What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-06 compared with 2023-11-01 · 165 added, 249 removed, 248 unchanged (63% of the section changed)

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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.

• The financial position as of March 29, 2024 and December 31, 2023.

• The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended March 29, 2024 (the “first quarter” of fiscal 2024 (“2024”)) and March 31, 2023 (the “first quarter” of fiscal 2023 (“2023”)).

• The changes in cash flows for the first quarter of 2024 and the first quarter of 2023.

Our Business and the Nonalcoholic Beverage Industry

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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.

Net sales increased 1% to $1.6 billion in the first quarter of 2024.

Sparkling and Still net sales increased 3.4% and 0.4%, respectively, compared to the first quarter of 2023.

Net sales growth was driven by our annual price increase that took effect during the quarter.

Standard physical case volume was down 0.4%, which was attributable to an extra selling day in the first quarter of 2023.

Comparable standard physical case volume, as defined in the “Comparable and Adjusted Results (Non-GAAP)” section, increased 0.7% versus the first quarter of 2023.

Comparable Sparkling category volume grew 2.0% with strong performance of multi-serve packages sold in larger retail stores.

The Sparkling category also benefited from Easter holiday sales activity shifting into the first quarter of 2024.

Comparable Still category volume declined 3.1% during the first quarter of 2024.

Gross profit in the first quarter of 2024 was $640.6 million, an increase of $16.5 million, or 3%.

Gross margin improved 50 basis points to 40.2%.

Pricing actions taken during the first quarter, stable commodity prices and higher Sparkling sales contributed to the overall improvement in gross margin.

Selling, delivery and administrative (“SD&A”) expenses in the first quarter of 2024 increased $7.1 million, or 2%.

SD&A expenses as a percentage of net sales increased 10 basis points to 26.7% in the first quarter of 2024.

The increase in SD&A expenses as compared to the first quarter of 2023 was primarily driven by an increase in labor costs related to annual wage adjustments.

Income from operations in the first quarter of 2024 was $215.4 million, compared to $206.1 million in the first quarter of 2023, an increase of 5%.

Operating margin for the first quarter of 2024 was 13.5% as compared to 13.1% for the first quarter of 2023, an increase of 40 basis points.

Net income in the first quarter of 2024 was $165.7 million, compared to $118.1 million in the first quarter of 2023, an improvement of $47.6 million.

On an adjusted basis, as defined in the “Comparable and Adjusted Results (Non-GAAP)” section, net income in the first quarter of 2024 was $162.5 million, compared to $151.8 million in the first quarter of 2023, an increase of $10.7 million.

Income tax expense for the first quarter of 2024 was $57.1 million, compared to $41.1 million in the first quarter of 2023.

The effective income tax rate for the first quarter of 2024 was 25.6%, compared to 25.8% for the first quarter of 2023.

Cash flows provided by operations for the first quarter of 2024 were $194.3 million, compared to $184.7 million for the first quarter of 2023.

Cash flows from operations reflected our strong operating performance during the first quarter of 2024.

In the first quarter of 2024, we invested $77 million in capital expenditures as we continue to enhance our supply chain and invest for future growth.

For the full year of 2024, we expect our capital expenditures to be between $300 million and $350 million.

During the first quarter of 2024, we made dividend payments of $155 million, which included a special dividend payment of $150 million.

Areas of Emphasis

Key priorities for the Company include commercial execution, revenue management, supply chain optimization and cash flow generation.

Key priorities for the Company include executing our commercial strategy, executing our revenue management strategy, optimizing our supply chain, generating cash flow, determining the optimal route to market and creating a digitally enabled selling platform.

Commercial Execution :

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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.

The Company undertook significant capital expenditures to optimize our supply chain and to invest for future growth during 2023, and expects to continue to make significant investments during 2024.

Over the past five years, the Company has made capital expenditures of approximately $200 million related to fleet, $125 million related to automation and $470 million related to supply chain improvements.

Cash Flow Generation :

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

Optimal Route to Market :

We are focused on implementing optimal methods of distribution of our products within our territory.

Our typical direct store delivery method uses Company-owned vehicles and warehouses, but we are increasingly using alternative methods of distribution.

For example, in instances of post-mix delivery for use in fountain machines, we have shifted our delivery method towards alternative distributors in order to enhance customer service and profitability.

In instances of bottle/can delivery, we are shifting certain products for certain customers and channels of business to alternative routes to market.

These alternative routes to market include third-party distributors, the manufacturer of the product or the customer’s supply chain infrastructure.

These bottle/can arrangements generally come with favorable commercial terms for the Company.

During the first quarter of 2024, more than half of our post-mix gallons and less than 10% of our bottle/can volume was delivered through alternative routes to market.

Digitally Enabled Selling Platform :

Through our investment in CONA Services LLC, we, along with other Coca-Cola bottlers, are building a digitally enabled selling platform called MyCoke 360 that we believe will enable us to better serve our customers.

This platform will enable a more seamless order and payment platform for certain customers and we expect this platform will enable us to enhance customer service and create more selling opportunities for our teammates.

This platform is targeted to certain on-premise and small store customers.

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

First Quarter Results

The Company’s results of operations for the first quarter of 2024 and the first quarter of 2023 are highlighted in the table below and discussed in the following paragraphs.

First Quarter

(in thousands) 2024 2023 Change

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Interest (income) expense, net (2,716) 2,929 (5,645)

Pension plan settlement expense 77,319 — 77,319

Mark-to-market on acquisition related contingent consideration (5,541) 41,654 (47,195)

Other expense, net 828 2,269 (1,441)

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Net income 165,741 118,127 47,614

Other comprehensive income, net of tax 57,214 815 56,399

Other comprehensive (loss) income, net of tax (153) 738 (891)

Comprehensive income

$ 165,588 $ 118,865 $ 46,723

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.

Net sales increased $20.0 million, or 1.3%, to $1.59 billion in the first quarter of 2024, as compared to $1.57 billion in the first quarter of 2023.

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 $40 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.

The increase in net sales was partially offset by a decline in external freight revenue, which decreased net sales by approximately $10 million.

The increase in net sales was also partially offset by lower case sales volume as compared to the first quarter of 2023, which decreased net sales by approximately $5 million.

The first quarter of 2024 included one less selling day compared to the first quarter of 2023.

Net sales by product category were as follows:

Third Quarter

First Quarter

(in thousands) 2024 2023 % Change

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Total net sales $ 1,591,626 $ 1,571,642 1.3 %

The decline in post-mix sales and other in the first quarter of 2024 as compared to the first quarter of 2023 was related to a shift in how we deliver post-mix products to our customers.

The Company has shifted to a broader use of alternative distributors, rather than Company-owned vehicles and warehouses, to deliver post-mix products to customers in our territory.

We receive a fee from a vendor on these post-mix gallons delivered to locally managed customers in our territory, which is recorded as a reduction to cost of sales.

This transition has occurred over the past several years but accelerated in 2023 and is expected to continue to be more prevalent throughout 2024.

More than half of the post-mix gallons sold to local customers in our franchise territory in the first quarter of 2024 were delivered using these alternative distribution methods.

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

Third Quarter

First Quarter

(in thousands) 2024 2023 % Change

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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.

Additionally, as the Company introduces new products, it reassesses the category assigned to its products at the SKU level, therefore categorization could differ from previously presented results in order to conform with current period categorization.

Any differences are not material.

The bottle/can sales volume above represents volume that is delivered directly to our customer outlets using Company-owned vehicles and warehouses.

In order to serve our customers in the most efficient way, as well as in response to customer demands, the Company has, in certain circumstances, shifted the delivery of our products to third-party distributors, the manufacturer of the product or the customer’s supply chain infrastructure, rather than through Company-owned vehicles and warehouses.

As a result of not physically delivering the product, the sales volume delivered using these alternative methods of distribution is not reflected in our volume metrics.

However, because we have the exclusive distribution rights for nonalcoholic beverages within

our franchise territory, we receive fees for the delivery of qualified product in our territory.

These fees are reported in net sales.

Changes in the delivery of our products to our customers has impacted, and will continue to impact, our reported volume and net sales.

This transition has occurred over the past several years but accelerated in 2023 and is expected to continue to be more prevalent throughout 2024.

Less than 10% of the bottle/can volume sold in our franchise territory in the first quarter of 2024 was delivered using these alternative routes to market.

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

First Quarter

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

Wal-Mart Stores, Inc.

The Kroger Company 15 % 11 %

Total approximate percent of the Company’s total bottle/can sales volume 36 % 32 %

Approximate percent of the Company’s total net sales:

Wal-Mart Stores, Inc.

The Kroger Company 12 % 9 %

Total approximate percent of the Company’s total net sales 29 % 25 %

Cost of Sales

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(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.

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

Cost of sales increased $3.5 million, or 0.4%, to $951.1 million in the first quarter of 2024, as compared to $947.5 million in the first quarter of 2023.

The increase in cost of sales was driven by higher input costs, including concentrate and manufacturing costs, which increased cost of sales by approximately $35 million.

The increase in cost of sales was partially offset by lower case sales volume as compared to the first quarter of 2023, which decreased cost of sales by approximately $20 million.

The increase in cost of sales was also partially offset by a decline in external freight volume, 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 $43.2 million in the third quarter of 2023 and $39.6 million in the third 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 $45.3 million in the first quarter of 2024 and $37.0 million in the first quarter of 2023.

Selling, Delivery and Administrative Expenses

SD&A expenses include the following:

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.

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

Labor costs represent approximately 60% of total SD&A expenses on an annual basis.

SD&A expenses increased $7.1 million, or 1.7%, to $425.2 million in the first quarter of 2024, as compared to $418.1 million in the first quarter of 2023.

SD&A expenses as a percentage of net sales increased to 26.7% in the first quarter of 2024 from 26.6% in the first quarter of 2023.

The increase in SD&A expenses was primarily driven by an increase in labor costs related to annual wage adjustments.

Shipping and handling costs included in SD&A expenses were $193.0 million in the first quarter of 2024 and $193.2 million in the first quarter of 2023.

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.

Interest (income) expense, net changed $5.6 million, or 192.7%, to $2.7 million of interest income, net in the first quarter of 2024, as compared to $2.9 million of interest expense, net in the first quarter of 2023.

The change in interest (income) expense, net was primarily a result of an increase in interest income due to higher cash, cash equivalent and short-term investment balances and increased yields as compared to the first quarter of 2023.

Mark-to-Market on Acquisition Related Contingent Consideration

Mark-to-market on acquisition related contingent consideration was a decrease of $5.5 million in the first quarter of 2024 as compared to an increase of $41.7 million in the first quarter of 2023, a change of $47.2 million.

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 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

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 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 %

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) %

First Nine Months

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

Wal-Mart Stores, Inc.

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.

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.

The change in the fair value of the acquisition related contingent consideration liability in the first quarter of 2024 as compared to the first quarter of 2023 was primarily driven by changes in the WACC used to calculate the fair value of the liability.

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.

Other expense, net decreased $1.4 million to $0.8 million in the first quarter of 2024, as compared to $2.3 million in the first quarter of 2023.

The decrease in other expense, net was primarily driven by changes in the actuarial assumptions related to our pension and postretirement plan liabilities.

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.

The Company’s effective income tax rate was 25.6% for the first quarter of 2024 and 25.8% for the first quarter of 2023.

The Company’s income tax expense increased $16.0 million, or 39.0%, to $57.1 million for the first quarter of 2024, as compared to $41.1 million for the first quarter of 2023.

The increase in income tax expense was primarily attributable to higher income before taxes during the first quarter of 2024 compared to the first quarter of 2023.

Other Comprehensive (Loss) Income, Net of Tax

Other comprehensive (loss) income, net of tax was $0.2 million of other comprehensive loss in the first quarter of 2024 and $0.7 million of other comprehensive income in the first quarter of 2023.

Segment Operating Results

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The Company’s segment results are as follows:

Third Quarter First Nine Months

First Quarter

(in thousands) 2024 2023

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

Adjusted Results (Non-GAAP)

Comparable and Adjusted Results (Non-GAAP)

The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”).

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The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting.

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

Third Quarter 2023

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

Results for the first quarter of 2023 include one additional selling day compared to the first quarter of 2024.

For comparison purposes, the estimated impact of the additional selling day in the first quarter of 2023 has been excluded from our comparable volume results.

First Quarter

(in thousands) 2024 2023 Change

Standard physical case volume 82,111 82,470 (0.4) %

Volume related to extra day in fiscal period — (923)

Comparable standard physical case volume 82,111 81,547 0.7 %

First Quarter 2024

(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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1,156 (43) 1,199 1,199 903 0.10

Supply chain optimization (3)

419 — 419 419 315 0.03

Pension plan settlement expense (4)

— — — 77,319 58,225 6.22

Total reconciling items 1,156 (43) 1,199 (4,342) (3,269) (0.35)

Adjusted results (non-GAAP) $ 641,715 $ 425,110 $ 216,605 $ 218,493 $ 162,472 $ 17.33

Third Quarter 2022

First Quarter 2023

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

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395 (2,690) 3,085 3,085 2,323 0.25

Supply chain optimization (3)

369 (6) 375 375 283 0.03

Total reconciling items 395 (2,690) 3,085 44,739 33,684 3.60

Adjusted results (non-GAAP) $ 624,501 $ 415,362 $ 209,139 $ 203,941 $ 151,811 $ 16.20

First Nine Months 2023

(in thousands, except per share data) Gross

expenses Income from

operations Income before taxes Net

income Basic net income

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

First Nine Months 2022

(in thousands, except per share data) Gross

expenses Income from

operations Income before taxes Net

income Basic net income

Reported results (GAAP) $ 1,679,342 $ 1,211,134 $ 468,208 $ 419,614 $ 311,713 $ 33.25

Fair value adjustment of acquisition related contingent consideration (1)

— — — 21,132 15,912 1.70

Fair value adjustments for commodity derivative instruments (2)

5,069 2,512 2,557 2,557 1,925 0.21

Supply chain optimization (3)

458 (78) 536 536 404 0.04

Total reconciling items 5,527 2,434 3,093 24,225 18,241 1.95

Adjusted results (non-GAAP) $ 1,684,869 $ 1,213,568 $ 471,301 $ 443,839 $ 329,954 $ 35.20

Following is an explanation of non-GAAP adjustments:

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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.

Total assets were $4.30 billion as of March 29, 2024, which was an increase of $8.2 million from December 31, 2023.

Net working capital, defined as current assets less current liabilities, was $797.0 million as of March 29, 2024, which was an increase of $183.2 million from December 31, 2023.

Significant changes in net working capital as of March 29, 2024 as compared to December 31, 2023 were as follows:

• A decrease in cash and cash equivalents of $234.0 million, primarily as a result of the purchase of short-term investments of approximately $184 million and dividend payments of approximately $155 million, partially offset by our strong operating performance.

• An increase in short-term investments of $183.6 million, due to the purchase of new short-term investments during the first quarter of 2024.

• An increase in inventories of $39.2 million, primarily due to seasonal builds of inventory.

• A decrease in accounts payable, trade of $36.6 million, primarily due to the timing of cash payments.

• An increase in accounts payable to The Coca-Cola Company of $67.0 million, primarily due to the timing of cash payments.

• A decrease in accrued compensation of $64.6 million, primarily as a result of the timing of bonus and incentive payments in the first quarter of 2024.

• A decrease in dividends payable of $154.7 million, primarily related to the payment of a special cash dividend during the first quarter of 2024.

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.

As of March 29, 2024, the Company had $401.3 million in cash and cash equivalents.

The Company’s cash equivalent balance consisted predominantly of investments in money market funds and U.S.

Treasury securities with maturities of 90 days or less.

As of March 29, 2024, the Company had $183.6 million in short-term investments, which consisted primarily of U.S.

Treasury securities and investment-grade corporate bonds with maturities of one year or less.

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.

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

The Company’s long-term debt as of March 29, 2024 and December 31, 2023 was as follows:

(in thousands) Maturity Date March 29, 2024 December 31, 2023

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 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 September 29, 2023.

The Company was in compliance with these covenants as of March 29, 2024.

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

As of March 29, 2024, the Company’s credit ratings and outlook for its long-term debt were as follows:

Credit Rating Rating Outlook

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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.

On May 6, 2024, the Company announced that it intends to purchase up to $3.1 billion in value of its Common Stock through both a modified “Dutch auction” tender offer (the “Tender Offer”) for up to $2.0 billion of its Common Stock and a separate share purchase agreement (the “Purchase Agreement”) with a subsidiary of The Coca‑Cola Company.

The Company intends to fund the Tender Offer and repurchase of shares under the Purchase Agreement with a combination of new funded debt and cash on hand.

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.

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Following is a summary of the Level 3 activity:

Third Quarter First Nine Months

First Quarter

(in thousands) 2024 2023

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Reclassification to current payables (4,500) (200)

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

(Decrease) increase in fair value (5,541) 41,654

Ending balance - Level 3 liability $ 649,596 $ 576,446

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A summary of cash-based activity is as follows:

First Nine Months

First Quarter

(in thousands) 2024 2023

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$ 194,273 $ 184,694

Proceeds from the disposal of short-term investments 1,116 —

Proceeds from the sale of property, plant and equipment 100 158

Total cash sources $ 195,489 $ 184,852

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

Purchases of short-term investments $ 183,806 $ —

Cash dividends paid 154,666 32,808

Additions to property, plant and equipment 77,040 52,700

Payments of acquisition related contingent consideration 9,700 6,499

Investment in equity method investees 3,632 —

Payments on financing lease obligations 601 558

Acquisition of distribution rights — 30,149

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

Other 9,288 1,757

Debt issuance fees 53 154

Total cash uses $ 429,498 $ 92,719

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.

Net (decrease) increase in cash during period $ (234,009) $ 92,133

(1) Net cash provided by operating activities included net income tax payments of $2.7 million in the first quarter of 2024 and $1.1 million in the first quarter of 2023.

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.

During the first quarter of 2024, cash provided by operating activities was $194.3 million, which was an increase of $9.6 million as compared to the first quarter of 2023.

The increase was primarily a result of our strong operating performance during the first quarter of 2024.

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.

During the first quarter of 2024, cash used in investing activities was $263.3 million, which was an increase of $210.7 million as compared to the first quarter of 2023.

The increase was primarily a result of the purchase of short-term investments of approximately $184 million during the first quarter of 2024, as well as additions to property, plant and equipment, which were approximately $77 million during the first quarter of 2024 and approximately $53 million during the first quarter of 2023.

There were $24.3 million and $18.1 million of additions to property, plant and equipment accrued in accounts payable, trade as of March 29, 2024 and March 31, 2023, 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 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.

The Company anticipates additions to property, plant and equipment in 2024 to be in the range of approximately $300 million to $350 million.

Over the next five years, the Company anticipates additions to property, plant and equipment to be in the range of approximately $250 million to $300 million.

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.

During the first quarter of 2024, cash used in financing activities was $165.0 million, which was an increase of $125.0 million as compared to the first quarter of 2023.

The increase was primarily a result of dividend payments of approximately $155 million during the first quarter of 2024 (which included a special cash dividend of $16.00 per share), as compared to dividend payments of approximately $33 million during the first quarter of 2023 (which included a special cash dividend of $3.00 per share).

The Company had cash payments for acquisition related contingent consideration of $9.7 million during the first quarter of 2024 and $6.5 million during the first quarter of 2023.

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 $50 million to $70 million.

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

Third Quarter First Nine Months

First Quarter

(in thousands) 2024 2023

Increase in cost of sales $ 1,534 $ 1,056

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

Increase in SD&A expenses 323 3,937

Net impact $ 1,857 $ 4,993

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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;

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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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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;

changes in the inputs used to calculate our

acquisition related contingent consideration liability;

technology failures or cyberattacks on our information technology systems or our effective response to technology failures or cyberattacks on our customers’, suppliers’ or other third parties’ information technology systems;

unfavorable changes in the general economy;

changes in our top customer relationships and marketing strategies;

the concentration risks among our customers and suppliers;

lower than expected net pricing of our products resulting from continued and increased customer and competitor consolidations and marketplace competition;

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climate change or legislative or regulatory responses to such change;

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

the impact of any pandemic or public health situation;

and the risks discussed in “Item 1A.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis