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Item 2. Management’s Discussion and Analysis

2023-05-03 compared with 2022-11-01 · 148 added, 274 removed, 240 unchanged (64% of the section changed)

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 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”), is intended to help the reader understand our financial condition and results of operations and is provided as an addition to, and should be read in conjunction with, our condensed consolidated financial statements 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.

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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.

• The financial position as of March 31, 2023 and December 31, 2022.

• The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended March 31, 2023 (the “first quarter” of fiscal 2023 (“2023”)) and April 1, 2022 (the “first quarter” of fiscal 2022 (“2022”)).

• The changes in cash flows for the first quarter of 2023 and the first quarter of 2022.

Our Business and the Nonalcoholic Beverage Industry

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(“Dr Pepper”) and Monster Energy Company.

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

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

Our Common Stock is traded on The Nasdaq Global Select Market under the symbol COKE.

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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;

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.

Net sales increased 12% to $1.57 billion in the first quarter of 2023.

The increase in net sales was driven primarily by price increases taken across our product portfolio during the second half of 2022 and the beginning of 2023.

Consumer traffic patterns continue to change within our sales channels as more consumers return to pre-covid work and leisure routines.

Total shopping trips to large stores have declined as meal occasions away from home continue to increase, resulting in increased consumer activity at convenience retail stores, restaurants and other on-premise locations where consumers typically consume our products immediately after purchase.

Sales at club stores also benefited from consumers seeking value-oriented packages.

Standard physical case volume, as defined in the “Results of Operations” section, declined 3.1% in the first quarter of 2023, which included the impact of one less selling day compared to the first quarter of 2022.

On a comparable basis, as defined in the “Comparable and Adjusted Results (Non-GAAP)” section, standard physical case volume declined 2.0% with Sparkling category volume up 0.2% during the first quarter of 2023.

Still category volume declined 7.9% on a comparable basis as our sports drink brands cycled significant growth in the first quarter of 2022 and new competitors entered the category.

We experienced strong sales momentum with other Still beverages such as smartwater, Gold Peak and fairlife products.

Overall, our product portfolio continues to perform well versus historical price elasticities typically associated with higher pricing.

Gross profit in the first quarter of 2023 was $624.1 million, an increase of $116.5 million, or 23%, while gross margin improved 360 basis points to 39.7%.

On an adjusted basis, as defined in the “Comparable and Adjusted Results (Non-GAAP)” section, gross profit in the first quarter of 2023 was $624.9 million, which represented an increase of $124.8 million, or 25%.

The improvement in gross profit resulted from stable volume on our Sparkling brands, higher prices for our products and a moderation of prices for certain commodities.

Selling, delivery and administrative (“SD&A”) expenses in the first quarter of 2023 increased $41.5 million, or 11%.

SD&A expenses as a percentage of net sales decreased 20 basis points to 26.6% in the first quarter of 2023.

On an adjusted basis, SD&A expenses in the first quarter of 2023 increased $32.6 million, or 9%.

The increase in SD&A expenses related primarily to an increase in labor costs, resulting from certain compensation and benefits adjustments made during 2022 in order to remain competitive in the current, highly competitive labor environment.

In addition, broad inflationary increases across a number of SD&A categories pushed expenses higher during the quarter.

Income from operations in the first quarter of 2023 was $206.1 million, compared to $131.0 million in the first quarter of 2022, an increase of 57%.

On an adjusted basis, income from operations in the first quarter of 2023 increased 79% as compared to the first quarter of 2022.

Net income in the first quarter of 2023 was $118.1 million, compared to $93.4 million in the first quarter of 2022, an improvement of $24.7 million.

First quarter net income was adversely impacted by routine, non-cash fair value adjustments to our acquisition related contingent consideration liability, driven by changes in the discount rate and future cash flow projections used to compute the fair value of the liability.

Income tax expense for the first quarter of 2023 was $41.1 million, compared to $33.2 million in the first quarter of 2022, resulting in an effective income tax rate of approximately 26% for both periods.

Cash flows provided by operations for first quarter 2023 were $184.7 million, compared to $130.9 million for first quarter 2022.

Cash flows from operations reflected our strong operating performance and the timing of certain working capital payments and receipts during the first quarter.

In the first quarter of 2023, we invested $52.7 million in capital expenditures as we continue to optimize our supply chain and invest for future growth.

In fiscal year 2023, we expect our capital expenditures to be between $250 million and $300 million.

Areas of Emphasis

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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.

We have several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures.

We believe strengthening our balance sheet gives us the flexibility to make optimal capital allocation decisions for long-term value creation.

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

First Quarter Results

The Company’s results of operations for the first quarter of 2023 and the first quarter of 2022 are highlighted in the table below and discussed in the following paragraphs.

First Quarter

(in thousands) 2023 2022 Change

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Interest expense, net 2,929 7,699 (4,770)

Other expense, net 24,746 34,982 (10,236)

Other expense (income), net 43,923 (3,279) 47,202

Income before taxes 159,202 126,565 32,637

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$ 118,865 $ 94,205 $ 24,660

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

$ 171.2 Total increase in net sales

Net sales increased $167.3 million, or 11.9%, to $1.57 billion in the first quarter of 2023, as compared to $1.40 billion in the first quarter of 2022.

The largest driver of the increase in net sales was higher average bottle/can sales price per unit charged to retail customers, which increased net sales by approximately $175 million.

The increase in net sales was partially offset by a decrease in case sales volume as compared to the first quarter of 2022, which decreased net sales by approximately $30 million.

Net sales by product category were as follows:

Third Quarter

First Quarter

(in thousands) 2023 2022 % Change

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Total net sales $ 1,571,642 $ 1,404,358 11.9 %

Product category sales volume of physical cases and the percentage change by product category were as follows:

Third Quarter

Product category sales volume of standard physical cases, as defined below, and the percentage change by product category were as follows:

First Quarter

(in thousands) 2023 2022 % Change

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Total bottle/can sales volume 82,470 85,076 (3.1) %

A standard physical case is a volume metric used to standardize differing package configurations in order to measure delivered cases on an equivalent basis.

As the Company evaluates its volume metrics, it reassesses the way in which physical case volume is measured, which may lead to differences from previously presented results in order to conform with current period standard volume measurement techniques, as used by management.

Any differences are not material.

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

First Quarter

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

Wal-Mart Stores, Inc.

The Kroger Company 11 % 12 %

Total approximate percent of the Company’s total bottle/can sales volume 32 % 32 %

Approximate percent of the Company’s total net sales:

Wal-Mart Stores, Inc.

The Kroger Company 9 % 9 %

Total approximate percent of the Company’s total net sales 25 % 24 %

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.

(i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles, carbon dioxide 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

$ 67.8 Total increase in cost of sales

Cost of sales increased $50.8 million, or 5.7%, to $947.5 million in the first quarter of 2023, as compared to $896.8 million in the first quarter of 2022.

The increase in cost of sales was driven by approximately $60 million in increased input costs, including

aluminum, PET resin and transportation costs, largely due to the impacts of continued inflation, as well as the shift in product mix to meet consumer preferences.

This increase was partially offset by a decrease in case sales volume as compared to the first quarter of 2022, which decreased cost of sales by approximately $10 million.

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.

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 $37.0 million in the first quarter of 2023 and $34.4 million in the first quarter of 2022.

Selling, Delivery and Administrative Expenses

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sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution center warehousing costs, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangible assets and administrative support labor and operating costs.

SD&A expenses 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

$ 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.

SD&A expenses increased $41.5 million, or 11.0%, to $418.1 million in the first quarter of 2023, as compared to $376.6 million in the first quarter of 2022.

SD&A expenses as a percentage of net sales decreased to 26.6% in the first quarter of 2023 from 26.8% in the first quarter of 2022.

Of the increase in SD&A expenses, approximately $13 million was driven by an increase in labor costs, resulting from certain compensation and benefits adjustments made during 2022 in order to remain competitive in the current, highly competitive labor environment.

In addition, approximately $13 million of the increase in SD&A expenses was driven by higher fuel costs and changes in our commodity hedge positions.

The remaining increase in SD&A expenses was primarily driven by broad inflationary increases across a number of SD&A categories as compared to the first quarter of 2022.

Shipping and handling costs included in SD&A expenses were $193.2 million in the first quarter of 2023 and $180.4 million in the first quarter of 2022.

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

Interest expense, net decreased $4.8 million, or 62.0%, to $2.9 million in the first quarter of 2023, as compared to $7.7 million in the first quarter of 2022.

The decrease was primarily a result of an increase in interest income due to higher cash and cash equivalent balances and increased yields, as well as lower average debt balances, as compared to the first quarter of 2022.

Other Expense (Income), Net

Other expense (income), net increased $47.2 million to $43.9 million of other expense, net in the first quarter of 2023, as compared to $3.3 million of other income, net in the first quarter of 2022.

The increase in other expense (income), net was primarily driven by changes in the fair value of the acquisition related contingent consideration liability.

During 2023, the Company anticipates a significant non-cash charge related to the termination of the primary Company-sponsored pension plan (the “Primary Plan”), which will be recorded in other expense (income), net in the condensed consolidated statement of operations.

The charge will relate primarily to a reclassification of actuarial losses from accumulated other comprehensive loss.

As of December 31, 2022, the gross actuarial losses included in accumulated other comprehensive loss associated with the Primary Plan were approximately $117 million.

See Note 17 to the condensed consolidated financial statements for additional information related to the Company’s pension plans.

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 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 related distribution assets acquired in each distribution territory, 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.

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 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

$ 467.8 Total increase in net sales

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 %

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 %

First Nine Months

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

Wal-Mart Stores, Inc.

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.

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

$ 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.

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

$ 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.

The change in the fair value of the acquisition related contingent consideration liability in the first quarter of 2023 as compared to the first quarter of 2022 was primarily driven by changes in the discount rate used to calculate fair value.

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.

The Company’s effective income tax rate was 25.8% for the first quarter of 2023 and 26.2% for the first quarter of 2022.

The Company’s income tax expense increased $7.9 million, or 23.8%, to $41.1 million for the first quarter of 2023, as compared to $33.2 million for the first quarter of 2022.

The increase in income tax expense was primarily attributable to higher income before taxes during the first quarter of 2023 compared to the first quarter of 2022.

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.

Other comprehensive income, net of tax was $0.7 million in the first quarter of 2023 and $0.8 million in the first quarter of 2022.

As noted in the discussion of other expense (income), net above, the Company anticipates a significant non-cash charge during 2023 related to the termination of the Primary Plan, which will also impact other comprehensive income, net of tax.

See Note 17 to the condensed consolidated financial statements for additional information related to the Company’s pension plans.

Segment Operating Results

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The Company’s segment results are as follows:

Third Quarter First Nine Months

First Quarter

(in thousands) 2023 2022

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Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction.

Adjusted Results (Non-GAAP)

Comparable and 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.

However, management believes that certain non-GAAP financial measures provide users of the financial statements with additional, meaningful financial information that should be considered, in addition to the measures reported in accordance with GAAP, when assessing the Company’s ongoing performance.

Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance.

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The 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

The following tables reconcile reported results (GAAP) to comparable and adjusted results (non-GAAP).

Results for the first quarter of 2022 include one additional selling day compared to the first quarter of 2023.

For comparison purposes, the estimated impact of the additional selling day in the first quarter of 2022 has been excluded from our comparable volume results.

First Quarter

(in thousands) 2023 2022 Change

Standard physical case volume 82,470 85,076 (3.1) %

Volume related to extra day in fiscal period — (935)

Comparable standard physical case volume 82,470 84,141 (2.0) %

First Quarter 2023

(in thousands, except per share data) Gross profit SD&A expenses Income from operations Income before taxes Net income Basic net income per share

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Adjusted results (non-GAAP) $ 624,850 $ 415,362 $ 209,488 $ 204,290 $ 152,074 $ 16.23

Third Quarter 2021

First 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

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Adjusted results (non-GAAP) $ 500,087 $ 382,777 $ 117,310 $ 107,433 $ 78,984 $ 8.42

First Nine Months 2022

(in thousands, except per share data) Gross

expenses Income from

operations Income before taxes Net

income Basic net income

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

expenses Income from

operations Income before taxes Net

income Basic net income

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:

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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:

Total assets were $3.80 billion as of March 31, 2023, which was an increase of $90.2 million from December 31, 2022.

Net working capital, defined as current assets less current liabilities, was $541.1 million as of March 31, 2023, which was an increase of $200.4 million from December 31, 2022.

Significant changes in net working capital as of March 31, 2023 as compared to December 31, 2022 were as follows:

• An increase in cash and cash equivalents of $92.1 million, primarily as a result of cash receipts relating to our strong operating performance.

• An increase in accounts receivable, trade of $23.0 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.

• A decrease in accounts payable, trade of $41.3 million due to the timing of cash payments.

• An increase in accounts payable to The Coca-Cola Company of $26.5 million due to the timing of cash payments.

• A decrease in accrued compensation of $51.2 million, primarily as a result of the timing of bonus and incentive payments in the first quarter of 2023.

• A decrease in dividends payable of $32.8 million, primarily as a result of the timing of dividend payments in the first quarter of 2023.

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.

As of March 31, 2023, the Company had $289.8 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.

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

The Company’s long-term debt as of March 31, 2023 and December 31, 2022 was as follows:

(in thousands) Maturity Date March 31, 2023 December 31, 2022

Senior bonds and unamortized discount on senior bonds (1)

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(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.

(2) The Company’s revolving credit facility has an aggregate maximum borrowing capacity of $500 million.

The Company currently believes all banks participating in the revolving credit facility have the ability to and will meet any funding requests from the Company.

(3) During the first quarter of 2023, the Company amended its revolving credit facility to complete the transition of the interest rate index from the London InterBank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR), as contemplated in the revolving credit facility.

The indenture under which the Company’s senior bonds were issued does not include financial covenants but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts.

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a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreement.

The Company was in compliance with these covenants as of September 30, 2022.

The Company was in compliance with these covenants as of March 31, 2023.

These covenants have not restricted, and are not expected to restrict, the Company’s liquidity or capital resources.

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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.

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Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material adverse impact on the Company’s operating results or financial position.

As of September 30, 2022, the Company’s credit ratings and outlook for its long‑term debt were as follows:

As of March 31, 2023, 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.

Standard & Poor’s BBB+ Stable

We review supplier terms and conditions on an ongoing basis, and have negotiated payment term extensions in recent years in connection with our efforts to improve cash flow and working capital.

Separate from those term extension actions, the Company has an agreement with a third-party financial institution to facilitate a supply chain finance (“SCF”) program, which allows qualifying suppliers to sell their receivables from the Company to the financial institution in order to negotiate shorter payment terms on outstanding receivable arrangements.

The Company’s obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted by a supplier’s participation in the SCF program.

See Note 12 to the condensed consolidated financial statements for additional information related to the Company’s SCF program.

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

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Following is a summary of the Level 3 activity:

Third Quarter First Nine Months

First Quarter

(in thousands) 2023 2022

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Reclassification to current payables (200) 1,100

Increase in fair value 22,568 33,924 21,132 90,905

Increase (decrease) in fair value 41,654 (5,457)

Ending balance - Level 3 liability $ 576,446 $ 527,926

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A summary of cash-based activity is as follows:

First Nine Months

First Quarter

(in thousands) 2023 2022

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Proceeds from the sale of property, plant and equipment 158 2,178

Borrowings under term loan facility — 70,000

Borrowings under revolving credit facility — 55,000

Total cash sources $ 184,852 $ 133,059

Additions to property, plant and equipment $ 52,700 $ 104,353

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 32,808 2,344

Payments of acquisition related contingent consideration 6,499 9,822

Payments on financing lease obligations 558 1,375

Payments on revolving credit facility — 55,000

Acquisition of distribution rights — 30,149

Other 154 245

Total cash uses $ 92,719 $ 148,288

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.

Net increase (decrease) in cash during period $ 92,133 $ (15,229)

(1) Net cash provided by operating activities included net income tax payments of $1.1 million in the first quarter of 2023 and $1.2 million in the first quarter of 2022.

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.

During the first quarter of 2023, cash provided by operating activities was $184.7 million, which was an increase of $53.8 million as compared to the first quarter of 2022.

The cash flows from operations reflected our strong operating performance and 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.

During the first quarter of 2023, cash used in investing activities was $52.5 million, which was a decrease of $80.0 million as compared to the first quarter of 2022.

The decrease was primarily a result of additions to property, plant and equipment, which were $52.7 million during the first quarter of 2023 and $104.4 million during the first quarter of 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 during the first quarter of 2022 for a purchase price of $60.0 million, which was included in additions to property, plant and equipment for that period.

There were $18.1 million and $12.7 million of additions to property, plant and equipment accrued in accounts payable, trade as of March 31, 2023 and April 1, 2022, respectively.

The increase in property, plant and equipment reflects the Company’s focus on optimizing its supply chain and investing for future growth.

The Company anticipates additions to property, plant and equipment in 2023 to be in the range of $250 million to $300 million.

The decrease in cash used in investing activities as compared to the first quarter of 2022 was also driven by the acquisition of $30.1 million of additional BODYARMOR distribution rights during the first quarter of 2022.

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.

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.

During the first quarter of 2023, cash used in financing activities was $40.0 million, which was an increase of $26.4 million as compared to the first quarter of 2022.

The increase was primarily a result of the dividend payment of $32.8 million made during the first quarter of 2023, which included a special cash dividend of $3.00 per share.

The Company had cash payments for acquisition related contingent consideration of $6.5 million during the first quarter of 2023 and $9.8 million during the first quarter of 2022.

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 $76 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

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

Third Quarter First Nine Months

First Quarter

(in thousands) 2023 2022

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The words “anticipate,” “believe,” “expect,” “intend,” “project,” “may,” “will,” “should,” “could” and similar expressions are intended to identify those forward-looking statements.

no assurance that future events will not affect the accuracy of such forward-looking information.

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 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.

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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;

the inability to attract and retain front-line employees in a tight labor market;

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;

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climate change or legislative or regulatory responses to such change;

the impact of the COVID-19 pandemic, any variants of the virus and any other similar pandemic or public health situation;

and the risks discussed in “Item 1A.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis