Coca-Cola Consolidated, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Consolidated, Inc., a Delaware corporation (together with its majority-owned subsidiaries, the “Company,” “we,” “us” or “our”), 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 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 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. 24 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 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 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 : 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. 25 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. 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 : 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. 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 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 Net sales $ 1,591,626 $ 1,571,642 $ 19,984 Cost of sales 951,067 947,536 3,531 Gross profit 640,559 624,106 16,453 Selling, delivery and administrative expenses 425,153 418,052 7,101 Income from operations 215,406 206,054 9,352 Interest (income) expense, net (2,716) 2,929 (5,645) Mark-to-market on acquisition related contingent consideration (5,541) 41,654 (47,195) Other expense, net 828 2,269 (1,441) Income before taxes 222,835 159,202 63,633 Income tax expense 57,094 41,075 16,019 Net income 165,741 118,127 47,614 Other comprehensive (loss) income, net of tax (153) 738 (891) Comprehensive income $ 165,588 $ 118,865 $ 46,723 26 Net Sales 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 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: First Quarter (in thousands) 2024 2023 % Change Bottle/can sales: Sparkling beverages $ 951,992 $ 920,562 3.4 % Still beverages 511,642 509,628 0.4 % Total bottle/can sales 1,463,634 1,430,190 2.3 % Other sales: Sales to other Coca‑Cola bottlers 78,703 86,445 (9.0) % Post-mix sales and other 49,289 55,007 (10.4) % Total other sales 127,992 141,452 (9.5) % 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: First Quarter (in thousands) 2024 2023 % Change Bottle/can sales volume: Sparkling beverages 61,785 61,250 0.9 % Still beverages 20,326 21,220 (4.2) % Total bottle/can sales volume 82,111 82,470 (0.4) % 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. 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 27 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 2024 2023 Approximate percent of the Company’s total bottle/can sales volume: Wal-Mart Stores, Inc. 21 % 21 % 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. 17 % 16 % The Kroger Company 12 % 9 % Total approximate percent of the Company’s total net sales 29 % 25 % 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 and post-mix funding from brand companies. 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. 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 $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: 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. 28 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 $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. 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 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 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 25.6% 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 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.” 29 The Company’s segment results are as follows: First Quarter (in thousands) 2024 2023 Net sales: Nonalcoholic Beverages $ 1,574,712 $ 1,545,412 All Other 88,102 92,376 Eliminations (1) (71,188) (66,146) Consolidated net sales $ 1,591,626 $ 1,571,642 Income from operations: Nonalcoholic Beverages $ 212,142 $ 209,779 All Other 3,264 (3,725) Consolidated income from operations $ 215,406 $ 206,054 (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. Comparable and Adjusted Results (Non-GAAP) The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users of the financial statements with additional, meaningful financial information that should be considered, 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 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 Reported results (GAAP) $ 640,559 $ 425,153 $ 215,406 $ 222,835 $ 165,741 $ 17.68 Fair value adjustment of acquisition related contingent consideration (1) — — — (5,541) (4,172) (0.45) Fair value adjustments for commodity derivative instruments (2) 1,156 (43) 1,199 1,199 903 0.10 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 30 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 Reported results (GAAP) $ 624,106 $ 418,052 $ 206,054 $ 159,202 $ 118,127 $ 12.60 Fair value adjustment of acquisition related contingent consideration (1) — — — 41,654 31,361 3.35 Fair value adjustments for commodity derivative instruments (2) 395 (2,690) 3,085 3,085 2,323 0.25 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 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. Financial Condition 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 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. 31 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) 11/25/2025 $ 349,985 $ 349,983 Revolving credit facility (2) 7/9/2026 — — Senior notes 10/10/2026 100,000 100,000 Senior notes 3/21/2030 150,000 150,000 Debt issuance costs (692) (824) Total long-term debt $ 599,293 $ 599,159 (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. 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 March 29, 2024. 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 March 29, 2024, 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 30 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. 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. 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 13 to the condensed consolidated financial statements for additional information related to the Company’s SCF program. 32 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: First Quarter (in thousands) 2024 2023 Beginning balance - Level 3 liability $ 669,337 $ 541,491 Payments of acquisition related contingent consideration (9,700) (6,499) Reclassification to current payables (4,500) (200) (Decrease) increase in fair value (5,541) 41,654 Ending balance - Level 3 liability $ 649,596 $ 576,446 Cash Sources and Uses A summary of cash-based activity is as follows: First Quarter (in thousands) 2024 2023 Cash Sources: Net cash provided by operating activities (1) $ 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 Cash Uses: 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 Debt issuance fees 53 154 Total cash uses $ 429,498 $ 92,719 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 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 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 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. 33 Cash Flows From Financing Activities 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. 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: First Quarter (in thousands) 2024 2023 Increase in cost of sales $ 1,534 $ 1,056 Increase in SD&A expenses 323 3,937 Net impact $ 1,857 $ 4,993 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; changes in government regulations related to nonalcoholic beverages, including regulations related to obesity, public health, artificial ingredients and product safety and sustainability; decreases from historic levels of marketing funding support provided to us by The Coca‑Cola Company and other beverage companies; material changes in the performance requirements for marketing funding support or our inability to meet such requirements; decreases from historic levels of advertising, marketing and product innovation spending by The Coca‑Cola Company and other beverage companies, or advertising campaigns that are negatively perceived by the public; any failure of the several Coca‑Cola system governance entities of which we are a participant to function efficiently or on our best behalf and any failure or delay of ours to receive anticipated benefits from these governance entities; provisions in our beverage distribution and manufacturing agreements with The Coca‑Cola Company that could delay or prevent a change in control of us or a sale of our Coca‑Cola distribution or manufacturing businesses; the concentration of our capital stock ownership; our inability to meet requirements under our beverage distribution and manufacturing agreements; changes in the inputs used to calculate our 34 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; 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; 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 any 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 2023 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.