078 (66,412) Income before taxes 419,614 232,790 186,824 Income tax expense 107,901 62,317 45,584 Net income 311,713 170,473 141,240 Other comprehensive income, net of tax 2,444 3,707 (1,263) Comprehensive income $ 314,157 $ 174,180 $ 139,977 Net Sales Net sales increased $467.8 million, or 11.2%, to $4.63 billion in the first nine months of 2022, as compared to $4.16 billion in the first nine months of 2021. The increase in net sales was primarily attributable to the following (in millions): First Nine Months 2022 Attributable to: $ 468.7 Increase in net sales related to price increases and the shift in product mix. Approximately 90% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers. 8.2 Increased physical case volume (9.1) Other $ 467.8 Total increase in net sales 30 Net sales by product category were as follows: First Nine Months (in thousands) 2022 2021 % Change Bottle/can sales: Sparkling beverages $ 2,573,376 $ 2,221,355 15.8 % Still beverages 1,556,438 1,424,069 9.3 % Total bottle/can sales 4,129,814 3,645,424 13.3 % Other sales: Sales to other Coca‑Cola bottlers 262,099 259,771 0.9 % Post-mix sales and other 236,249 255,180 (7.4) % Total other sales 498,348 514,951 (3.2) % Total net sales $ 4,628,162 $ 4,160,375 11.2 % Product category sales volume of physical cases and the percentage change by product category were as follows: First Nine Months (in thousands) 2022 2021 % Change Bottle/can sales volume: Sparkling beverages 190,613 189,750 0.5 % Still beverages 87,266 87,104 0.2 % Total bottle/can sales volume 277,879 276,854 0.4 % 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 2022 2021 Approximate percent of the Company’s total bottle/can sales volume: Wal-Mart Stores, Inc. 20 % 20 % The Kroger Company 12 % 13 % Total approximate percent of the Company’s total bottle/can sales volume 32 % 33 % Approximate percent of the Company’s total net sales: Wal-Mart Stores, Inc. 16 % 14 % The Kroger Company 9 % 9 % Total approximate percent of the Company’s total net sales 25 % 23 % Cost of Sales Cost of sales increased $249.8 million, or 9.3%, to $2.95 billion in the first nine months of 2022, as compared to $2.70 billion in the first nine months of 2021. The increase in cost of sales was primarily attributable to the following (in millions): First Nine Months 2022 Attributable to: $ 268.3 Increased input costs, including aluminum, PET resin and transportation costs, partially due to the impacts of inflation and supply chain challenges, as well as the shift in product mix to meet consumer preferences 4.4 Increased physical case volume (22.9) Other $ 249.8 Total increase in cost of sales Total marketing funding support from The Coca‑Cola Company and other beverage companies was $111.3 million in the first nine months of 2022, as compared to $102.1 million in the first nine months of 2021. 31 Selling, Delivery and Administrative Expenses SD&A expenses increased $101.9 million, or 9.2%, to $1.21 billion in the first nine months of 2022, as compared to $1.11 billion in the first nine months of 2021. SD&A expenses as a percentage of net sales decreased to 26.2% in the first nine months of 2022 from 26.7% in the first nine months of 2021. The increase in SD&A expenses was primarily attributable to the following (in millions): First Nine Months 2022 Attributable to: $ 70.3 Increase in labor costs due to compensation adjustments across our workforce to remain competitive in a challenging labor market and to reward our teammates for their contributions in achieving strong operating results 13.1 Increase in commitments to various charities and donor-advised funds in light of the Company’s financial performance 6.4 Increase in fleet-related expenses, including fuel costs 12.1 Other $ 101.9 Total increase in SD&A expenses Shipping and handling costs included in SD&A expenses were $567.0 million in the first nine months of 2022 and $502.7 million in the first nine months of 2021. Interest Expense, Net Interest expense, net decreased $4.3 million, or 17.0%, to $20.9 million in the first nine months of 2022, as compared to $25.2 million in the first nine months of 2021. 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) 2022 2021 Increase in the fair value of the acquisition related contingent consideration liability $ 21,132 $ 90,905 Non-service cost component of net periodic benefit cost 6,534 3,173 Total other expense, net $ 27,666 $ 94,078 The change in the fair value of the acquisition related contingent consideration liability in the first nine months of 2022 as compared to the first nine months of 2021 was primarily driven by an increase in the discount rate used to calculate fair value, partially offset by higher projections of future cash flows in the distribution territories subject to acquisition related sub-bottling payments. Income Tax Expense The Company’s effective income tax rate was 25.7% for the first nine months of 2022 and 26.8% for the first nine months of 2021. The Company’s income tax expense increased $45.6 million, or 73.1%, to $107.9 million for the first nine months of 2022, as compared to $62.3 million for the first nine months of 2021. The increase in income tax expense was primarily attributable to higher income before taxes during the first nine months of 2022 compared to the first nine months of 2021. Other Comprehensive Income, Net of Tax Other comprehensive income, net of tax was $2.4 million in the first nine months of 2022 and $3.7 million in the first nine months of 2021. Segment Operating Results The Company evaluates segment reporting in accordance with 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. 32 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) 2022 2021 2022 2021 Net sales: Nonalcoholic Beverages $ 1,600,065 $ 1,426,971 $ 4,535,300 $ 4,061,976 All Other 101,136 88,991 303,209 272,132 Eliminations (1) (72,612) (58,530) (210,347) (173,733) Consolidated net sales $ 1,628,589 $ 1,457,432 $ 4,628,162 $ 4,160,375 Income from operations: Nonalcoholic Beverages $ 189,218 $ 144,130 $ 467,788 $ 363,544 All Other 712 (7,099) 420 (11,468) Consolidated income from operations $ 189,930 $ 137,031 $ 468,208 $ 352,076 (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 Results (Non-GAAP) The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users 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 2022 (in thousands, except per share data) Gross profit SD&A expenses Income from operations Income before taxes Net income Basic net income per share Reported results (GAAP) $ 621,107 $ 431,177 $ 189,930 $ 159,101 $ 118,761 $ 12.67 Fair value adjustment of acquisition related contingent consideration (1) — — — 22,568 16,993 1.82 Fair value adjustments for commodity derivative instruments (2) (1,100) (4,711) 3,611 3,611 2,719 0.29 Supply chain optimization (3) 369 (6) 375 375 283 0.03 Total reconciling items (731) (4,717) 3,986 26,554 19,995 2.14 Adjusted results (non-GAAP) $ 620,376 $ 426,460 $ 193,916 $ 185,655 $ 138,756 $ 14.81 Third Quarter 2021 (in thousands, except per share data) Gross profit SD&A expenses Income from operations Income before 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 33 First Nine Months 2022 (in thousands, except per share data) Gross profit SD&A expenses Income from operations Income before taxes Net income Basic net income per share Reported results (GAAP) $ 1,679,342 $ 1,211,134 $ 468,208 $ 419,614 $ 311,713 $ 33.25 Fair value adjustment of acquisition related contingent consideration (1) — — — 21,132 15,912 1.70 Fair value adjustments for commodity derivative instruments (2) 5,069 2,512 2,557 2,557 1,925 0.21 Supply chain optimization (3) 458 (78) 536 536 404 0.04 Total reconciling items 5,527 2,434 3,093 24,225 18,241 1.95 Adjusted results (non-GAAP) $ 1,684,869 $ 1,213,568 $ 471,301 $ 443,839 $ 329,954 $ 35.20 First Nine Months 2021 (in thousands, except per share data) Gross profit SD&A expenses Income from operations Income before 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 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 acquisition related sub-bottling payments. (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 price 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 $3.60 billion as of September 30, 2022, which was an increase of $151.7 million from December 31, 2021. Net working capital, defined as current assets less current liabilities, was $353.6 million as of September 30, 2022, which was an increase of $111.8 million from December 31, 2021. Significant changes in net working capital as of September 30, 2022 as compared to December 31, 2021 were as follows: • An increase in accounts receivable, trade of $84.8 million, driven primarily by increased net sales and the timing of cash receipts. • An increase in accounts receivable, other of $36.3 million due to increased rebates due from CCBSS, primarily as a result of volatility in raw material prices and the timing of cash receipts of rebates. • An increase in accounts payable to The Coca-Cola Company of $44.2 million due to 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 September 30, 2022, the Company had $163.2 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 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. 34 The Company’s long-term debt as of September 30, 2022 and December 31, 2021 was as follows: (in thousands) Maturity Date September 30, 2022 December 31, 2021 Senior notes 2/27/2023 $ — $ 125,000 Senior bonds and unamortized discount on senior bonds (1) 11/25/2025 349,972 349,966 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 (1,194) (1,523) Total long-term debt $ 598,778 $ 723,443 (1) The senior bonds due in 2025 were issued at 99.975% of par. On September 13, 2022, the Company used cash on hand to repay the $125 million of senior notes with a stated maturity date of February 27, 2023. There was no penalty for the early repayment of the senior notes. 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 September 30, 2022. These covenants have not restricted, and are not expected to restrict, the Company’s 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 long‑term debt. The Company’s Board of Directors has declared, and the Company has paid, dividends on the Common Stock and the 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 September 30, 2022, the Company’s credit ratings and outlook for its long‑term debt were as follows: Credit Rating Rating Outlook Moody’s Baa1 Stable Standard & Poor’s BBB Positive Subsequent to quarter end, on October 26, 2022, Standard & Poor’s upgraded the Company’s credit rating to BBB+ with a stable outlook. 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) 2022 2021 2022 2021 Beginning balance - Level 3 liability $ 522,259 $ 473,055 $ 542,105 $ 434,694 Payments of acquisition related contingent consideration (9,711) (8,720) (28,421) (28,640) Reclassification to current payables 1,800 (1,600) 2,100 (300) Increase in fair value 22,568 33,924 21,132 90,905 Ending balance - Level 3 liability $ 536,916 $ 496,659 $ 536,916 $ 496,659 35 Cash Sources and Uses A summary of cash-based activity is as follows: First Nine Months (in thousands) 2022 2021 Cash Sources: Net cash provided by operating activities (1) $ 394,309 $ 439,875 Proceeds from the sale of property, plant and equipment 5,348 4,215 Borrowings under term loan facility — 70,000 Borrowings under revolving credit facility — 55,000 Total cash sources $ 399,657 $ 569,090 Cash Uses: Additions to property, plant and equipment $ 183,929 $ 119,620 Payments on term loan facility and senior notes 125,000 217,500 Acquisition of BODYARMOR distribution rights 30,149 1,998 Payments of acquisition related contingent consideration 28,421 28,640 Cash dividends paid 7,030 7,030 Payments on financing lease obligations 2,441 3,567 Payments on revolving credit facility — 55,000 Other 1,757 3,650 Total cash uses $ 378,727 $ 437,005 Net increase in cash during period $ 20,930 $ 132,085 (1) Net cash provided by operating activities in the first nine months of 2022 included net income tax payments of $96.5 million, payment of deferred payroll taxes under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) of $18.7 million and pension plan contributions of $26.0 million. 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. Cash Flows From Operating Activities During the first nine months of 2022, cash provided by operating activities was $394.3 million, which was a decrease of $45.6 million as compared to the first nine months of 2021. The cash flows from operations were impacted by the timing of certain working capital payments and receipts. Cash Flows From Investing Activities During the first nine months of 2022, cash used in investing activities was $210.3 million, which was an increase of $90.7 million as compared to the first nine months of 2021. The increase was primarily a result of additions to property, plant and equipment, which were $183.9 million during the first nine months of 2022 and $119.6 million during the first nine months of 2021. There were $20.0 million and $9.6 million of additions to property, plant and equipment accrued in accounts payable, trade as of September 30, 2022 and October 1, 2021, respectively. On January 1, 2022, the Company acquired $30.1 million of additional BODYARMOR distribution rights. On March 17, 2022, CCBCC Operations, LLC, a wholly owned subsidiary of the Company, purchased the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina for a purchase price of $60.0 million, which was included in additions to property, plant and equipment. Cash Flows From Financing Activities During the first nine months of 2022, cash used in financing activities was $163.1 million, which was a decrease of $25.1 million as compared to the first nine months of 2021. The decrease was primarily a result of higher repayments of debt during the first nine months of 2021 as compared to the first nine months of 2022, partially offset by borrowings under the Company’s credit facilities during the first nine months of 2021. 36 The Company had cash payments for acquisition related contingent consideration of $28.4 million during the first nine months of 2022 and $28.6 million during the first nine months of 2021. The Company anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to acquisition related sub-bottling payments will be in the range of $35 million to $75 million. On September 13, 2022, the Company used cash on hand to repay the $125 million of senior notes with a stated maturity date of February 27, 2023. There was no penalty for the early repayment of the senior notes. During 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 that matured on June 7, 2021. Also during 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. Borrowings under the 2021 Revolving Credit Facility bear interest at a base rate or adjusted London InterBank Offered Rate (“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”). The 2021 Revolving Credit Facility’s underlying credit agreement includes successor LIBOR provisions, providing that the Secured Overnight Financing Rate will be used as the LIBOR replacement rate for borrowings under the facility after June 30, 2023, unless the Company and its lenders agree to an alternative reference rate based on prevailing market convention at the replacement date. 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. Also during 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. Borrowings under the 2021 Term Loan Facility bore 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 and subsequently repaid during 2021. 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) 2022 2021 2022 2021 Increase (decrease) in cost of sales $ 484 $ (5,923) $ 3,413 $ (12,576) Increase (decrease) in SD&A expenses 683 (965) (14,459) (2,876) Net impact $ 1,167 $ (6,888) $ (11,046) $ (15,452) Cautionary Note Regarding Forward-Looking Statements Certain statements made in this report, or in other public filings, press releases, or other written or oral communications made by the Company, 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 involve risks and uncertainties which we expect will or may occur in the future and may impact our business, financial condition and results of operations. The words “anticipate,” “believe,” “expect,” “intend,” “project,” “may,” “will,” “should,” “could” and similar expressions are intended to identify those forward-looking statements. These forward-looking statements reflect the Company’s best judgment based on current information, and, although we base these statements on circumstances that we believe to be reasonable when made, there can be 37 no assurance that future events will not affect the accuracy of such forward-looking information. As such, the forward-looking statements are not guarantees of future performance, and actual results may vary materially from the projected results and expectations discussed in this report. Factors that might cause the Company’s actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to: increased costs (including due to inflation), disruption of supply or unavailability or shortages of raw materials, fuel and other supplies; the inability to attract and retain front-line employees in a tight labor market; the reliance on purchased finished products from external sources; changes in public and consumer perception and preferences, including concerns related to product safety and sustainability, artificial ingredients, brand reputation and obesity; the COVID-19 pandemic and other pandemic outbreaks in the future; changes in government regulations related to nonalcoholic beverages, including regulations related to obesity, public health, artificial ingredients and product safety and sustainability; decreases from historic levels of marketing funding support provided to us by The Coca‑Cola Company and other beverage companies; material changes in the performance requirements for marketing funding support or our inability to meet such requirements; decreases from historic levels of advertising, marketing and product innovation spending by The Coca‑Cola Company and other beverage companies, or advertising campaigns that are negatively perceived by the public; any failure of the several Coca‑Cola system governance entities of which we are a participant to function efficiently or on our best behalf and any failure or delay of ours to receive anticipated benefits from these governance entities; provisions in our beverage distribution and manufacturing agreements with The Coca‑Cola Company that could delay or prevent a change in control of us or a sale of our Coca‑Cola distribution or manufacturing businesses; the concentration of our capital stock ownership; our inability to meet requirements under our beverage distribution and manufacturing agreements; changes in the inputs used to calculate our acquisition related contingent consideration liability; technology failures or cyberattacks on our technology systems or our effective response to technology failures or cyberattacks on our customers’, suppliers’ or other third parties’ technology systems; unfavorable changes in the general economy; changes in our top customer relationships and marketing strategies; lower than expected net pricing of our products resulting from continued and increased customer and competitor consolidations and marketplace competition; the effect of changes in our level of debt, borrowing costs and credit ratings on our access to capital and credit markets, operating flexibility and ability to obtain additional financing to fund future needs; the failure to attract, train and retain qualified employees while controlling labor costs, and other labor issues; the failure to maintain productive relationships with our employees covered by collective bargaining agreements, including failing to renegotiate collective bargaining agreements; changes in accounting standards; our use of estimates and assumptions; changes in tax laws, disagreements with tax authorities or additional tax liabilities; changes in legal contingencies; natural disasters, changing weather patterns and unfavorable weather; climate change or legislative or regulatory responses to such change; and the risks discussed in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and elsewhere in this report. 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 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 reports and other filings with the United States Securities and Exchange Commission.