Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Consolidated, Inc., a Delaware corporation (together with its majority-owned subsidiaries, the “Company,” “we,” “us” or “our”), 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 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.
Each of the Company’s quarters, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The Company’s fourth quarter and fiscal year end on December 31 regardless of the day of the week on which December 31 falls. The condensed consolidated financial statements presented are:
• The financial position as of September 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
We distribute, market and manufacture nonalcoholic beverages in territories spanning 14 states and the District of Columbia. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest Coca‑Cola bottler in the United States. Approximately 85% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage companies, including Keurig Dr Pepper Inc. (“Dr Pepper”) and Monster Energy Company. Our Purpose is to honor God in all we do, 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.”
We offer a range of nonalcoholic beverage products and flavors, including both sparkling and still beverages, designed to meet the demands of our consumers. Sparkling beverages are carbonated beverages and the Company’s principal sparkling beverage is Coca‑Cola. Still beverages include energy products and noncarbonated beverages such as bottled water, ready to drink tea, ready to drink coffee, enhanced water, juices and sports drinks.
Our sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, post-mix sales, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.
The Company’s products are sold and distributed in the United States through various channels, which include selling directly to customers, including grocery stores, mass merchandise stores, club stores, convenience stores and drug stores, selling to on-premise locations, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, and selling through other channels such as vending machine outlets.
The nonalcoholic beverage industry is highly competitive for both sparkling and still beverages. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of PepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper products.
The principal methods of competition in the nonalcoholic beverage industry are new brand and product introductions, point-of-sale merchandising, new vending and dispensing equipment, packaging changes, pricing, sales promotions, product quality, retail space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition.
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Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters of the fiscal year, as sales of our products are typically correlated with warmer weather. We believe that we and other manufacturers from whom we purchase finished products have adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.
Executive Summary
Net sales increased 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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Areas of Emphasis
Key priorities for the Company include commercial execution, revenue management, supply chain optimization and cash flow generation.
Commercial Execution : Our success is dependent on our ability to execute our commercial strategy within our customers’ stores. Our ability to obtain shelf space within stores and remain in-stock across our portfolio of brands and packages in a profitable manner will have a significant impact on our results. We are focused on execution at every step in our supply chain, including raw material and finished product procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur. We continue to invest in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and to drive long-term value in our business.
Revenue Management : Our revenue management strategy focuses on pricing our brands and packages optimally within product categories and channels, creating effective working relationships with our customers and making disciplined fact-based decisions. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs, the roles certain brands play in our product portfolio and other market conditions.
Supply Chain Optimization : We are continually focused on optimizing our supply chain, which includes identifying nearby warehousing and distribution operations that can be consolidated into new facilities to increase capacity, expand production capabilities, reduce overall production costs and add automation to allow the Company to better serve its customers and consumers.
Cash Flow Generation : We have several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures. 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 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
Net sales $ 1,712,428 $ 1,628,589 $ 83,839
Cost of sales 1,050,878 1,007,482 43,396
Gross profit 661,550 621,107 40,443
Selling, delivery and administrative expenses 445,290 431,177 14,113
Income from operations 216,260 189,930 26,330
Interest (income) expense, net (1,516) 6,083 (7,599)
Pension plan settlement expense 77,319 — 77,319
Other expense, net 19,473 24,746 (5,273)
Income before taxes 120,984 159,101 (38,117)
Income tax expense 28,891 40,340 (11,449)
Net income 92,093 118,761 (26,668)
Other comprehensive income, net of tax 57,214 815 56,399
Comprehensive income
$ 149,307 $ 119,576 $ 29,731
Net Sales
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 lower case sales volume as compared to the third quarter of 2022, which decreased net sales by approximately $25 million.
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Net sales by product category were as follows:
Third Quarter
(in thousands) 2023 2022 % Change
Bottle/can sales:
Sparkling beverages $ 977,663 $ 917,162 6.6 %
Still beverages 575,954 548,333 5.0 %
Total bottle/can sales 1,553,617 1,465,495 6.0 %
Other sales:
Sales to other Coca‑Cola bottlers 87,710 83,644 4.9 %
Post-mix sales and other 71,101 79,450 (10.5) %
Total other sales 158,811 163,094 (2.6) %
Total net sales $ 1,712,428 $ 1,628,589 5.1 %
Product category sales volume of standard physical cases (as defined below) and the percentage change by product category were as follows:
Third Quarter
(in thousands) 2023 2022 % Change
Bottle/can sales volume:
Sparkling beverages 66,251 66,134 0.2 %
Still beverages 25,546 27,007 (5.4) %
Total bottle/can sales volume 91,797 93,141 (1.4) %
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.
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, 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 $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. 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 to 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 $43.2 million in the third quarter of 2023 and $39.6 million in the third quarter of 2022.
Selling, Delivery and Administrative Expenses
SD&A expenses include the following: sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution
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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 $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 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 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. 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 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 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 $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
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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 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)
2023 2022 Change
Net sales $ 5,022,902 $ 4,628,162 $ 394,740
Cost of sales 3,065,669 2,948,820 116,849
Gross profit 1,957,233 1,679,342 277,891
Selling, delivery and administrative expenses 1,301,249 1,211,134 90,115
Income from operations 655,984 468,208 187,776
Interest expense, net 2,766 20,928 (18,162)
Pension plan settlement expense 117,096 — 117,096
Other expense, net 91,184 27,666 63,518
Income before taxes 444,938 419,614 25,324
Income tax expense 112,399 107,901 4,498
Net income 332,539 311,713 20,826
Other comprehensive income, net of tax 85,775 2,444 83,331
Comprehensive income
$ 418,314 $ 314,157 $ 104,157
Net Sales
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 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
Bottle/can sales:
Sparkling beverages $ 2,892,106 $ 2,573,376 12.4 %
Still beverages 1,660,469 1,556,438 6.7 %
Total bottle/can sales 4,552,575 4,129,814 10.2 %
Other sales:
Sales to other Coca‑Cola bottlers 267,362 262,099 2.0 %
Post-mix sales and other 202,965 236,249 (14.1) %
Total other sales 470,327 498,348 (5.6) %
Total net sales $ 5,022,902 $ 4,628,162 8.5 %
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
Bottle/can sales volume:
Sparkling beverages 195,395 197,887 (1.3) %
Still beverages 71,426 76,737 (6.9) %
Total bottle/can sales volume 266,821 274,624 (2.8) %
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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
2023 2022
Approximate percent of the Company’s total bottle/can sales volume:
Wal-Mart Stores, Inc. 21 % 20 %
The Kroger Company 12 % 12 %
Total approximate percent of the Company’s total bottle/can sales volume 33 % 32 %
Approximate percent of the Company’s total net sales:
Wal-Mart Stores, Inc. 16 % 16 %
The Kroger Company 9 % 9 %
Total approximate percent of the Company’s total net sales 25 % 25 %
Cost of Sales
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 $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 nine months of 2022.
Interest Expense, Net
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 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.
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Other Expense, Net
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 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 25.3% 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 $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. 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.
Segment Operating Results
The Company evaluates segment reporting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operating Decision Maker (the “CODM”). The Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM.
The Company believes three operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.”
The Company’s segment results are as follows:
Third Quarter First Nine Months
(in thousands) 2023 2022 2023 2022
Net sales:
Nonalcoholic Beverages $ 1,691,060 $ 1,600,065 $ 4,951,334 $ 4,535,300
All Other 93,636 101,136 281,186 303,209
Eliminations (1)
(72,268) (72,612) (209,618) (210,347)
Consolidated net sales $ 1,712,428 $ 1,628,589 $ 5,022,902 $ 4,628,162
Income from operations:
Nonalcoholic Beverages $ 217,405 $ 189,218 $ 661,395 $ 467,788
All Other (1,145) 712 (5,411) 420
Consolidated income from operations $ 216,260 $ 189,930 $ 655,984 $ 468,208
(1) The entire net sales elimination represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction.
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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, 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. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting.
The following tables reconcile reported results (GAAP) to adjusted results (non-GAAP):
Third Quarter 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
Reported results (GAAP) $ 661,550 $ 445,290 $ 216,260 $ 120,984 $ 92,093 $ 9.82
Fair value adjustment of acquisition related contingent consideration (1)
— — — 18,864 14,212 1.51
Fair value adjustments for commodity derivative instruments (2)
25 703 (678) (678) (510) (0.05)
Supply chain optimization (3)
419 — 419 419 315 0.03
Pension plan settlement expense (4)
— — — 77,319 58,225 6.22
Total reconciling items 444 703 (259) 95,924 72,242 7.71
Adjusted results (non-GAAP) $ 661,994 $ 445,993 $ 216,001 $ 216,908 $ 164,335 $ 17.53
Third Quarter 2022
(in thousands, except per share data) Gross profit SD&A expenses Income from operations Income before taxes Net income Basic net income per share
Reported results (GAAP) $ 621,107 $ 431,177 $ 189,930 $ 159,101 $ 118,761 $ 12.67
Fair value adjustment of acquisition related contingent consideration (1)
— — — 22,568 16,993 1.82
Fair value adjustments for commodity derivative instruments (2)
(1,100) (4,711) 3,611 3,611 2,719 0.29
Supply chain optimization (3)
369 (6) 375 375 283 0.03
Total reconciling items (731) (4,717) 3,986 26,554 19,995 2.14
Adjusted results (non-GAAP) $ 620,376 $ 426,460 $ 193,916 $ 185,655 $ 138,756 $ 14.81
First Nine Months 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
Reported results (GAAP) $ 1,957,233 $ 1,301,249 $ 655,984 $ 444,938 $ 332,539 $ 35.47
Fair value adjustment of acquisition related contingent consideration (1)
— — — 86,038 64,787 6.91
Fair value adjustments for commodity derivative instruments (2)
1,517 (2,211) 3,728 3,728 2,807 0.30
Supply chain optimization (3)
1,242 — 1,242 1,242 935 0.10
Pension plan settlement expense (4)
— — — 117,096 88,173 9.41
Total reconciling items 2,759 (2,211) 4,970 208,104 156,702 16.72
Adjusted results (non-GAAP) $ 1,959,992 $ 1,299,038 $ 660,954 $ 653,042 $ 489,241 $ 52.19
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First Nine Months 2022
(in thousands, except per share data) Gross
profit SD&A
expenses Income from
operations Income before taxes Net
income Basic net income
per share
Reported results (GAAP) $ 1,679,342 $ 1,211,134 $ 468,208 $ 419,614 $ 311,713 $ 33.25
Fair value adjustment of acquisition related contingent consideration (1)
— — — 21,132 15,912 1.70
Fair value adjustments for commodity derivative instruments (2)
5,069 2,512 2,557 2,557 1,925 0.21
Supply chain optimization (3)
458 (78) 536 536 404 0.04
Total reconciling items 5,527 2,434 3,093 24,225 18,241 1.95
Adjusted results (non-GAAP) $ 1,684,869 $ 1,213,568 $ 471,301 $ 443,839 $ 329,954 $ 35.20
Following is an explanation of non-GAAP adjustments:
(1) This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates and future cash flow projections of the distribution territories subject to acquisition related sub-bottling payments.
(2) The Company enters into commodity derivative instruments from time to time to hedge some or all of its projected purchases of aluminum, PET resin, diesel fuel and unleaded gasoline in order to mitigate commodity price risk. The Company accounts for its commodity derivative instruments on a mark-to-market basis.
(3) 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 $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.
• 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 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, 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.
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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)
11/25/2025 $ 349,981 $ 349,974
Revolving credit facility (2)(3)
7/9/2026 — —
Senior notes 10/10/2026 100,000 100,000
Senior notes 3/21/2030 150,000 150,000
Debt issuance costs (858) (1,157)
Total long-term debt $ 599,123 $ 598,817
(1) The senior bonds due in 2025 were issued at 99.975% of par.
(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 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. The agreements under which the Company’s nonpublic debt was issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreement. The Company was in compliance with these covenants as of September 29, 2023. These covenants have not restricted, and are not expected to restrict, the Company’s liquidity or capital resources.
All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s long-term debt.
The Company’s credit ratings are reviewed periodically by certain nationally recognized rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material adverse impact on the Company’s operating results or financial position. As of September 29, 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+ Stable
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.
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.
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The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability. There were no transfers from Level 1 or Level 2 in any period presented. Fair value adjustments were non-cash and, therefore, did not impact the Company’s liquidity or capital resources. Following is a summary of the Level 3 activity:
Third Quarter First Nine Months
(in thousands) 2023 2022 2023 2022
Beginning balance - Level 3 liability $ 594,389 $ 522,259 $ 541,491 $ 542,105
Payments of acquisition related contingent consideration (7,603) (9,711) (20,979) (28,421)
Reclassification to current payables — 1,800 (900) 2,100
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
Cash Sources and Uses
A summary of cash-based activity is as follows:
First Nine Months
(in thousands) 2023 2022
Cash Sources:
Net cash provided by operating activities (1)
$ 644,549 $ 394,309
Proceeds from the sale of property, plant and equipment 441 5,348
Total cash sources $ 644,990 $ 399,657
Cash Uses:
Additions to property, plant and equipment $ 152,260 $ 183,929
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
Total cash uses $ 226,421 $ 378,727
Net increase in cash during period $ 418,569 $ 20,930
(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 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 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
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$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 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
The Company uses commodity derivative instruments to manage its exposure to fluctuations in certain commodity prices. Fees paid by the Company for commodity derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity derivative instruments on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or SD&A expenses, consistent with the expense classification of the underlying hedged item.
The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its commodity derivative instruments that provide for net settlement of derivative transactions. The net impact of the commodity derivative instruments on the condensed consolidated statements of operations was as follows:
Third Quarter First Nine Months
(in thousands) 2023 2022 2023 2022
Increase in cost of sales $ 786 $ 484 $ 3,770 $ 3,413
(Decrease) increase in SD&A expenses (403) 683 5,226 (14,459)
Net impact $ 383 $ 1,167 $ 8,996 $ (11,046)
Cautionary Note Regarding Forward-Looking Statements
Certain statements made in this report, or in other public filings, press releases, or other written or oral communications made by the Company, which are not historical facts, are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties which we expect will or may occur in the future and may impact our business, financial condition and results of operations. The words “anticipate,” “believe,” “expect,” “intend,” “project,” “may,” “will,” “should,” “could” and similar expressions are intended to identify those forward-looking statements. These forward-looking statements reflect the Company’s best judgment based on current information, and, although we base these statements on circumstances that we believe to be reasonable when made, there can be no assurance that future events will not affect the accuracy of such forward-looking information. As such, the forward-looking statements are not guarantees of future performance, and actual results may vary materially from the projected results and expectations discussed in this report. Factors that might cause the Company’s actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to: increased costs (including due to inflation), disruption of supply or unavailability or shortages of raw materials, fuel and other supplies; the 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 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; material changes in the performance requirements for marketing funding support or our inability to meet such requirements; decreases from historic levels of
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advertising, marketing and product innovation spending by The Coca‑Cola Company and other beverage companies, or advertising campaigns that are negatively perceived by the public; any failure of the several Coca‑Cola system governance entities of which we are a participant to function efficiently or on our best behalf and any failure or delay of ours to receive anticipated benefits from these governance entities; provisions in our beverage distribution and manufacturing agreements with The Coca‑Cola Company that could delay or prevent a change in control of us or a sale of our Coca‑Cola distribution or manufacturing businesses; the concentration of our capital stock ownership; our inability to meet requirements under our beverage distribution and manufacturing agreements; changes in the inputs used to calculate our acquisition related contingent consideration liability; technology failures or cyberattacks on our technology systems or our effective response to technology failures or cyberattacks on our customers’, suppliers’ or other third parties’ technology systems; unfavorable changes in the general economy; changes in our top customer relationships and marketing strategies; lower than expected net pricing of our products resulting from continued and increased customer and competitor consolidations and marketplace competition; the effect of changes in our level of debt, borrowing costs and credit ratings on our access to capital and credit markets, operating flexibility and ability to obtain additional financing to fund future needs; the failure to attract, train and retain qualified employees while controlling labor costs, and other labor issues; the failure to maintain productive relationships with our employees covered by collective bargaining agreements, including failing to renegotiate collective bargaining agreements; changes in accounting standards; our use of estimates and assumptions; changes in tax laws, disagreements with tax authorities or additional tax liabilities; changes in legal contingencies; natural disasters, changing weather patterns and unfavorable weather; climate change or legislative or regulatory responses to such change; 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. Risk Factors” of the Company’s Annual Report on Form 10-K for 2022 and elsewhere in this report.
Caution should be taken not to place undue reliance on the forward-looking statements included in this report. The Company assumes no obligation to update any forward-looking statements except as may be required by law. In evaluating forward-looking statements, these risks and uncertainties should be considered, together with the other risks described from time to time in the Company’s reports and other filings with the United States Securities and Exchange Commission.