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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________________
FORM 10-Q
______________________________________________________________________________________________ | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
or
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File Number: 0-9286
______________________________________________________________________________________________
COCA-COLA CONSOLIDATED, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________________ | | | | | | | | |
Delaware | 56-0950585 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| |
4100 Coca‑Cola Plaza |
| |
Charlotte, NC | 28211 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (704) 557-4400
______________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class Common Stock, par value $1.00 per share | Trading Symbol(s) COKE | Name of each exchange on which registered NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 21, 2022, there were 8,368,993 shares of the registrant’s Common Stock, par value $1.00 per share, and 1,004,696 shares of the registrant’s Class B Common Stock, par value $1.00 per share, outstanding.
COCA‑COLA CONSOLIDATED, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2022
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| (in thousands, except per share data) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net sales | | $ | 1,628,589 | | | $ | 1,457,432 | | | $ | 4,628,162 | | | $ | 4,160,375 | |
| Cost of sales | | 1,007,482 | | | 939,720 | | | 2,948,820 | | | 2,699,020 | |
| Gross profit | | 621,107 | | | 517,712 | | | 1,679,342 | | | 1,461,355 | |
| Selling, delivery and administrative expenses | | 431,177 | | | 380,681 | | | 1,211,134 | | | 1,109,279 | |
| Income from operations | | 189,930 | | | 137,031 | | | 468,208 | | | 352,076 | |
| Interest expense, net | | 6,083 | | | 8,097 | | | 20,928 | | | 25,208 | |
| Other expense, net | | 24,746 | | | 34,982 | | | 27,666 | | | 94,078 | |
| Income before taxes | | 159,101 | | | 93,952 | | | 419,614 | | | 232,790 | |
| Income tax expense | | 40,340 | | | 25,022 | | | 107,901 | | | 62,317 | |
| Net income | | $ | 118,761 | | | $ | 68,930 | | | $ | 311,713 | | | $ | 170,473 | |
| | | | | | | | |
| Basic net income per share: | | | | | | | | |
| Common Stock | | $ | 12.67 | | | $ | 7.36 | | | $ | 33.25 | | | $ | 18.19 | |
| Weighted average number of Common Stock shares outstanding | | 8,369 | | | 7,141 | | | 8,032 | | | 7,141 | |
| | | | | | | | |
| Class B Common Stock | | $ | 12.67 | | | $ | 7.36 | | | $ | 33.29 | | | $ | 18.19 | |
| Weighted average number of Class B Common Stock shares outstanding | | 1,005 | | | 2,232 | | | 1,342 | | | 2,232 | |
| | | | | | | | |
| Diluted net income per share: | | | | | | | | |
| Common Stock | | $ | 12.63 | | | $ | 7.32 | | | $ | 33.13 | | | $ | 18.11 | |
| Weighted average number of Common Stock shares outstanding – assuming dilution | | 9,406 | | | 9,409 | | | 9,410 | | | 9,413 | |
| | | | | | | | |
| Class B Common Stock | | $ | 12.62 | | | $ | 7.31 | | | $ | 33.15 | | | $ | 18.10 | |
| Weighted average number of Class B Common Stock shares outstanding – assuming dilution | | 1,037 | | | 2,268 | | | 1,378 | | | 2,272 | |
| | | | | | | | |
| Cash dividends per share: | | | | | | | | |
| Common Stock | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.75 | | | $ | 0.75 | |
| Class B Common Stock | | $ | 0.25 | | | $ | 0.25 | | | $ | 0.75 | | | $ | 0.75 | |
See accompanying notes to condensed consolidated financial statements.
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net income | | $ | 118,761 | | | $ | 68,930 | | | $ | 311,713 | | | $ | 170,473 | |
| | | | | | | | |
| Other comprehensive income, net of tax: | | | | | | | | |
| Defined benefit plans reclassification including pension costs: | | | | | | | | |
| Actuarial gain | | 746 | | | 916 | | | 2,237 | | | 2,745 | |
| Prior service credits | | — | | | 1 | | | — | | | 2 | |
| Postretirement benefits reclassification including benefit costs: | | | | | | | | |
| Actuarial gain | | 69 | | | 140 | | | 207 | | | 419 | |
| Interest rate swap | | — | | | — | | | — | | | 556 | |
| Foreign currency translation adjustment | | — | | | (6) | | | — | | | (15) | |
| Other comprehensive income, net of tax | | 815 | | | 1,051 | | | 2,444 | | | 3,707 | |
| Comprehensive income | | $ | 119,576 | | | $ | 69,981 | | | $ | 314,157 | | | $ | 174,180 | |
See accompanying notes to condensed consolidated financial statements.
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | | | | | | | | | |
| (in thousands, except share data) | | September 30, 2022 | | December 31, 2021 |
| ASSETS | | | | |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 163,244 | | | $ | 142,314 | |
| Accounts receivable, trade | | 557,026 | | | 472,270 | |
| Allowance for doubtful accounts | | (15,617) | | | (17,336) | |
| Accounts receivable from The Coca‑Cola Company | | 46,745 | | | 57,737 | |
| Accounts receivable, other | | 70,168 | | | 33,878 | |
| Inventories | | 313,699 | | | 302,851 | |
| Prepaid expenses and other current assets | | 91,959 | | | 78,068 | |
| Assets held for sale | | 3,045 | | | 6,880 | |
| Total current assets | | 1,230,269 | | | 1,076,662 | |
| Property, plant and equipment, net | | 1,082,940 | | | 1,030,688 | |
| Right-of-use assets - operating leases | | 140,977 | | | 139,877 | |
| Leased property under financing leases, net | | 6,843 | | | 64,211 | |
| Other assets | | 112,474 | | | 120,486 | |
| Goodwill | | 165,903 | | | 165,903 | |
| Distribution agreements, net | | 848,257 | | | 836,777 | |
| Customer lists, net | | 9,615 | | | 10,966 | |
| Total assets | | $ | 3,597,278 | | | $ | 3,445,570 | |
| | | | |
| LIABILITIES AND EQUITY | | | | |
| Current Liabilities: | | | | |
| Current portion of obligations under operating leases | | $ | 26,465 | | | $ | 22,048 | |
| Current portion of obligations under financing leases | | 2,259 | | | 6,060 | |
| Accounts payable, trade | | 323,352 | | | 319,318 | |
| Accounts payable to The Coca‑Cola Company | | 189,885 | | | 145,671 | |
| Other accrued liabilities | | 207,250 | | | 226,769 | |
| Accrued compensation | | 121,592 | | | 110,894 | |
| Accrued interest payable | | 5,892 | | | 4,096 | |
| Total current liabilities | | 876,695 | | | 834,856 | |
| Deferred income taxes | | 147,976 | | | 136,432 | |
| Pension and postretirement benefit obligations | | 76,375 | | | 93,391 | |
| Other liabilities | | 750,814 | | | 758,610 | |
| Noncurrent portion of obligations under operating leases | | 119,617 | | | 122,046 | |
| Noncurrent portion of obligations under financing leases | | 8,110 | | | 65,006 | |
| Long-term debt | | 598,778 | | | 723,443 | |
| Total liabilities | | 2,578,365 | | | 2,733,784 | |
| Commitments and Contingencies | | | | |
| Equity: | | | | |
Common Stock, $1.00 par value: 30,000,000 shares authorized; 11,431,367 and 10,203,821 shares issued, respectively | | 11,431 | | | 10,204 | |
Class B Common Stock, $1.00 par value: 10,000,000 shares authorized; 1,632,810 and 2,860,356 shares issued, respectively | | 1,633 | | | 2,860 | |
| Additional paid-in capital | | 135,953 | | | 135,953 | |
| Retained earnings | | 1,029,169 | | | 724,486 | |
| Accumulated other comprehensive loss | | (98,019) | | | (100,463) | |
Treasury stock, at cost: Common Stock – 3,062,374 shares | | (60,845) | | | (60,845) | |
Treasury stock, at cost: Class B Common Stock – 628,114 shares | | (409) | | | (409) | |
| Total equity | | 1,018,913 | | | 711,786 | |
| Total liabilities and equity | | $ | 3,597,278 | | | $ | 3,445,570 | |
See accompanying notes to condensed consolidated financial statements.
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | |
| | First Nine Months |
| (in thousands) | | 2022 | | 2021 |
| Cash Flows from Operating Activities: | | | | |
| Net income | | $ | 311,713 | | | $ | 170,473 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation and amortization expense from property, plant and equipment and financing leases | | 110,661 | | | 117,910 | |
| Amortization of intangible assets and deferred proceeds, net | | 17,722 | | | 17,431 | |
| Fair value adjustment of acquisition related contingent consideration | | 21,132 | | | 90,905 | |
| Deferred payroll taxes under CARES Act | | (18,739) | | | (18,739) | |
| Deferred income taxes | | 10,749 | | | 10,907 | |
| Loss on sale of property, plant and equipment | | 2,855 | | | 4,017 | |
| Amortization of debt costs | | 768 | | | 790 | |
| Impairment and abandonment of property, plant and equipment | | — | | | 3,200 | |
| Change in current assets less current liabilities | | (61,657) | | | 60,546 | |
| Change in other noncurrent assets | | 27,806 | | | 10,355 | |
| Change in other noncurrent liabilities | | (28,701) | | | (27,920) | |
| Total adjustments | | 82,596 | | | 269,402 | |
| Net cash provided by operating activities | | $ | 394,309 | | | $ | 439,875 | |
| | | | |
| Cash Flows from Investing Activities: | | | | |
| Additions to property, plant and equipment | | $ | (183,929) | | | $ | (119,620) | |
| Acquisition of BODYARMOR distribution rights | | (30,149) | | | (1,998) | |
| Proceeds from the sale of property, plant and equipment | | 5,348 | | | 4,215 | |
| Investment in CONA Services LLC | | (1,538) | | | (2,194) | |
| Net cash used in investing activities | | $ | (210,268) | | | $ | (119,597) | |
| | | | |
| Cash Flows from Financing Activities: | | | | |
| Payments on term loan facility and senior notes | | $ | (125,000) | | | $ | (217,500) | |
| Payments of acquisition related contingent consideration | | (28,421) | | | (28,640) | |
| Cash dividends paid | | (7,030) | | | (7,030) | |
| Payments on financing lease obligations | | (2,441) | | | (3,567) | |
| Debt issuance fees | | (219) | | | (1,456) | |
| Borrowings under term loan facility | | — | | | 70,000 | |
| Payments on revolving credit facility | | — | | | (55,000) | |
| Borrowings under revolving credit facility | | — | | | 55,000 | |
| Net cash used in financing activities | | $ | (163,111) | | | $ | (188,193) | |
| | | | |
| Net increase in cash during period | | $ | 20,930 | | | $ | 132,085 | |
| Cash at beginning of period | | 142,314 | | | 54,793 | |
| Cash at end of period | | $ | 163,244 | | | $ | 186,878 | |
| | | | |
| Significant non-cash investing and financing activities: | | | | |
| Reductions to leased property under financing leases | | $ | 55,465 | | | $ | — | |
| Additions to property, plant and equipment accrued and recorded in accounts payable, trade | | 20,049 | | | 9,612 | |
| Right-of-use assets obtained in exchange for operating lease obligations | | 18,703 | | | 21,759 | |
See accompanying notes to condensed consolidated financial statements.
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands, except share data) | | Common
Stock | | Class B
Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Treasury
Stock - Common
Stock | | Treasury Stock - Class B Common Stock | | Total
Equity |
| Balance on July 1, 2022 | | $ | 11,431 | | | $ | 1,633 | | | $ | 135,953 | | | $ | 912,751 | | | $ | (98,834) | | | $ | (60,845) | | | $ | (409) | | | $ | 901,680 | |
| Net income | | — | | | — | | | — | | | 118,761 | | | — | | | — | | | — | | | 118,761 | |
| Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 815 | | | — | | | — | | | 815 | |
| Cash dividends paid: | | | | | | | | | | | | | | | | |
Common Stock ($0.25 per share) | | — | | | — | | | — | | | (2,092) | | | — | | | — | | | — | | | (2,092) | |
Class B Common Stock ($0.25 per share) | | — | | | — | | | — | | | (251) | | | — | | | — | | | — | | | (251) | |
| Balance on September 30, 2022 | | $ | 11,431 | | | $ | 1,633 | | | $ | 135,953 | | | $ | 1,029,169 | | | $ | (98,019) | | | $ | (60,845) | | | $ | (409) | | | $ | 1,018,913 | |
| | | | | | | | | | | | | | | | |
| Balance on December 31, 2021 | | $ | 10,204 | | | $ | 2,860 | | | $ | 135,953 | | | $ | 724,486 | | | $ | (100,463) | | | $ | (60,845) | | | $ | (409) | | | $ | 711,786 | |
| Net income | | — | | | — | | | — | | | 311,713 | | | — | | | — | | | — | | | 311,713 | |
| Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 2,444 | | | — | | | — | | | 2,444 | |
| Cash dividends paid: | | | | | | | | | | | | | | | | |
Common Stock ($0.75 per share) | | — | | | — | | | — | | | (5,970) | | | — | | | — | | | — | | | (5,970) | |
Class B Common Stock ($0.75 per share) | | — | | | — | | | — | | | (1,060) | | | — | | | — | | | — | | | (1,060) | |
Conversion of 1,227,546 shares of Class B Common Stock | | 1,227 | | | (1,227) | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance on September 30, 2022 | | $ | 11,431 | | | $ | 1,633 | | | $ | 135,953 | | | $ | 1,029,169 | | | $ | (98,019) | | | $ | (60,845) | | | $ | (409) | | | $ | 1,018,913 | |
| | | | | | | | | | | | | | | | |
| (in thousands, except share data) | | Common
Stock | | Class B
Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Treasury
Stock - Common
Stock | | Treasury Stock - Class B Common Stock | | Total
Equity |
| Balance on July 2, 2021 | | $ | 10,204 | | | $ | 2,860 | | | $ | 135,953 | | | $ | 641,136 | | | $ | (116,397) | | | $ | (60,845) | | | $ | (409) | | | $ | 612,502 | |
| Net income | | — | | | — | | | — | | | 68,930 | | | — | | | — | | | — | | | 68,930 | |
| Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 1,051 | | | — | | | — | | | 1,051 | |
| Cash dividends paid: | | | | | | | | | | | | | | | | |
Common Stock ($0.25 per share) | | — | | | — | | | — | | | (1,785) | | | — | | | — | | | — | | | (1,785) | |
Class B Common Stock ($0.25 per share) | | — | | | — | | | — | | | (558) | | | — | | | — | | | — | | | (558) | |
| Balance on October 1, 2021 | | $ | 10,204 | | | $ | 2,860 | | | $ | 135,953 | | | $ | 707,723 | | | $ | (115,346) | | | $ | (60,845) | | | $ | (409) | | | $ | 680,140 | |
| | | | | | | | | | | | | | | | |
| Balance on December 31, 2020 | | $ | 10,204 | | | $ | 2,860 | | | $ | 135,953 | | | $ | 544,280 | | | $ | (119,053) | | | $ | (60,845) | | | $ | (409) | | | $ | 512,990 | |
| Net income | | — | | | — | | | — | | | 170,473 | | | — | | | — | | | — | | | 170,473 | |
| Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 3,707 | | | — | | | — | | | 3,707 | |
| Cash dividends paid: | | | | | | | | | | | | | | | | |
Common Stock ($0.75 per share) | | — | | | — | | | — | | | (5,356) | | | — | | | — | | | — | | | (5,356) | |
Class B Common Stock ($0.75 per share) | | — | | | — | | | — | | | (1,674) | | | — | | | — | | | — | | | (1,674) | |
| Balance on October 1, 2021 | | $ | 10,204 | | | $ | 2,860 | | | $ | 135,953 | | | $ | 707,723 | | | $ | (115,346) | | | $ | (60,845) | | | $ | (409) | | | $ | 680,140 | |
See accompanying notes to condensed consolidated financial statements.
COCA‑COLA CONSOLIDATED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Critical Accounting Policies
The condensed consolidated financial statements include the accounts and the consolidated operations of Coca‑Cola Consolidated, Inc. and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the periods presented.
Each of the Company’s quarters, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The Company’s fourth quarter and fiscal year end on December 31 regardless of the day of the week on which December 31 falls. The condensed consolidated financial statements presented are:
•The financial position as of September 30, 2022 and December 31, 2021.
•The results of operations, comprehensive income and changes in stockholders’ equity for the three-month periods ended September 30, 2022 (the “third quarter” of fiscal 2022 (“2022”)) and October 1, 2021 (the “third quarter” of fiscal 2021 (“2021”)) and the nine-month periods ended September 30, 2022 (the “first nine months” of 2022) and October 1, 2021 (the “first nine months” of 2021).
•The changes in cash flows for the first nine months of 2022 and the first nine months of 2021.
The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for 2021 filed with the United States Securities and Exchange Commission (the “SEC”).
The preparation of condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical Accounting Estimates
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of its results of operations and financial position in the preparation of its condensed consolidated financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for 2021 under the caption “Discussion of Critical Accounting Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” a discussion of the Company’s most critical accounting estimates, which are those the Company believes to be the most important to the portrayal of its financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Any changes in critical accounting estimates are discussed with the Audit Committee of the Company’s Board of Directors during the quarter in which a change is contemplated and prior to making such change.
2. Related Party Transactions
The Coca‑Cola Company
The Company’s business consists primarily of the distribution, marketing and manufacture of nonalcoholic beverages of The Coca‑Cola Company, which is the sole owner of the formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.
On March 17, 2022, the Company entered into a stockholder conversion agreement (the “Stockholder Conversion Agreement”) with the JFH Family Limited Partnership—SW1, the Anne Lupton Carter Trust f/b/o Sue Anne H. Wells, the JFH Family Limited Partnership—DH1 and the Anne Lupton Carter Trust f/b/o Deborah S. Harrison (collectively, the “Converting Stockholders”),
pursuant to which the Company and the Converting Stockholders agreed upon the process for converting an aggregate of 1,227,546 shares of the Company’s Class B Common Stock owned by the Converting Stockholders on a one share for one share basis into shares of the Company’s Common Stock, effective as of March 17, 2022 (the “Converted Shares”). In the Stockholder Conversion Agreement, the Company agreed to cause the Converted Shares to be registered for resale pursuant to the Company’s existing automatic shelf registration statement and the Converting Stockholders agreed to certain restrictions on their resale of the Converted Shares, including a trade volume limitation that prohibits the sale of more than 175,000 of the Converted Shares in the aggregate during any three-consecutive month period. On June 21, 2022, the Company filed a prospectus supplement with the SEC pursuant to the Company’s existing automatic shelf registration statement, registering the Converted Shares for resale by the Converting Stockholders. The Company will not receive any proceeds from any resale of the Converted Shares by the Converting Stockholders.
J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, controls 1,004,394 shares of the Company’s Class B Common Stock, which represent approximately 71% of the total voting power of the Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis. In addition, other members of the Harrison family control shares of the Company’s Common Stock representing approximately 4% of the total voting power of the Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis.
As of September 30, 2022, The Coca‑Cola Company owned shares of the Company’s Common Stock representing approximately 9% of the total voting power of the Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis. The number of shares of the Company’s Common Stock currently held by The Coca‑Cola Company gives it the right to have a designee proposed by the Company for nomination to the Company’s Board of Directors in the Company’s annual proxy statement. J. Frank Harrison, III and the trustees of certain trusts established for the benefit of descendants of the late J. Frank Harrison, Jr., have agreed to vote the shares of the Company’s Class B Common Stock and Common Stock that they control in favor of such designee. The Coca‑Cola Company does not own any shares of the Company’s Class B Common Stock.
The following table summarizes the significant cash transactions between the Company and The Coca‑Cola Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Payments made by the Company to The Coca-Cola Company(1) | | $ | 481,021 | | | $ | 403,889 | | | $ | 1,411,300 | | | $ | 1,120,042 | |
| Payments made by The Coca-Cola Company to the Company | | 67,540 | | | 51,024 | | | 187,810 | | | 131,026 | |
(1)This excludes acquisition related sub-bottling payments made by the Company to Coca-Cola Refreshments USA, Inc., a wholly owned subsidiary of The Coca‑Cola Company, but includes the purchase price of certain additional BODYARMOR distribution rights, each as discussed below.
On January 1, 2022, the Company entered into an agreement to acquire $30.1 million of additional BODYARMOR distribution rights with an estimated useful life of 40 years.
More than 80% of the payments made by the Company to The Coca‑Cola Company were for concentrate, syrup, sweetener and other finished goods products, which were recorded in cost of sales in the condensed consolidated statements of operations and represent the primary components of the soft drink products the Company manufactures and distributes. Payments made by the Company to The Coca‑Cola Company also included payments for marketing programs associated with large, national customers managed by The Coca‑Cola Company on behalf of the Company, which were recorded as a reduction to net sales in the condensed consolidated statements of operations. Other payments made by the Company to The Coca‑Cola Company related to cold drink equipment parts, fees associated with the rights to distribute certain brands and other customary items.
Payments made by The Coca‑Cola Company to the Company included annual funding in connection with the Company’s agreement to support certain business initiatives developed by The Coca‑Cola Company and funding associated with the delivery of post-mix products to various customers, both of which were recorded as a reduction to cost of sales in the condensed consolidated statements of operations. 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. Payments made by The Coca‑Cola Company to the Company also included transportation services and fountain product delivery and equipment repair services performed by the Company on The Coca‑Cola Company’s equipment, all of which were recorded in net sales in the condensed consolidated statements of operations.
Coca‑Cola Refreshments USA, Inc. (“CCR”)
The Company, The Coca‑Cola Company and CCR entered into comprehensive beverage agreements (collectively, the “CBA”), related to a multi-year series of transactions, which were completed in October 2017, through which the Company acquired and exchanged distribution territories and manufacturing plants (the “System Transformation”). The CBA requires the Company to make quarterly sub-bottling payments to CCR on a continuing basis in exchange for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in certain distribution territories the Company acquired from CCR. These sub-bottling payments are based on gross profit derived from the Company’s sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, a beverage product or certain cross-licensed brands applicable to the System Transformation (“acquisition related sub-bottling payments”).
Acquisition related sub-bottling payments to CCR were $28.4 million in the first nine months of 2022 and $28.6 million in the first nine months of 2021. The following table summarizes the liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future expected acquisition related sub‑bottling payments to CCR:
| | | | | | | | | | | | | | |
| (in thousands) | | September 30, 2022 | | December 31, 2021 |
| Current portion of acquisition related contingent consideration | | $ | 33,186 | | | $ | 51,518 | |
| Noncurrent portion of acquisition related contingent consideration | | 503,730 | | | 490,587 | |
| Total acquisition related contingent consideration | | $ | 536,916 | | | $ | 542,105 | |
Southeastern Container (“Southeastern”)
The Company is a shareholder of Southeastern, a plastic bottle manufacturing cooperative. The Company accounts for Southeastern as an equity method investment. The Company’s investment in Southeastern, which was classified as other assets in the condensed consolidated balance sheets, was $21.8 million as of September 30, 2022 and $21.7 million as of December 31, 2021.
South Atlantic Canners, Inc. (“SAC”)
The Company is a shareholder of SAC, a manufacturing cooperative located in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights. The Company accounts for SAC as an equity method investment. The Company’s investment in SAC, which was classified as other assets in the condensed consolidated balance sheets, was $8.2 million as of both September 30, 2022 and December 31, 2021. The Company also guarantees a portion of SAC’s debt; see Note 20 for additional information.
The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Proceeds from management fees received from SAC, which were recorded as a reduction to cost of sales in the condensed consolidated statements of operations, were $6.7 million in the first nine months of 2022 and $6.6 million in the first nine months of 2021.
Coca‑Cola Bottlers’ Sales & Services Company LLC (“CCBSS”)
Along with all other Coca‑Cola bottlers in the United States and Canada, the Company is a member of CCBSS, a company formed to provide certain procurement and other services with the intention of enhancing the efficiency and competitiveness of the Coca‑Cola bottling system. The Company accounts for CCBSS as an equity method investment and its investment in CCBSS is not material.
CCBSS negotiates the procurement for the majority of the Company’s raw materials, excluding concentrate, and the Company receives a rebate from CCBSS for the purchase of these raw materials. The Company had rebates due from CCBSS of $40.5 million on September 30, 2022 and $7.9 million on December 31, 2021, which were classified as accounts receivable, other in the condensed consolidated balance sheets. Changes in rebates receivable relate to volatility in raw material prices and the timing of cash receipts of rebates.
In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $1.9 million in the first nine months of 2022 and $2.2 million in the first nine months of 2021, which were classified as selling, delivery and administrative (“SD&A”) expenses in the condensed consolidated statements of operations.
CONA Services LLC (“CONA”)
The Company is a member of CONA, an entity formed with The Coca‑Cola Company and certain other Coca‑Cola bottlers to provide business process and information technology services to its members. The Company accounts for CONA as an equity method investment. The Company’s investment in CONA, which was classified as other assets in the condensed consolidated balance sheets, was $16.3 million as of September 30, 2022 and $13.7 million as of December 31, 2021.
Pursuant to an amended and restated master services agreement with CONA, the Company is authorized to use the Coke One North America system (the “CONA System”), a uniform information technology system developed to promote operational efficiency and uniformity among North American Coca‑Cola bottlers. In exchange for the Company’s rights to use the CONA System and receive CONA-related services, it is charged service fees by CONA. The Company incurred service fees to CONA of $19.9 million in the first nine months of 2022 and $18.9 million in the first nine months of 2021.
Related Party Leases
The Company leases its headquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation, of which J. Frank Harrison, III is the majority stockholder and Morgan H. Everett, Vice Chair of the Company’s Board of Directors, is a minority stockholder. The annual base rent the Company is obligated to pay under this lease is subject to an adjustment for an inflation factor and the lease expires on December 31, 2029. The principal balance outstanding under this lease was $26.2 million on September 30, 2022 and $28.2 million on December 31, 2021.
The Company previously leased the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina (together, the “Snyder Production Center”) from Harrison Limited Partnership One (“HLP”), which is directly and indirectly owned by trusts of which J. Frank Harrison, III and Sue Anne H. Wells, a former director of the Company, are trustees and beneficiaries and of which Morgan H. Everett is a permissible, discretionary beneficiary. On March 17, 2022, CCBCC Operations, LLC (“Operations”), a wholly owned subsidiary of the Company, entered into a definitive purchase and sale agreement with HLP, pursuant to which Operations purchased the Snyder Production Center from HLP on such date for a purchase price of $60.0 million. This lease, which was scheduled to expire on December 31, 2035, was terminated in connection with the purchase of the Snyder Production Center by Operations. There was no principal balance outstanding under this lease on September 30, 2022 and there was a principal balance outstanding of $59.1 million on December 31, 2021.
A summary of rental payments for these leases related to the third quarter and the first nine months of 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Company headquarters | | $ | 963 | | | $ | 944 | | | $ | 2,890 | | | $ | 2,834 | |
| Snyder Production Center | | — | | | 1,112 | | | 927 | | | 3,338 | |
Long-Term Performance Equity Plan
The Long-Term Performance Equity Plan compensates J. Frank Harrison, III based on the Company’s performance. Awards granted to Mr. Harrison under the Long-Term Performance Equity Plan are earned based on the Company’s attainment during a performance period of certain performance measures, each as specified by the Compensation Committee of the Company’s Board of Directors. These awards may be settled in cash and/or shares of the Company’s Class B Common Stock, based on the average of the closing prices of shares of the Company’s Common Stock during the last 20 trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which was included in SD&A expenses in the condensed consolidated statements of operations, was $2.3 million and $2.1 million in the third quarter of 2022 and the third quarter of 2021, respectively, and $7.9 million and $7.6 million in the first nine months of 2022 and the first nine months of 2021, respectively.
3. Revenue Recognition
The Company’s 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.
The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Generally, the Company’s service contracts and contracts related to the delivery of specifically identifiable products have a single performance obligation. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time (“point in time”). Point in time sales accounted for approximately 97% of the Company’s net sales in both the first nine months of 2022 and the first nine months of 2021.
Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time (“over time”). Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the condensed consolidated financial statements.
The following table represents a disaggregation of revenue from contracts with customers:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Point in time net sales: | | | | | | | | |
| Nonalcoholic Beverages - point in time | | $ | 1,587,771 | | | $ | 1,415,643 | | | $ | 4,500,277 | | | $ | 4,029,846 | |
| Total point in time net sales | | $ | 1,587,771 | | | $ | 1,415,643 | | | $ | 4,500,277 | | | $ | 4,029,846 | |
| | | | | | | | |
| Over time net sales: | | | | | | | | |
| Nonalcoholic Beverages - over time | | $ | 12,294 | | | $ | 11,328 | | | $ | 35,023 | | | $ | 32,130 | |
| All Other - over time | | 28,524 | | | 30,461 | | | 92,862 | | | 98,399 | |
| Total over time net sales | | $ | 40,818 | | | $ | 41,789 | | | $ | 127,885 | | | $ | 130,529 | |
| | | | | | | | |
| Total net sales | | $ | 1,628,589 | | | $ | 1,457,432 | | | $ | 4,628,162 | | | $ | 4,160,375 | |
The Company’s allowance for doubtful accounts in the condensed consolidated balance sheets includes a reserve for customer returns and an allowance for credit losses. The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers. Returned product is recognized as a reduction to net sales. The Company’s reserve for customer returns was $3.0 million as of both September 30, 2022 and December 31, 2021.
The Company estimates an allowance for credit losses, based on historic days’ sales outstanding trends, aged customer balances, previously written-off balances and expected recoveries up to balances previously written off, in order to present the net amount expected to be collected. Accounts receivable balances are written off when determined uncollectible and are recognized as a reduction to the allowance for credit losses. Following is a summary of activity for the allowance for credit losses during the first nine months of 2022 and the first nine months of 2021:
| | | | | | | | | | | | | | |
| | First Nine Months |
| (in thousands) | | 2022 | | 2021 |
| Beginning balance - allowance for credit losses | | $ | 14,336 | | | $ | 18,070 | |
| Additions charged to expenses and as reductions to net sales | | 1,987 | | | 2,619 | |
| Deductions | | (3,706) | | | (7,079) | |
| Ending balance - allowance for credit losses | | $ | 12,617 | | | $ | 13,610 | |
4. Segments
The Company evaluates segment reporting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operating Decision Maker (the “CODM”). The Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM.
The Company believes three operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.”
The Company’s segment results are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Third Quarter | | First Nine Months |
| (in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Net sales: | | | | | | | | |
| Nonalcoholic Beverages | | $ | 1,600,065 | | | $ | 1,426,971 | | | $ | 4,535,300 | | | $ | 4,061,976 | |
| All Other | | 101,136 | | | 88,991 | | | 303,209 | | | 272,132 | |
Eliminations(1) | | (72,612) | | | (58,530) | | | (210,347) | | | (173,733) | |
| Consolidated net sales | | $ | 1,628,589 | | | $ | 1,457,432 | | | $ | 4,628,162 | | | $ | 4,160,375 | |
| | | | | | | | |
| Income from operations: | | | | | | | | |
| Nonalcoholic Beverages | | $ | 189,218 | | | $ | 144,130 | | | $ | 467,788 | | | $ | 363,544 | |
| All Other | | 712 | | | (7,099) | | | 420 | | | (11,468) | |
| Consolidated income from operations | | $ | 189,930 | | | $ | 137,031 | | | $ | 468,208 | | | $ | 352,076 | |
| | | | | | | | |
| Depreciation and amortization: | | | | | | | | |
| Nonalcoholic Beverages | | $ | 39,578 | | | $ | 44,313 | | | $ | 119,635 | | | |
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