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Item 2. Management’s Discussion and Analysis

2023-11-01 compared with 2023-08-02 · 145 added, 146 removed, 352 unchanged (45% of the section changed)

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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.

The condensed consolidated financial statements include the accounts and 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.

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The condensed consolidated financial statements presented are:

• The financial position as of June 30, 2023 and December 31, 2022.

• The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended June 30, 2023 (the “second quarter” of fiscal 2023 (“2023”)) and July 1, 2022 (the “second quarter” of fiscal 2022 (“2022”)) and the six-month periods ended June 30, 2023 (the “first half” of 2023) and July 1, 2022 (the “first half” of 2022).

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

• The financial position as of September 29, 2023 and December 31, 2022.

• The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended September 29, 2023 (the “third quarter” of fiscal 2023 (“2023”)) and September 30, 2022 (the “third quarter” of fiscal 2022 (“2022”)) and the nine-month periods ended September 29, 2023 (the “first nine months” of 2023) and September 30, 2022 (the “first nine months” of 2022).

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

Our Business and the Nonalcoholic Beverage Industry

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Executive Summary

Net sales increased 9% to $1.74 billion in the second quarter of 2023 and increased 10% to $3.31 billion in the first half of 2023.

The increase in net sales was driven primarily by price increases taken across our product portfolio over the last year.

Standard physical case volume declined 4.0% in the second quarter of 2023 and declined 3.6% in the first half of 2023.

Sparkling category volume decreased 2.1% during the second quarter;

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

Sales in Immediate Consumption continue to perform well, outpacing sales of take-home packages.

Still volume declined 8.9% during the second quarter as the overall sports drinks category slowed considerably.

Other Still categories such as energy and enhanced water continue to perform well with Monster and smartwater both achieving solid growth in the quarter.

Gross profit in the second quarter of 2023 was $671.6 million, an increase of $120.9 million, or 22%, while gross margin improved 410 basis points to 38.6%.

The improvement in gross profit resulted primarily from higher prices for our products and a moderation of prices for certain commodities.

Gross profit in the first half of 2023 was $1.30 billion, an increase of $237.4 million, or 22%.

The Company continues to expect pricing growth to slow in the second half of 2023 as we hurdle 2022 price increases.

Selling, delivery and administrative (“SD&A”) expenses in the second quarter of 2023 increased $34.5 million, or 9%.

SD&A expenses as a percentage of net sales decreased 10 basis points to 25.2% in the second quarter of 2023.

The increase in SD&A expenses related primarily to an increase in labor costs, resulting from certain compensation and benefits adjustments made in the prior year to retain and reward our teammates in a challenging labor environment.

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

SD&A expenses in the first half of 2023 increased $76.0 million, or 10%.

SD&A expenses as a percentage of net sales in the first half of 2023 decreased 10 basis points to 25.9% as compared to the first half of 2022.

We expect the rate of increase to slow in the second half of this year as we hurdle labor adjustments made in late 2022.

Income from operations in the second quarter of 2023 was $233.7 million, compared to $147.3 million in the second quarter of 2022, an increase of 59%.

On an adjusted basis, as defined in the “Adjusted Results (Non-GAAP)” section, income from operations in the second quarter of 2023 increased 47% as compared to the second quarter of 2022.

Operating margin for the second quarter of 2023 was 13.4% as compared to 9.2% in the second quarter of 2022, an increase of 420 basis points.

Net income in the second quarter of 2023 was $122.3 million, compared to $99.6 million in the second quarter of 2022, an improvement of $22.8 million.

On an adjusted basis, net income in the second quarter of 2023 was $172.8 million, compared to $112.2 million in the second quarter of 2022, an increase of $60.6 million.

Second 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.

Second quarter net income was also adversely impacted by the partial settlement of our primary pension plan, which resulted in a non-cash charge of $39.8 million.

In the third quarter of 2023, the Company expects to record an additional non-cash charge of approximately $79 million related to the remaining settlement of the primary pension plan.

Income tax expense for the second quarter of 2023 was $42.4 million, compared to $34.4 million in the second quarter of 2022, resulting in an effective income tax rate of approximately 26% for both periods.

For the second quarter of 2023, basic net income per share was $13.05 and adjusted basic net income per share was $18.43.

Cash flows provided by operations for first half 2023 were $383.3 million, compared to $243.5 million for first half 2022.

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

In the first half of 2023, we invested $92.9 million in capital expenditures as we continue to optimize our supply chain and invest for the future growth of small bottle PET packages and mini cans.

Net sales increased 5% to $1.71 billion in the third quarter of 2023 and increased 9% to $5.02 billion in the first nine months of 2023.

Our net sales growth moderated during the third quarter from levels achieved in the first six months of 2023, as we partially cycled price increases taken across our product portfolio within the third quarter of 2022.

We expect sales growth to slow further in the fourth quarter as we fully cycle 2022 price increases.

Sales at our on-premise outlets were strong during the quarter.

We continued to drive solid sales growth within our Club and Value channel stores, while sales growth related to our take-home packages sold in larger retail stores declined.

Standard physical case volume declined 1.4% in the third quarter of 2023 and decreased 2.8% in the first nine months of 2023.

Sparkling category volume was up slightly during the third quarter, while Still volume declined 5.4%.

In the first nine months of 2023, Sparkling volume declined 1.3% and Still volume was down 6.9%.

Gross profit in the third quarter of 2023 was $661.6 million, an increase of $40.4 million, or 7%, while gross margin improved 50 basis points to 38.6%.

The improvement in gross profit resulted primarily from higher prices for our products while prices for certain commodities remained stable.

Gross profit in the first nine months of 2023 was $1.96 billion, an increase of $277.9 million, or 17%.

Selling, delivery and administrative (“SD&A”) expenses in the third quarter of 2023 increased $14.1 million, or 3%.

SD&A expenses as a percentage of net sales decreased 50 basis points to 26.0% in the third quarter of 2023.

The rate of increase in SD&A expenses slowed during the third quarter, as we hurdled certain compensation and benefits adjustments made in the prior year and we focused on effectively controlling our discretionary spending in a number of SD&A categories.

SD&A expenses in the first nine months of 2023 increased $90.1 million, or 7%.

SD&A expenses as a percentage of net sales in the first nine months of 2023 decreased 30 basis points to 25.9% as compared to the first nine months of 2022.

Income from operations in the third quarter of 2023 was $216.3 million, compared to $189.9 million in the third quarter of 2022, an increase of 14%.

On an adjusted basis, as defined in the “Adjusted Results (Non-GAAP)” section, income from operations in the third quarter of 2023 increased 11% as compared to the third quarter of 2022.

Operating margin for the third quarter of 2023 was 12.6% as compared to 11.7% in the third quarter of 2022, an increase of 90 basis points.

Net income in the third quarter of 2023 was $92.1 million, compared to $118.8 million in the third quarter of 2022, a decline of $26.7 million.

On an adjusted basis, net income in the third quarter of 2023 was $164.3 million, compared to $138.8 million in the third quarter of 2022, an increase of $25.6 million.

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

Third quarter net income also included a non-cash charge of $77.3 million related to the full settlement of our primary pension plan benefit liabilities.

During the first nine months of 2023, the Company recognized a non-cash charge of $117.1 million related to the full settlement of the primary pension plan benefit liabilities.

Income tax expense for the third quarter of 2023 was $28.9 million, compared to $40.3 million in the third quarter of 2022.

The effective income tax rate for the first nine months of 2023 was 25.3%, compared to 25.7% for the first nine months of 2022.

For the third quarter of 2023, basic net income per share was $9.82 and adjusted basic net income per share was $17.53.

For the first nine months of 2023, basic net income per share was $35.47 and adjusted basic net income per share was $52.19.

Cash flows provided by operations for the first nine months of 2023 were $644.5 million, compared to $394.3 million for the first nine months of 2022.

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

In the first nine months of 2023, we invested $152.3 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.

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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.

We continue to invest in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and to drive long-term value in our business.

Revenue Management :

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Results of Operations

Second Quarter Results

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

Second Quarter

Third Quarter Results

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

Third Quarter

(in thousands) 2023 2022 Change

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Income from operations 216,260 189,930 26,330

Interest expense, net 1,353 7,146 (5,793)

Interest (income) expense, net (1,516) 6,083 (7,599)

Pension plan settlement expense 77,319 — 77,319

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$ 149,307 $ 119,576 $ 29,731

Net sales increased $143.6 million, or 9.0%, to $1.74 billion in the second quarter of 2023, as compared to $1.60 billion in the second quarter of 2022.

Net sales increased $83.8 million, or 5.1%, to $1.71 billion in the third quarter of 2023, as compared to $1.63 billion in the third 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 $95 million.

The increase in net sales was partially offset by a decrease in case sales volume as compared to the second quarter of 2022, which decreased net sales by approximately $60 million.

The increase in net sales was partially offset by lower case sales volume as compared to the third quarter of 2022, which decreased net sales by approximately $25 million.

Net sales by product category were as follows:

Second Quarter

Third Quarter

(in thousands) 2023 2022 % Change

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

Second Quarter

Third Quarter

(in thousands) 2023 2022 % Change

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

Cost of sales increased $22.7 million, or 2.2%, to $1.07 billion in the second quarter of 2023, as compared to $1.04 billion in the second quarter of 2022.

Approximately $70 million of the increase in cost of sales related to increased manufacturing costs and a shift in product mix to meet consumer preferences.

This increase was partially offset by a decrease in case sales volume as compared to the second quarter of 2022, which decreased cost of sales by approximately $20 million.

Cost of sales increased $43.4 million, or 4.3%, to $1.05 billion in the third quarter of 2023, as compared to $1.01 billion in the third quarter of 2022.

The increase in cost of sales was driven by higher manufacturing costs, which increased cost of sales by approximately $50 million.

The increase in cost of sales was partially offset by lower case sales volume as compared to the third quarter of 2022, which decreased cost of sales by approximately $15 million.

The Company relies extensively on advertising and sales promotions in the marketing of its products.

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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 $46.1 million in the second quarter of 2023 and $37.3 million in the second quarter of 2022.

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 $43.2 million in the third quarter of 2023 and $39.6 million in the third quarter of 2022.

Selling, Delivery and Administrative Expenses

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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 $34.5 million, or 8.6%, to $437.9 million in the second quarter of 2023, as compared to $403.4 million in the second quarter of 2022.

SD&A expenses as a percentage of net sales decreased to 25.2% in the second quarter of 2023 from 25.3% in the second quarter of 2022.

Of the increase in SD&A expenses, approximately $14 million was driven by an increase in labor costs, resulting from certain compensation and benefits adjustments made in 2022 to retain and reward our teammates in a challenging labor environment.

In addition, approximately $9 million of the increase was attributable to higher transportation costs, including fuel and fleet repairs, as well as changes in our commodity hedge positions as compared to the second quarter of 2022.

Approximately $4 million of the increase in SD&A expenses was driven by an increase in commitments to various charities and donor-advised funds in light of the Company’s financial performance.

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 second quarter of 2022.

Interest Expense, Net

Interest expense, net decreased $5.8 million, or 81.1%, to $1.4 million in the second quarter of 2023, as compared to $7.1 million in the second 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 second quarter of 2022.

SD&A expenses increased $14.1 million, or 3.3%, to $445.3 million in the third quarter of 2023, as compared to $431.2 million in the third quarter of 2022.

SD&A expenses as a percentage of net sales decreased to 26.0% in the third quarter of 2023 from 26.5% in the third quarter of 2022.

Of the increase in SD&A expenses, approximately $10 million was driven by an increase in labor costs related primarily to certain compensation and benefits adjustments.

In addition, approximately $4 million of the increase was driven by an increase in commitments to various charities and donor-advised funds in light of the Company’s financial performance.

Interest (Income) Expense, Net

Interest (income) expense, net changed $7.6 million, or 124.9%, to $1.5 million of interest income, net in the third quarter of 2023, as compared to $6.1 million of interest expense, net in the third quarter of 2022.

The change in interest (income) expense, net was primarily a result of an increase in interest income due to higher cash and cash equivalent balances and increased yields as compared to the third quarter of 2022.

Pension Plan Settlement Expense

During the second quarter of 2023, the Company recognized a non-cash charge of $39.8 million related to the partial termination of the primary Company-sponsored pension plan (the “Primary Plan”), which was recorded as pension plan settlement expense in the condensed consolidated statement of operations.

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

During the third quarter of 2023, the Company expects a non-cash charge of approximately $79 million related to the full termination of the Primary Plan, which will also be recorded as pension plan settlement expense in the condensed consolidated statement of operations.

As of June 30, 2023 and December 31, 2022, the gross actuarial losses included in accumulated other comprehensive loss associated with the Primary Plan were approximately $79 million and $117 million, respectively.

During the third quarter of 2023, the Company recognized a non-cash charge of $77.3 million related to the full settlement of the primary Company-sponsored pension plan (the “Primary Plan”) benefit liabilities, which was recorded as pension plan settlement expense in the condensed consolidated statement of operations.

The charge related primarily to a reclassification of actuarial losses from accumulated other comprehensive income (loss).

As of September 29, 2023, there were no gross actuarial losses included in accumulated other comprehensive income (loss) associated with the Primary Plan.

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

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

Other Expense, Net

Other expense, net increased $21.6 million to $27.8 million in the second quarter of 2023, as compared to $6.2 million in the second quarter of 2022.

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

Other expense, net decreased $5.3 million to $19.5 million in the third quarter of 2023, as compared to $24.7 million in the third quarter of 2022.

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

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.

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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 second quarter of 2023 as compared to the second quarter of 2022 was primarily driven by changes in the discount rate used to calculate fair value.

The change in the fair value of the acquisition related contingent consideration liability in the third quarter of 2023 as compared to the third quarter of 2022 was driven by changes in projections of future cash flows in the distribution territories subject to acquisition related sub-bottling payments, as well as changes in the discount rate used to calculate fair value.

Income Tax Expense

The Company’s effective income tax rate was 25.8% for the second quarter of 2023 and 25.7% for the second quarter of 2022.

The Company’s income tax expense increased $8.0 million, or 23.4%, to $42.4 million for the second quarter of 2023, as compared to $34.4 million for the second quarter of 2022.

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

The Company’s effective income tax rate was 23.9% for the third quarter of 2023 and 25.4% for the third quarter of 2022.

The Company’s income tax expense decreased $11.4 million, or 28.4%, to $28.9 million for the third quarter of 2023, as compared to $40.3 million for the third quarter of 2022.

The decrease in income tax expense was primarily attributable to lower income before taxes during the third quarter of 2023 compared to the third quarter of 2022.

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $27.8 million in the second quarter of 2023 and $0.8 million in the second quarter of 2022.

As noted in the discussion of pension plan settlement expense above, the Company recognized a significant non-cash

charge during the second quarter of 2023 related to the partial termination of the Primary Plan.

A corresponding benefit was recognized within other comprehensive income, net of tax due to the reclassification of certain previously recognized actuarial losses from accumulated other comprehensive loss.

An additional non-cash charge is expected during the third quarter of 2023 related to the full termination of the Primary Plan.

Other comprehensive income, net of tax was $57.2 million in the third quarter of 2023 and $0.8 million in the third quarter of 2022.

As noted in the discussion of pension plan settlement expense above, the Company recognized a significant non-cash charge during the third quarter of 2023 related to the full settlement of the Primary Plan benefit liabilities.

A corresponding

benefit was recognized within other comprehensive income, net of tax due to the reclassification of certain previously recognized actuarial losses from accumulated other comprehensive income (loss).

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

First Half Results

Our results of operations for the first half of 2023 and the first half of 2022 are highlighted in the table below and discussed in the following paragraphs.

First Nine Months Results

Our results of operations for the first nine months of 2023 and the first nine months of 2022 are highlighted in the table below and discussed in the following paragraphs.

First Nine Months

(in thousands)

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$ 418,314 $ 314,157 $ 104,157

Net sales increased $310.9 million, or 10.4%, to $3.31 billion in the first half of 2023, as compared to $3.00 billion in the first half of 2022.

Net sales increased $394.7 million, or 8.5%, to $5.02 billion in the first nine months of 2023, as compared to $4.63 billion in the first nine months 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 $455 million.

The increase in net sales was partially offset by a decrease in case sales volume as compared to the first half of 2022, which decreased net sales by approximately $80 million.

The increase in net sales was partially offset by lower case sales volume as compared to the first nine months of 2022, which decreased net sales by approximately $105 million.

Net sales by product category were as follows:

First Nine Months

(in thousands) 2023 2022 % Change

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

First Nine Months

(in thousands) 2023 2022 % Change

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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

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

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Cost of Sales

Cost of sales increased $73.5 million, or 3.8%, to $2.01 billion in the first half of 2023, as compared to $1.94 billion in the first half of 2022.

Approximately $120 million of the increase in cost of sales related to increased manufacturing costs and a 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 half of 2022, which decreased cost of sales by approximately $30 million.

Total marketing funding support from The Coca‑Cola Company and other beverage companies was $83.1 million in the first half of 2023, as compared to $71.7 million in the first half of 2022.

Cost of sales increased $116.8 million, or 4.0%, to $3.07 billion in the first nine months of 2023, as compared to $2.95 billion in the first nine months of 2022.

The increase in cost of sales was driven by higher manufacturing costs, which increased cost of sales by approximately $165 million.

The increase in cost of sales was partially offset by lower case sales volume as compared to the first nine months of 2022, which decreased cost of sales by approximately $40 million.

Total marketing funding support from The Coca‑Cola Company and other beverage companies was $126.3 million in the first nine months of 2023, as compared to $111.3 million in the first nine months of 2022.

Selling, Delivery and Administrative Expenses

SD&A expenses increased $76.0 million, or 9.7%, to $856.0 million in the first half of 2023, as compared to $780.0 million in the first half of 2022.

SD&A expenses as a percentage of net sales decreased to 25.9% in the first half of 2023 from 26.0% in the first half of 2022.

Of the increase in SD&A expenses, approximately $27 million was driven by an increase in labor costs, resulting from certain compensation and benefits adjustments made in 2022 to retain and reward our teammates in a challenging labor environment.

In addition, approximately $25 million of the increase was attributable to higher transportation costs, including fuel and fleet repairs, as well as changes in our commodity hedge positions as compared to the first half of 2022.

SD&A expenses increased $90.1 million, or 7.4%, to $1.30 billion in the first nine months of 2023, as compared to $1.21 billion in the first nine months of 2022.

SD&A expenses as a percentage of net sales decreased to 25.9% in the first nine months of 2023 from 26.2% in the first nine months of 2022.

Of the increase in SD&A expenses, approximately $37 million was driven by an increase in labor costs related primarily to certain compensation and benefits adjustments.

In addition, approximately $25 million of the increase was attributable to higher transportation costs, including fleet repairs, as well as changes in our fuel commodity hedge positions as compared to the first nine months of 2022.

Approximately $13 million of the increase in SD&A expenses was driven by an increase in commitments to various charities and donor-advised funds in light of the Company’s financial performance.

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 half of 2022.

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 nine months of 2022.

Interest Expense, Net

Interest expense, net decreased $10.6 million, or 71.2%, to $4.3 million in the first half of 2023, as compared to $14.8 million in the first half of 2022.

Interest expense, net decreased $18.2 million, or 86.8%, to $2.8 million in the first nine months of 2023, as compared to $20.9 million in the first nine months of 2022.

The decrease in interest expense, net was primarily a result of an increase in interest income due to higher cash and cash equivalent balances and increased yields as compared to the first nine months of 2022.

Pension Plan Settlement Expense

During the first half of 2023, the Company recognized a non-cash charge of $39.8 million related to the partial termination of the Primary Plan, which was recorded as pension plan settlement expense in the condensed consolidated statement of operations.

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

During the third quarter of 2023, the Company expects a non-cash charge of approximately $79 million related to the full termination of the

Primary Plan, which will also be recorded as pension plan settlement expense in the condensed consolidated statement of operations.

During the first nine months of 2023, the Company recognized a non-cash charge of $117.1 million related to the full settlement of the Primary Plan benefit liabilities, which was recorded as pension plan settlement expense in the condensed consolidated statement of operations.

The charge related primarily to a reclassification of actuarial losses from accumulated other comprehensive income (loss).

As of September 29, 2023, there were no gross actuarial losses included in accumulated other comprehensive income (loss) associated with the Primary Plan.

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

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

Other Expense, Net

Other expense, net increased $68.8 million to $71.7 million in the first half of 2023, as compared to $2.9 million in the first half of 2022.

Other expense, net increased $63.5 million to $91.2 million in the first nine months of 2023, as compared to $27.7 million in the first nine months of 2022.

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

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

The change in the fair value of the acquisition related contingent consideration liability in the first nine months of 2023 as compared to the first nine months of 2022 was primarily driven by changes in the discount rate used to calculate fair value, as well as changes in 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 25.8% for the first half of 2023 and 25.9% for the first half of 2022.

The Company’s income tax expense increased $15.9 million, or 23.6%, to $83.5 million for the first half of 2023, as compared to $67.6 million for the first half of 2022.

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

The Company’s effective income tax rate was 25.3% for the first nine months of 2023 and 25.7% for the first nine months of 2022.

The Company’s income tax expense increased $4.5 million, or 4.2%, to $112.4 million for the first nine months of 2023, as compared to $107.9 million for the first nine months of 2022.

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

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $28.6 million in the first half of 2023 and $1.6 million in the first half of 2022.

As noted in the discussion of pension plan settlement expense above, the Company recognized a significant non-cash charge during the second quarter of 2023 related to the partial termination of the Primary Plan.

An additional non-cash charge is expected during the third quarter of 2023 related to the full termination of the Primary Plan.

Other comprehensive income, net of tax was $85.8 million in the first nine months of 2023 and $2.4 million in the first nine months of 2022.

As noted in the discussion of pension plan settlement expense above, the Company recognized a significant non-cash charge during the first nine months of 2023 related to the full settlement of the Primary Plan benefit liabilities.

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

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The Company’s segment results are as follows:

Second Quarter First Half

Third Quarter First Nine Months

(in thousands) 2023 2022 2023 2022

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

Second Quarter 2023

Third 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) $ 661,994 $ 445,993 $ 216,001 $ 216,908 $ 164,335 $ 17.53

Second Quarter 2022

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

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Adjusted results (non-GAAP) $ 620,376 $ 426,460 $ 193,916 $ 185,655 $ 138,756 $ 14.81

First Half 2023

First Nine Months 2023

(in thousands, except per share data) Gross

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Adjusted results (non-GAAP) $ 1,959,992 $ 1,299,038 $ 660,954 $ 653,042 $ 489,241 $ 52.19

First Half 2022

First Nine Months 2022

(in thousands, except per share data) Gross

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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.

(4) This non-cash settlement expense relates to the partial termination of the Primary Plan during the second quarter of 2023.

Full termination of the Primary Plan is expected to occur in the third quarter of 2023.

(3) This adjustment reflects expenses within the Nonalcoholic Beverages segment as the Company continues to optimize efficiency opportunities across its business.

(4) This non-cash settlement expense relates to the termination of the Primary Plan during the second and third quarters of 2023.

Financial Condition

Total assets were $3.99 billion as of June 30, 2023, which was an increase of $285.0 million from December 31, 2022.

Net working capital, defined as current assets less current liabilities, was $656.0 million as of June 30, 2023, which was an increase of $315.4 million from December 31, 2022.

Significant changes in net working capital as of June 30, 2023 as compared to December 31, 2022 were as follows:

• An increase in cash and cash equivalents of $232.5 million, primarily as a result of cash receipts relating to our strong operating performance.

Total assets were $4.14 billion as of September 29, 2023, which was an increase of $431.7 million from December 31, 2022.

Net working capital, defined as current assets less current liabilities, was $768.6 million as of September 29, 2023, which was an increase of $428.0 million from December 31, 2022.

Significant changes in net working capital as of September 29, 2023 as compared to December 31, 2022 were as follows:

• An increase in cash and cash equivalents of $418.6 million, primarily as a result of cash flows relating to our strong operating performance.

• An increase in accounts receivable, trade of $26.1 million, driven primarily by increased net sales and the timing of cash receipts.

• An increase in accounts payable to The Coca-Cola Company of $32.1 million due to the timing of cash payments.

• An increase in other accrued liabilities of $27.8 million, primarily due to the reclassification of the liability related to the Primary Plan from non-current to current in anticipation of the full termination of the Primary Plan during the third quarter of 2023, as well as the increase in the current portion of the acquisition related contingent consideration liability.

• A decrease in accrued compensation of $49.1 million, primarily as a result of the timing of bonus and incentive payments in the first half of 2023.

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

• A decrease in inventories of $27.1 million, primarily due to lower inventory levels for certain manufacturing materials compared to December 31, 2022.

• A decrease in dividends payable of $32.8 million, primarily related to the payment of a special cash dividend during the first nine months 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 June 30, 2023, the Company had $430.2 million in cash and cash equivalents.

As of September 29, 2023, the Company had $616.2 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.

The Company’s long-term debt as of June 30, 2023 and December 31, 2022 was as follows:

(in thousands) Maturity Date June 30, 2023 December 31, 2022

Management believes the Company has sufficient sources of capital available to finance its business plan, to meet its working capital requirements and to 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 29, 2023 and December 31, 2022 was as follows:

(in thousands) Maturity Date September 29, 2023 December 31, 2022

Senior bonds and unamortized discount on senior bonds (1)

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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 half 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.

(3) During the first nine months 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 June 30, 2023.

The Company was in compliance with these covenants as of September 29, 2023.

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

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

As of June 30, 2023, the Company’s credit ratings and outlook for its long-term debt were as follows:

As of September 29, 2023, the Company’s credit ratings and outlook for its long-term debt were as follows:

Credit Rating Rating Outlook

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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.

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.

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Following is a summary of the Level 3 activity:

Second Quarter First Half

Third Quarter First Nine Months

(in thousands) 2023 2022 2023 2022

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Reclassification to current payables — 1,800 (900) 2,100

Increase (decrease) in fair value 25,520 4,021 67,174 (1,436)

Increase in fair value 18,864 22,568 86,038 21,132

Ending balance - Level 3 liability $ 605,650 $ 536,916 $ 605,650 $ 536,916

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A summary of cash-based activity is as follows:

First Nine Months

(in thousands) 2023 2022

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Additions to property, plant and equipment $ 152,260 $ 183,929

Payments of acquisition related contingent consideration 13,376 18,710

Cash dividends paid 42,182 7,030

Payments of acquisition related contingent consideration 20,979 28,421

Payments on financing lease obligations 1,712 2,441

Acquisition of distribution rights — 30,149

Payments on term loan facility and senior notes — 125,000

Other 9,288 1,757

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Net increase in cash during period $ 418,569 $ 20,930

(1) Net cash provided by operating activities included net income tax payments of $90.2 million in the first half of 2023 and $55.7 million in the first half of 2022.

(1) Net cash provided by operating activities in the first nine months of 2023 included net income tax payments of $146.5 million and pension plan contributions of $16.3 million.

Net cash provided by operating activities in the first nine months of 2022 included net income tax payments of $96.5 million, pension plan contributions of $26.0 million and payment of deferred payroll taxes under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) of $18.7 million.

Cash Flows From Operating Activities

During the first half of 2023, cash provided by operating activities was $383.3 million, which was an increase of $139.8 million as compared to the first half of 2022.

During the first nine months of 2023, cash provided by operating activities was $644.5 million, which was an increase of $250.2 million as compared to the first nine months 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 half of 2023, cash used in investing activities was $98.7 million, which was a decrease of $73.0 million as compared to the first half of 2022.

The decrease was primarily a result of additions to property, plant and equipment, which were $92.9 million during the first half of 2023 and $145.2 million during the first half 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 half 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 $23.4 million and $19.6 million of additions to property, plant and equipment accrued in accounts payable, trade as of June 30, 2023 and July 1, 2022, respectively.

During the first nine months of 2023, cash used in investing activities was $160.9 million, which was a decrease of $49.4 million as compared to the first nine months of 2022.

The decrease was primarily a result of additions to property, plant and equipment, which were $152.3 million during the first nine months of 2023 and $183.9 million during the first nine months 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 nine months 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 $32.4 million and $20.0 million of additions to property, plant and equipment accrued in accounts payable, trade as of September 29, 2023 and September 30, 2022, respectively.

The additions to property, plant and equipment reflect 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, with remaining anticipated expenditures in the second half of 2023 of approximately $160 million to $210 million.

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

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

$300 million, with remaining anticipated expenditures in the fourth quarter of 2023 of approximately $100 million to $150 million.

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

Cash Flows From Financing Activities

During the first half of 2023, cash used in financing activities was $52.2 million, which was an increase of $26.7 million as compared to the first half of 2022.

The increase was primarily a result of dividend payments of $37.5 million during the first half of 2023 (which included a special cash dividend of $3.00 per share), as compared to $4.7 million during the first half of 2022.

The Company had cash payments for acquisition related contingent consideration of $13.4 million during the first half of 2023 and $18.7 million during the first half of 2022.

For the next five years, 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 approximately $30 million to $60 million.

During the first nine months of 2023, cash used in financing activities was $65.1 million, which was a decrease of $98.0 million as compared to the first nine months of 2022.

The decrease was primarily a result of the repayment of $125.0 million of debt during the first nine months of 2022.

This was partially offset by dividend payments of $42.2 million during the first nine months of 2023 (which included a special cash dividend of $3.00 per share), as compared to $7.0 million during the first nine months of 2022.

The Company had cash payments for acquisition related contingent consideration of $21.0 million during the first nine months of 2023 and $28.4 million during the first nine months of 2022.

For the next five future years, 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 approximately $45 million to $65 million.

Hedging Activities

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

Second Quarter First Half

Third Quarter First Nine Months

(in thousands) 2023 2022 2023 2022

Increase in cost of sales $ 786 $ 484 $ 3,770 $ 3,413

Increase (decrease) in SD&A expenses 1,692 (6,698) 5,629 (15,142)

(Decrease) increase in SD&A expenses (403) 683 5,226 (14,459)

Net impact $ 383 $ 1,167 $ 8,996 $ (11,046)

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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;

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;

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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