COCA-COLA CONSOLIDATED, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ofCoca-Cola Consolidated, Inc. , aDelaware corporation (together with its majority-owned subsidiaries, the "Company," "we," "us" or "our"), should be read in conjunction with the condensed consolidated financial statements of the Company and the accompanying notes to the condensed consolidated financial statements.
The Company's fiscal year generally ends on the Sunday closest to
•The financial position as ofJune 28, 2020 andDecember 29, 2019 . •The results of operations and comprehensive income for the 13-week periods endedJune 28, 2020 (the "second quarter" of fiscal 2020 ("2020")) andJune 30, 2019 (the "second quarter" of fiscal 2019 ("2019")), and the 26-week periods endedJune 28, 2020 (the "first half" of 2020) andJune 30, 2019 (the "first half" of 2019). •The changes in cash flows and equity for the first half of 2020 and the first half of 2019.
All comparisons are to the corresponding period in the prior year unless specified otherwise.
The condensed consolidated financial statements include the consolidated
operations of the Company and its majority-owned subsidiaries, including
Our Business and the Nonalcoholic Beverage Industry
We distribute, market and manufacture nonalcoholic beverages in territories spanning 14 states and theDistrict 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 inthe 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, includingBA Sports Nutrition, LLC ("BodyArmor"), Keurig Dr Pepper Inc. ("Dr Pepper") andMonster Energy Company . Our purpose is to honor God, to serve others, to pursue excellence and to grow profitably. Our stock is traded on the NASDAQ Global Select Market under the symbol "COKE." We offer a range of nonalcoholic beverage products and flavors designed to meet the demands of our consumers, including both sparkling and still beverages. 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, 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. Other sales include sales to other Coca-Cola bottlers, "post-mix" products, 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. 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. The Company's products are sold and distributed inthe United States through various channels, which include selling directly to retail stores and other outlets such as food markets, institutional accounts and 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 29 -------------------------------------------------------------------------------- space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition. Business seasonality results primarily from higher unit sales of the Company's products in the second and third quarters of the fiscal year. 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.
COVID-19 Impact on Customer, Teammate and Community Safety
The Company continues to diligently monitor the impact of the COVID-19 pandemic on all aspects of its business, including the impact on its customers, teammates, suppliers and distribution network. Our business has been recognized by theUnited States Department of Homeland Security and state and local governments in the communities in which we operate as "essential," as all of our teammates support beverage manufacturing and distribution.
The Company has taken the following actions to protect our customers, teammates and communities, while it continues to manufacture and distribute its products:
•We continue to execute our Infectious Disease Response Plan and Incident Management Crisis Response protocols as the macro environment moves through the Response, Reopen and Recovery phases of the COVID-19 pandemic. •We have established a cross-functionalHealth & Wellness Task Force to manage and monitor all risk mitigation and safety activities related to COVID-19. In addition, a subset of leaders from theHealth & Wellness Task Force conducts case management activities that follow prescribed company and other accepted standards (e.g.,Centers for Disease Control and Prevention ("CDC") and local health authorities). •We have established a process for the reporting of COVID-19 symptoms, exposures, and positive test results of teammates and of incidents in our customer accounts that our teammates have serviced. This reporting process enables the Company to follow appropriate quarantine protocols and to communicate to our workforce in a timely and appropriate manner. •We have increased our communications with our teammates through podcasts, meetings, videos and emails about safety protocols, Personal Protective Equipment ("PPE"), such as disposable gloves and masks, andCDC requirements and recommendations. •We have increased our sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations. •We have promoted hygiene practices recommended by theCDC , including social distancing requiring six or more feet between teammates where possible, and staggered work start and stop times and lunch breaks. •We have utilized daily health and wellness monitoring, PPE and other measures to promote workplace safety and remain in compliance with local or state regulatory requirements. •We have restricted access to our facilities for non-essential visitors, vendors and contractors. For essential visitors, vendors and contractors we require health and wellness certifications to be completed and the use of PPE as the Company deems appropriate. •We have restricted business travel to "essential travel" to curtail exposure risks for all teammates. •We have provided sanitation solution and supplies for our front-line teammates who interact with our products, customers, communities and office environments. •We have implemented work-from-home routines for teammates whose work duties permit it and are utilizing virtual technology to replace many of our in-person meetings. •We have developed a comprehensive Return to Office Program of Guidelines to manage a phased, measured approach and to prepare our higher density locations with safety modifications, signage, and process changes to promote a safe work environment. •We have offered our teammates 40 hours of supplemental sick time for non-exempt teammates to encourage our teammates to stay home if they or their family members are experiencing COVID-19 symptoms. •We have modified our healthcare plans for COVID-19-related events to cover the costs of COVID-19 treatment to remove a barrier for our teammates to receive care if they are experiencing symptoms. •We have worked with state and local elected officials in order to quickly implement newly enacted state and local government regulatory safety requirements and guidelines.
Executive Summary for the Second Quarter of 2020
Physical case volume increased 0.6% in the second quarter of 2020. COVID-19-related stay-at-home orders resulted in extreme volatility in our revenue and physical case sales during the quarter as the shift towards multi-serve packages sold in larger retail
30
--------------------------------------------------------------------------------
stores caused by the closure of on-premise outlets that started during March
continued during the second quarter of 2020. Volume was strong in our Sparkling
category, increasing 3.7% in the second quarter of 2020. Still beverage volume
declined 6.6%, as convenience retail and on-premise outlets were negatively
impacted by less consumer traffic. Our Still beverage portfolio relies more
heavily on single serve sales in our small stores and accounts where our
products are consumed on-premise. Consumer demand was highly volatile during the
quarter but improved sequentially as stay-at-home orders were lifted and local
economies re-opened. Our bottle/can physical case sales volume monthly
growth/(decline) compared to the same month of 2019 was (6.1)%, 1.9% and 4.7%
for April, May and June 2020 , respectively. We don't expect the demand
experienced in June to sustain itself in future months, but we are encouraged by
the volume growth generated in the second quarter of 2020.
Revenue decreased 3.6% in the second quarter of 2020. Revenue from our
bottle/can Sparkling beverages increased 4.4% in the second quarter of 2020,
driven primarily by volume growth and price realization within this category.
Revenue from our Still beverages declined 4.7% in the second quarter of 2020 as
a result of lower sales volume in small store and on-premise outlets. Revenue
from fountain syrup, which is primarily sold through restaurants, convenience
stores, amusement parks and other on-premise outlets, declined $29.3 million , or
56.6%, during the second quarter of 2020. The significant decline in fountain
syrup revenue is a direct result of the previously mentioned stay-at-home
orders. For the first half of 2020, revenue increased $23.7 million , or 1.0%.
While sales within our Sparkling and Still categories grew 5.1% and 2.2% for the
first half of 2020, respectively, fountain syrup sales decreased 32.8%.
Gross profit decreased $6.5 million , or 1.5%, in the second quarter of 2020,
while gross margin increased 80 basis points to 35.0%, primarily driven by a
shift in our product mix to Sparkling take home packages which generally carry a
lower per case gross profit than immediate consumption packages. The negative
mix impact was partially offset by commodity price favorability and favorable
manufacturing costs. On an adjusted basis, as defined in the "Adjusted Non-GAAP
Results" section below, gross profit declined $13.2 million , or 3.0%, in the
second quarter of 2020. Adjusted gross margin increased 20 basis points to 34.9%
primarily as a result of favorable commodity prices. Gross profit for the first
half of 2020 increased $9.5 million , or 1.2%. On an adjusted basis, gross profit
increased $8.8 million compared to the first half of 2019,while adjusted gross
margin was 34.8%, consistent with the prior year period.
Selling, delivery and administrative ("SD&A") expenses in the second quarter of
2020 decreased $22.4 million , or 6.1%. SD&A expenses as a percentage of net
sales decreased 70 basis points in the second quarter of 2020. Adjusted SD&A
expenses in the second quarter of 2020 decreased $17.4 million , or 4.8%. The
decrease in SD&A expenses relates to lower labor costs as a result of
adjustments we made to our operating model in response to COVID-19-related
impacts on our business. In April, we furloughed approximately 700 employees,
most of whom returned to work in mid-June. We estimate these furloughs resulted
in approximately $6.0 million of payroll savings for the second quarter of 2020.
Additionally, we generated favorable results in a number of expense categories
due to reductions in local market activity and diligent management of our
variable operating expenses. SD&A expenses in the first half of 2020 decreased
$19.1 million or 2.6%. SD&A expenses as a percentage of net sales decreased 110
basis points in the first half of 2020 as compared to the first half of 2019.
Income from operations in the second quarter of 2020 was $83.1 million , compared
to $67.2 million in the second quarter of 2019, an increase of 23.7%. Adjusted
income from operations in the second quarter of 2020 was $81.7 million , an
increase of 5.4% For the first half of 2020, income from operations increased
$28.6 million to $115.9 million . Adjusted income from operations in the first
half of 2020 was $118.5 million , an increase of $20.2 million , or 20.5% compared
to the first half of 2019.
Net income in the second quarter of 2020 was $39.6 million , compared to
$15.4 million in the second quarter of 2019, an improvement of $24.2 million .
Net income for the second quarter of 2020 was adversely impacted by fair value
adjustments to our acquisition related contingent consideration liability,
driven by changes in future cash flow projections. Fair value adjustments to
this liability are non-cash in nature and a routine part of our quarterly
financial closing process. Net income increased $45.7 million for the first half
of 2020 to $54.2 million as compared to the first half of 2019.
Cash flows provided by operations for the first half of 2020 were $229.0
million , compared to $88.6 million for the first half of 2019. The significant
increase in operating cash flows for the first half of 2020 was primarily a
result of our strong operating performance and working capital improvement,
primarily related to a reduction in inventory related to the June sales trends,
the timing of accounts payable and the deferral of payroll taxes permitted under
the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act").
We do not currently expect the COVID-19 pandemic to materially impact our
liquidity position or access to capital in the short term. Our revolving credit
facility matures on June 8, 2023 and has an aggregate maximum borrowing capacity
of $500 million , which may be increased at the Company's option to $750 million ,
subject to obtaining commitments from the lenders and
31--------------------------------------------------------------------------------
satisfying other conditions specified in the credit agreement. We had no
borrowings under the revolving credit facility as of
Our supply chain is dependent on several key raw materials, including aluminum, PET resin and high-fructose corn syrup. As overall beverage consumption continues to shift from restaurants and on-premise locations to homes during the COVID-19 pandemic, the supply of aluminum cans has tightened. Further, many new product offerings within the beverage industry, both alcoholic and non-alcoholic, are coming to the market in cans. During the pandemic, consumers appear to be favoring the portability and storability of cans as they spend more time at home. We have made changes to our typical sourcing model and product offerings to address the supply constraints for can production. Specifically, we have sourced cans from international locations and have limited our can product package offerings. We will continue to monitor and react as needed to the limited supply of cans in the marketplace. We do not expect any material impairments or adjustments to the fair value of our assets as a result of the COVID-19 pandemic. Through the normal course of business, we have assessed the collectability of our receivables and have recorded any expected losses as ofJune 28, 2020 . During the second quarter of 2020, we recorded a$3.5 million reserve against our accounts receivable balance to address the COVID-19-related collectability risk for primarily our on-premise customers. The charge related to this additional reserve is included in SD&A expenses for the second quarter of 2020. Further, there have been no triggering events identified during the second quarter of 2020 that would indicate an impairment of our goodwill, intangible assets and long-lived assets. We will continue to monitor the valuation of our assets and the collectability of our receivables and record any adjustments as necessary.
We have assessed the COVID-19-related circumstances around work routines, including remote work arrangements, and their impact on our internal controls over financial reporting. We do not anticipate any material impact to our control procedures that would materially affect our internal controls over financial reporting.
Areas of Emphasis
Key priorities for the Company include commercial execution, revenue management, supply chain optimization and cash flow generation.
Commercial Execution: Our success is dependent on our ability to execute our commercial strategy within our customers' stores. Our ability to obtain shelf space within stores and remain in-stock across our portfolio of brands and packages in a profitable manner will have a significant impact on our results. We are focused on execution at every step in our supply chain, including raw material and finished goods procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur. We are investing in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and drive value in our business for the long term. Revenue Management: Our revenue management strategy focuses on the optimal pricing of our brands and packages within product categories and channels, creating effective working relationships with our customers, and disciplined fact-based decision-making. 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: InOctober 2017 , we completed a multi-year series of transactions through which we acquired and exchanged distribution territories and manufacturing facilities (the "System Transformation"). We are focused on optimizing our supply chain as we continue to integrate the acquired territories and facilities into our operations. We are in the process of integrating ourMemphis, Tennessee production center with ourWest Memphis, Arkansas operations, which is expected to greatly expand ourWest Memphis production capabilities and to reduce our overall production costs. Additionally, we are planning to consolidate ourAnderson ,Bloomington ,Lafayette ,Shelbyville andSpeedway, Indiana warehousing and distribution operations into a new facility inWhitestown, Indiana by the spring of 2021. This increased space and capacity will allow us to expand our operations and better serve our customers and consumers inIndiana and the surrounding areas. We will continue to look for opportunities to invest in our supply chain to optimize our costs.
Cash Flow Generation: Cash flow generation continues to be a key focus area for us. We have several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures, as we continue to prioritize debt repayment and to focus on strengthening our balance sheet.
32--------------------------------------------------------------------------------
Results of Operations
Second Quarter Results
The Company's results of operations for the second quarter of 2020 and the
second quarter of 2019 are summarized in the table below and discussed in the
following paragraphs.
Second Quarter
(in thousands) 2020 2019 Change
Net sales $ 1,227,215 $ 1,273,659 $ (46,444)
Cost of sales 797,914 837,880 (39,966)
Gross profit 429,301 435,779 (6,478)
Selling, delivery and administrative expenses 346,183 368,565 (22,382)
Income from operations 83,118 67,214 15,904
Interest expense, net 9,184 11,995 (2,811)
Other expense, net 16,134 31,181 (15,047)
Income before income taxes 57,800 24,038 33,762
Income tax expense 15,187 7,182 8,005
Net income 42,613 16,856 25,757
Less: Net income attributable to noncontrolling interest 3,044 1,486 1,558
Net income attributable to
$ 15,370 $ 24,199 Other comprehensive income, net of tax 971 593 378 Comprehensive income attributable to Coca-Cola Consolidated, Inc.$ 40,540 $ 15,963 $ 24,577
Items Impacting Operations and Financial Condition
Second Quarter 2020
•$14.5 million recorded in other expense, net as a result of an increase in the fair value of the Company's acquisition related contingent consideration liability; •$2.1 million in pre-tax unfavorable mark-to-market adjustments related to the Company's commodity hedging program; and •$0.6 million of net expense related to the impairment and accelerated depreciation of property, plant and equipment as the Company continues to optimize the efficiency of its supply chain.
Second Quarter 2019
•$29.2 million recorded in other expense, net as a result of an increase in the
fair value of the Company's acquisition related contingent consideration
liability;
•$4.9 million in pre-tax favorable mark-to-market adjustments related to the
Company's commodity hedging program;
•$2.2 million of expenses related to the System Transformation transactions, the
majority of which were information technology-related costs; and
•$1.9 million adjustment to reflect the prospective change of increasing the
capitalization thresholds on certain low-cost, short-lived assets.
33--------------------------------------------------------------------------------
Net sales decreased
Second Quarter 2020 Attributable to:
$ (34.2) Decrease in net sales primarily driven by a decrease in fountain syrup
sales mainly sold in on-premise outlets impacted by COVID-19-related
stay-at-home orders and closures
(9.4) Decrease in sales volume to other Coca-Cola bottlers
(2.8) Other
$ (46.4) Total decrease in net sales
Net sales by product category were as follows:
Second Quarter
(in thousands) 2020 2019 % Change
Bottle/can sales:
Sparkling beverages $ 694,162 $ 664,906 4.4 %
Still beverages 397,045 416,568 (4.7) %
Total bottle/can sales 1,091,207 1,081,474 0.9 %
Other sales:
Sales to other Coca-Cola bottlers 79,904 89,278 (10.5) %
Post-mix and other 56,104 102,907 (45.5) %
Total other sales 136,008 192,185 (29.2) %
Total net sales $ 1,227,215 $ 1,273,659 (3.6) %
Product category sales volume of physical cases as a percentage of total
bottle/can sales volume and the percentage change by product category were as
follows:
Bottle/Can Sales Volume
Second Quarter Bottle/Can Sales
Product Category 2020 2019 Volume % Change
Sparkling beverages 72.0 % 69.8 % 3.7 %
Still beverages 28.0 % 30.2 % (6.6) %
Total bottle/can sales volume 100.0 % 100.0 % 0.6 %
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 to conform with current period categorization. Any
differences are not material.
Cost of Sales
Inputs representing a substantial portion of the Company's cost of sales
include: (i) purchases of finished products, (ii) raw material costs, including
aluminum cans, plastic bottles 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 goods from manufacturing facilities 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.
34
--------------------------------------------------------------------------------
Cost of sales decreased $40.0 million , or 4.8%, to $797.9 million in the second
quarter of 2020, as compared to $837.9 million in the second quarter of 2019.
The decrease in cost of sales was primarily attributable to the following (in
millions):
Second Quarter 2020 Attributable to:
$ (26.0) Decrease in cost of sales primarily driven by a decrease in fountain
syrup sales mainly sold in on-premise outlets impacted by
COVID-19-related stay-at-home orders andclosures, a favorable commodity
environment and lower manufacturing costs
(9.8) Decrease in sales volume to other Coca-Cola bottlers
(6.1) Decrease in cost of sales due to changes in the fair value adjustments
on commodity hedges
1.9 Other
$ (40.0) Total decrease in cost of sales
The Company relies extensively on advertising and sales promotion 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 to promote sales in the
Company's territories. Certain of the marketing expenditures by
The Coca-Cola Company and other beverage companies are made pursuant to annual
arrangements. The Company also benefits from national advertising programs
conducted by The Coca-Cola Company and other beverage companies. 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 $26.3 million in the second quarter of 2020, as compared
to $34.7 million in the second quarter of 2019.
The Company's cost of sales may not be comparable to other peer companies, as
some peer companies include all costs related to their distribution network in
cost of sales. The Company includes a portion of these costs in SD&A expenses,
as described below.
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 intangibles and administrative support labor and operating costs. SD&A expenses decreased by$22.4 million , or 6.1%, to$346.2 million in the second quarter of 2020, as compared to$368.6 million in the second quarter of 2019. SD&A expenses as a percentage of net sales decreased to 28.2% in the second quarter of 2020 from 28.9% in the second quarter of 2019. The decrease in SD&A expenses was primarily attributable to the following (in millions): Second Quarter 2020 Attributable to:$ (13.1) Decrease in payroll costs and employee benefits including bonuses and incentives, primarily as a result of the furloughs of 700 teammates during the majority of the second quarter of 2020 and structural changes made to certain portions of our business (8.6) Decrease in a number of expense categories due to reductions in discretionary spending, including travel and entertainment and local marketing activities (2.2) Decrease in System Transformation transaction expenses 1.5 Other$ (22.4) Total decrease in SD&A expenses The Company has three primary delivery systems: (i) bulk delivery for large supermarkets, mass merchandisers and club stores, (ii) advanced sale delivery for convenience stores, drug stores, small supermarkets and on-premise accounts and (iii) full-service delivery for its full-service vending customers. Shipping and handling costs related to the movement of finished goods from manufacturing locations to distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished goods from distribution centers to customer locations, including distribution center warehousing costs, totaled$149.1 million in the second quarter of 2020 and$155.8 million in the second quarter of 2019. 35
--------------------------------------------------------------------------------
Interest Expense, Net
Interest expense, net decreased$2.8 million , or 23.4%, to$9.2 million in the second quarter of 2020, as compared to$12.0 million in the second quarter of 2019. The decrease was primarily a result of lower average interest rates and lower average debt balances. Other Expense, Net
A summary of other expense, net is as follows:
Second Quarter
(in thousands) 2020 2019
Increase in the fair value of the acquisition related contingent consideration liability
$ 14,548 $ 29,222 Non-service cost component of net periodic benefit cost 1,586 1,959 Total other expense, net$ 16,134 $ 31,181 Each reporting period, the Company adjusts its contingent consideration liability related to the distribution territories subject to sub-bottling fees to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the Company's comprehensive beverage agreement, which extend through the life of the applicable distribution assets, using the Company's estimated weighted average cost of capital ("WACC"), which is impacted by many factors, including long-term interest rates and projections of future cash flows. The life of these distribution assets is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis. The increase in the fair value of the acquisition related contingent consideration liability during the second quarter of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees. The increase in the fair value of the acquisition related contingent consideration liability during the second quarter of 2019 was primarily driven by a decrease in the discount rate and changes in future cash flow projections of the distribution territories subject to sub-bottling fees.
Income Tax Expense
The Company's effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 26.3% for the second quarter of 2020 and 29.9% for the second quarter of 2019. The decrease in the effective income tax rate was primarily driven by improved financial results. The Company's effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 27.7% for the second quarter of 2020 and 31.8% for the second quarter of 2019. Noncontrolling Interest
The Company recorded net income attributable to noncontrolling interest of
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was
36--------------------------------------------------------------------------------
First Half Results
Our results of operations for the first half of 2020 and the first half of 2019
are highlighted in the table below and discussed in the following paragraphs.
First Half
(in thousands) 2020 2019 Change
Net sales $ 2,400,236 $ 2,376,571 $ 23,665
Cost of sales 1,565,640 1,551,484 14,156
Gross profit 834,596 825,087 9,509
Selling, delivery and administrative expenses 718,657 737,719 (19,062)
Income from operations 115,939 87,368 28,571
Interest expense, net 18,745 24,881 (6,136)
Other expense, net 18,432 47,032 (28,600)
Income before income taxes 78,762 15,455 63,307
Income tax expense 20,548 4,177 16,371
Net income 58,214 11,278 46,936
Less: Net income attributable to noncontrolling interest 3,983 2,739 1,244
Net income attributable to
$ 8,539 $ 45,692 Other comprehensive income, net of tax 921 1,171 (250) Comprehensive income attributable to Coca-Cola Consolidated, Inc.$ 55,152 $ 9,710 $ 45,442
Items Impacting Operations and Financial Condition
First Half 2020
•$15.3 million recorded in other expense, net as a result of an increase in the fair value of the Company's acquisition related contingent consideration liability; •$1.8 million in pre-tax favorable mark-to-market adjustments related to the Company's commodity hedging program; and •$0.7 million of net expense related to the impairment and accelerated depreciation of property, plant and equipment as the Company continues to optimize the efficiency of its supply chain.
First Half 2019
•$43.3 million recorded in other expense, net as a result of an increase in the fair value of the Company's acquisition related contingent consideration liability; •$6.9 million of expenses related to the System Transformation transactions, the majority of which were information technology-related costs; •$4.4 million adjustment to reflect the prospective change of increasing the capitalization thresholds on certain low-cost, short-lived assets; and •$1.7 million in pre-tax unfavorable mark-to-market adjustments related to the Company's commodity hedging program.
Net sales increased$23.7 million , or 1.0%, to$2.40 billion in the first half of 2020, as compared to$2.38 billion in the first half of 2019. The increase in net sales was primarily attributable to the following (in millions): First Half 2020 Attributable to: $ 32.4 Increase in net sales primarily driven by an increase in bottle/can sales volume partially offset by a decrease in fountain syrup sales mainly sold in on-premise outlets impacted by COVID-19-related stay-at-home orders and closures (5.8) Decrease in sales volume to other Coca-Cola bottlers (2.9) Other $ 23.7 Total increase in net sales 37
--------------------------------------------------------------------------------
Net sales by product category were as follows:
First Half
(in thousands) 2020 2019 % Change
Bottle/can sales:
Sparkling beverages $ 1,324,854 $ 1,260,565 5.1 %
Still beverages 769,849 753,573 2.2 %
Total bottle/can sales 2,094,703 2,014,138 4.0 %
Other sales:
Sales to other Coca-Cola bottlers 165,143 170,950 (3.4) %
Post-mix and other 140,390 191,483 (26.7) %
Total other sales 305,533 362,433 (15.7) %
Total net sales $ 2,400,236 $ 2,376,571 1.0 %
Product category sales volume of physical cases as a percentage of total
bottle/can sales volume and the percentage change by product category were as
follows:
Bottle/Can Sales Volume
First Half Bottle/Can Sales
Product Category 2020 2019 Volume % Change
Sparkling beverages 71.3 % 71.1 % 3.5 %
Still beverages 28.7 % 28.9 % 2.2 %
Total bottle/can sales volume 100.0 % 100.0 % 3.1 %
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 to conform with current period categorization. Any
differences are not material.
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 Half
2020 2019
Approximate percent of the Company's total bottle/can sales
volume:
Wal-Mart Stores, Inc. 20 % 19 %
The Kroger Company 14 % 12 %Total approximate percent of the Company's total bottle/can sales volume
34 % 31 %
Approximate percent of the Company's total net sales: Wal-Mart Stores, Inc.
14 % 14 %
The Kroger Company 10 % 8 %
Total approximate percent of the Company's total net sales 24 % 22 %
38--------------------------------------------------------------------------------
Cost of Sales
Cost of sales increased
First Half 2020 Attributable to:
$ 15.7 Increase in cost of sales primarily driven by an increase in bottle/can
sales volume partially offset by a decrease in fountain syrup sales mainly
sold in on-premise outlets impacted by COVID-19-related stay-at-home
orders and closures
(6.5) Decrease in sales volume to other Coca-Cola bottlers
5.0 Other
$ 14.2 Total increase in cost of sales
Total marketing funding support from The Coca-Cola Company and other beverage
companies was
Selling, Delivery and Administrative Expenses
SD&A expenses decreased by$19.1 million , or 2.6%, to$718.7 million in the first half of 2020, as compared to$737.7 million in the first half of 2019. SD&A expenses as a percentage of net sales decreased to 29.9% in the first half of 2020 from 31.0% in the first half of 2019. The decrease in SD&A expenses was primarily attributable to the following (in millions):
First Half 2020 Attributable to: $ (8.8) Decrease in payroll costs and employee benefits including bonuses and
incentives, primarily as a result of the furloughs of 700 teammates
during the majority of the second quarter of 2020 and structural changes
made to certain portions of our business
(6.9) Decrease in System Transformation transaction expenses
(3.4) Other
$ (19.1) Total decrease in SD&A expenses
Shipping and handling costs related to the movement of finished goods from
distribution centers to customer locations, including distribution center
warehousing costs, totaled
Interest Expense, Net
Interest expense, net decreased$6.1 million , or 24.7%, to$18.7 million in the first half of 2020, as compared to$24.9 million in the first half of 2019. The decrease was primarily a result of lower average interest rates and lower average debt balances.
Other Expense, Net
A summary of other expense, net is as follows:
First Half
(in thousands) 2020 2019
Increase in the fair value of the acquisition related contingent consideration liability
$ 15,260 $ 43,268 Non-service cost component of net periodic benefit cost 3,172 3,920 Other - (156) Total other expense, net$ 18,432 $ 47,032 The increase in the fair value of the acquisition related contingent consideration liability during the first half of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees. The increase in the fair value of the acquisition related contingent consideration liability during the first half of 2019 was primarily driven by a decrease in the discount rate and changes in future cash flow projections of the distribution territories subject to sub-bottling fees. 39
--------------------------------------------------------------------------------
Income Tax Expense
The Company's effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 26.1% for the first half of 2020 and 27.0% for the first half of 2019. The decrease in the effective income tax rate was primarily driven by improved financial results and the extension of certain tax credits in 2020. The Company's effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 27.5% for the first half of 2020 and 32.8% for the first half of 2019.
Noncontrolling Interest
The Company recorded net income attributable to noncontrolling interest of
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was
Segment Operating Results
The Company evaluates segment reporting in accordance with the 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 revenues 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:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Net sales:
Nonalcoholic Beverages $ 1,195,524 $1,238,885$ 2,338,105 $ 2,311,112 All Other 80,329 94,942 161,630 182,857 Eliminations(1) (48,638) (60,168) (99,499) (117,398) Consolidated net sales$ 1,227,215 $
1,273,659
Income from operations: Nonalcoholic Beverages$ 83,907 $ 57,724 $ 119,524 $ 72,365 All Other (789) 9,490 (3,585) 15,003 Consolidated income from operations$ 83,118 $
67,214
Depreciation and amortization: Nonalcoholic Beverages$ 39,909 $ 42,568 $ 80,667 $ 85,919 All Other 2,928 2,488 5,729 4,909
Consolidated depreciation and amortization
45,056
(1)The entire net sales elimination for each period presented 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.
40--------------------------------------------------------------------------------
Adjusted Non-GAAP Results
The Company reports its financial results in accordance with accounting principles generally accepted inthe United States ("GAAP"). However, management believes that certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company's ongoing performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company's performance.
Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company's reported results prepared in accordance with GAAP. The Company's non-GAAP financial information does not represent a comprehensive basis of accounting. The following tables reconcile reported results (GAAP) to adjusted results (non-GAAP):
Second Quarter 2020
Income from Income before Basic net income
(in thousands, except per share data) Gross profit SD&A expenses operations income taxes Net income per share
Reported results (GAAP) $ 429,301 $ 346,183 $ 83,118 $ 57,800 $ 39,569 $ 4.23
Fair value adjustment of acquisition
related contingent consideration(1) - - - 14,548 10,941 1.16
Fair value adjustments for commodity hedges(2) (1,266) 805 (2,071) (2,071) (1,557) (0.17) Supply chain optimization and consolidation(3) 671 30 641 641 482 0.05 Other tax adjustments(4) - - - - (511) (0.05) Total reconciling items (595) 835 (1,430) 13,118 9,355 0.99 Adjusted results (non-GAAP)$ 428,706 $ 347,018 $ 81,688 $ 70,918 $ 48,924 $ 5.22 Second Quarter 2019 Income from Income before Basic net income (in thousands, except per share data) Gross profit SD&A expenses operations income taxes Net income per share Reported results (GAAP)$ 435,779 $ 368,565 $ 67,214 $ 24,038 $ 15,370 $ 1.64 System Transformation transaction expenses(5) - (2,185) 2,185 2,185 1,643
0.18
Fair value adjustment of acquisition related contingent consideration(1) - - - 29,222 21,975
2.34
Fair value adjustments for commodity hedges(2) 4,874 (66) 4,940 4,940 3,715
0.40
Capitalization threshold change for certain assets(6) - (1,903) 1,903 1,903 1,431 0.15 Supply chain optimization and consolidation(3) 1,294 - 1,294 1,294 973 0.10 Other tax adjustments(4) - - - - (2,815) (0.30) Total reconciling items 6,168 (4,154) 10,322 39,544 26,922 2.87 Adjusted results (non-GAAP)$ 441,947 $ 364,411 $ 77,536 $ 63,582 $ 42,292 $ 4.51 41
--------------------------------------------------------------------------------
First Half 2020
Basic net
Income from Income before income
(in thousands, except per share data) Gross profit SD&A expenses operations income taxes Net income per share
Reported results (GAAP) $ 834,596 $ 718,657 $ 115,939 $ 78,762 $ 54,231 $ 5.79
Fair value adjustment of acquisition
related contingent consideration(1) - - - 15,260 11,476 1.22
Fair value adjustments for commodity hedges(2) 270 (1,524) 1,794 1,794 1,349 0.14 Supply chain optimization and consolidation(3) 1,319 601 718 718 540 0.06 Other tax adjustments(4) - - - - (682) (0.07) Total reconciling items 1,589 (923) 2,512 17,772 12,683 1.35 Adjusted results (non-GAAP)$ 836,185 $ 717,734 $ 118,451 $ 96,534 $ 66,914 $ 7.14 First Half 2019 Basic net Income from Income before income (in thousands, except per share data) Gross profit SD&A expenses operations income taxes Net income per share Reported results (GAAP)$ 825,087 $ 737,719 $ 87,368 $ 15,455 $ 8,539 $ 0.91 System Transformation transaction expenses(5) - (6,915) 6,915 6,915 5,200
0.56
Fair value adjustment of acquisition related contingent consideration(1) - - - 43,268 32,538
3.47
Fair value adjustments for commodity hedges(2) 969 2,649 (1,680) (1,680) (1,263)
(0.13)
Capitalization threshold change for certain assets(6) - (4,379) 4,379 4,379 3,293
0.35
Supply chain optimization and consolidation (3) 1,294 - 1,294 1,294 973
0.10
Other tax adjustments(4) - - - - (3,660)
(0.39)
Total reconciling items 2,263 (8,645) 10,908 54,176 31,881
3.96
Adjusted results (non-GAAP)$ 827,350 $ 729,074 $ 98,276 $ 69,631 $ 40,420 $ 4.87
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 projections of future cash flows of distribution territories subject to sub-bottling fees.
(2)The Company enters into 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 risk. The Company accounts for its commodity hedges on a mark-to-market basis. (3)Adjustment reflects expenses within the Nonalcoholic Beverages segment related to the impairment and accelerated depreciation of property, plant and equipment as the Company continues to optimize efficiency opportunities across its business.
(4)Adjustment reflects the impact from the reconciling items to reported results on the annualized adjusted effective income tax rate.
(5)Adjustment reflects expenses incurred during the applicable period of 2019 related to the System Transformation transactions, which primarily includes information technology system conversions.
(6)Adjustment reflects the prospective change of increasing the capitalization
thresholds during the applicable period of 2019 on certain low-cost, short-lived
assets.
42--------------------------------------------------------------------------------
Financial Condition
Total assets were$3.18 billion onJune 28, 2020 , which was an increase of$57.7 million fromDecember 29, 2019 . Net working capital, defined as current assets less current liabilities, was$265.9 million onJune 28, 2020 , which was an increase of$57.8 million fromDecember 29, 2019 .
Significant changes in net working capital on
•An increase in cash and cash equivalents of$67.9 million as a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory related to the June sales trends, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act. •An increase in accounts receivable, trade of$38.4 million driven primarily by an increase in average daily sales inJune 2020 , as compared toDecember 2019 . •A decrease in accounts receivable from The Coca-Cola Company of$14.3 million , primarily as a result of the timing of cash receipts. •A decrease in inventory of$14.8 million , primarily as a result of higher than anticipated sales volume in June that resulted in lower inventory levels. •An increase in accounts payable, trade of$28.7 million and an increase in accounts payable to The Coca-Cola Company of$31.1 million , both primarily as a result of the timing of cash payments. •A decrease in other accrued compensation of$25.6 million , primarily as a result of the timing of bonus and incentive payments in the first quarter of 2020.
Liquidity and Capital Resources
The Company's sources of capital include cash flows from operations, available credit facilities and the issuance of debt and equity securities. The Company has obtained its long-term debt from public markets, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of the condensed consolidated financial statements. At this time, the Company does not expect the COVID-19 pandemic to have a material impact on its liquidity or sources of capital. The amount and frequency of future dividends will be determined by the Company's Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future. The Company's total debt as ofJune 28, 2020 andDecember 29, 2019 was as follows: (in thousands) Maturity Date June 28, 2020 December 29, 2019 Term loan facility(1) 6/7/2021$ 247,500 $ 262,500 Senior notes 2/27/2023 125,000 125,000 Revolving credit facility 6/8/2023 - 45,000 Senior notes and unamortized discount on senior notes(2) 11/25/2025 349,952 349,948 Senior notes 10/10/2026 100,000 100,000 Senior notes 3/21/2030 150,000 150,000 Debt issuance costs (2,278) (2,528) Long-term debt$ 970,174 $ 1,029,920 (1)The Company intends to refinance principal payments due in the next 12 months under the term loan facility, and has the capacity to do so under its revolving credit facility, which is classified as long-term debt. As such, any amounts due in the next 12 months were classified as noncurrent. (2)The senior notes due in 2025 were issued at 99.975% of par. The Company's term loan facility matures onJune 7, 2021 . The original aggregate principal amount borrowed by the Company under the facility was$300 million and repayment of principal amounts outstanding began in 2018. The Company may request additional term loans under the term loan facility, provided the Company's aggregate borrowings under the facility do not exceed$500 million . 43 -------------------------------------------------------------------------------- In 2019, the Company entered into a$100 million fixed rate swap maturingJune 7, 2021 , to hedge a portion of the interest rate risk on the Company's term loan facility. This interest rate swap is designated as a cash flow hedging instrument and changes in its fair value are not expected to be material to the condensed consolidated balance sheets. Changes in the fair value of this interest rate swap were classified as accumulated other comprehensive loss on the condensed consolidated balance sheets and included in the condensed consolidated statements of comprehensive income. As discussed below under "Cash Flows From Financing Activities," in the first quarter of 2019, the Company sold$100 million aggregate principal amount of senior unsecured notes due in 2026 toMetLife Investment Advisors, LLC ("MetLife") and certain of its affiliates. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to$200 million . The Company's revolving credit facility matures onJune 8, 2023 and has an aggregate maximum borrowing capacity of$500 million , which may be increased at the Company's option to$750 million , subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. 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. As ofJune 28, 2020 , the Company had no outstanding borrowings under the revolving credit facility, and, therefore, had$500 million borrowing capacity available. The indentures under which the Company's public debt was issued do not include financial covenants but do 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 agreements. The Company was in compliance with these covenants as ofJune 28, 2020 . These covenants do not currently, and the Company does not anticipate they will, restrict its 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 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. During the first quarter of 2020,Standard & Poor's reaffirmed the Company's BBB rating and revised the Company's rating outlook to stable from negative. Moody's rating outlook for the Company is stable. As ofJune 28, 2020 , the Company's credit ratings were as follows: Long-Term DebtStandard & Poor's BBB Moody's Baa2
The Company is subject to interest rate risk on its variable rate debt,
including its revolving credit facility and term loan facility. Assuming no
changes in the Company's capital structure, if market interest rates average 1%
more over the next 12 months than the interest rates as of
The Company's only Level 3 asset or liability is the acquisition related contingent consideration liability. There were no transfers of assets or liabilities 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:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Beginning balance - Level 3 liability $ 437,094 $ 393,007 $ 446,684 $ 382,898
Payments of acquisition related contingent
consideration (10,079) (6,599) (20,531) (12,836)
Reclassification to current payables (450) (3,180) (300) (880)
Increase in fair value 14,548 29,222 15,260 43,268
Ending balance - Level 3 liability $ 441,113 $ 412,450 $ 441,113 $ 412,450
44--------------------------------------------------------------------------------
Cash Sources and Uses
A summary of cash-based activity is as follows:
First Half
(in thousands) 2020 2019
Cash Sources:
Borrowings under revolving credit facility $ 235,000 $ 206,339
Proceeds from issuance of senior notes - 100,000
Net cash provided by operating activities(1) 229,003
88,586
Proceeds from the sale of property, plant and equipment 1,764 823 Total cash sources$ 465,767 $ 395,748 Cash Uses: Payments on revolving credit facility$ 280,000 $ 186,339 Payments on term loan facility and senior notes 15,000
132,500
Additions to property, plant and equipment 72,886
57,581
Payments of acquisition related contingent consideration 20,531
12,836
Cash dividends paid 4,686
4,682
Payments on financing lease obligations 3,001 4,261 Other distribution agreements - 4,654 Other 1,727 751 Total cash uses$ 397,831 $ 403,604 Net increase (decrease) in cash during period$ 67,936
(1)Net cash provided by operating activities in the first half of 2020 included
net income tax payments of
Cash Flows From Operating Activities
During the first half of 2020, cash provided by operating activities was$229.0 million , which was an increase of$140.4 million as compared to the first half of 2019. The increase was primarily a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory related to the June sales trends, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act.
Cash Flows From Investing Activities
During the first half of 2020, cash used in investing activities was
Additions to property, plant and equipment were$72.9 million during the first half of 2020. As ofJune 28, 2020 ,$11.9 million of additions to property, plant and equipment were accrued in accounts payable, trade. Additions to property, plant and equipment were$57.6 million during the first half of 2019. As ofJune 30, 2019 ,$10.3 million of additions to property, plant and equipment were accrued in accounts payable, trade.
Cash Flows From Financing Activities
During the first half of 2020, cash used in financing activities was$88.4 million , which was an increase of$53.8 million as compared to the first half of 2019. The change was primarily driven by an increase in cash flows from operating activities as noted above which enabled the Company to repay debt of$59.7 million .
The Company had cash payments for acquisition related contingent consideration
of
45
--------------------------------------------------------------------------------
acquisition related contingent consideration arrangements for the distribution
territories subject to sub-bottling fees will be in the range of $28 million to
$52 million .
In the first quarter of 2019, the Company sold $100 million aggregate principal
amount of senior unsecured notes due in 2026 to MetLife and certain of its
affiliates pursuant to a note purchase and private shelf agreement, dated
January 23, 2019 , between the Company, MetLife and the other parties thereto.
These notes bear interest at 3.93%, payable quarterly in arrears, and will
mature on October 10, 2026 , unless earlier redeemed by the Company. The Company
used the proceeds to refinance the senior notes due on April 15, 2019 . The
Company may request that MetLife consider the purchase of additional senior
unsecured notes of the Company under the agreement in an aggregate principal
amount of up to $200 million .
Critical Accounting Policies
See Note 1, Note 3 and Note 9 to the condensed consolidated financial statements for information on the Company's critical accounting policies.
Off-Balance Sheet Arrangements
The Company is a shareholder ofSouth Atlantic Canners, Inc. ("SAC"), a manufacturing cooperative inBishopville, South Carolina . All of SAC's shareholders are Coca-Cola bottlers and each has equal voting rights. As ofJune 28, 2020 , the Company had guaranteed$14.7 million of SAC's debt. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company's guarantee. See Note 19 to the condensed consolidated financial statements for additional information.
Hedging Activities
The Company uses derivative financial instruments to manage its exposure to
movements in certain commodity prices. Fees paid by the Company for derivative
instruments are amortized over the corresponding period of the instrument. The
Company accounts for its commodity hedges on a mark-to-market basis with any
expense or income being reflected as an adjustment to cost of sales or SD&A
expenses.
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 derivative financial
agreements that provide for net settlement of derivative transactions. The net
impact of the commodity hedges on the condensed consolidated statements of
operations was as follows:
Second Quarter First Half
(in thousands) 2020 2019 2020 2019
Increase in cost of sales $ 378 $ 7,784 $ 2,592 $ 5,795
Increase (decrease) in SD&A expenses 219 388 2,995 (1,985)
Net impact $ 597 $ 8,172 $ 5,587 $ 3,810 Cautionary Information Regarding Forward-Looking Statements
Certain statements contained in this report, or in other public filings, press
releases, or other written or oral communications made by the Company or its
representatives, 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 address, among other
things, Company plans, activities or events which the Company expects will or
may occur in the future and may include express or implied projections of
revenue or expenditures? statements of plans and objectives for future
operations, growth or initiatives? statements of future economic performance,
including, but not limited to, the state of the economy, capital investment and
financing plans, net sales, cost of sales, SD&A expenses, gross profit, income
tax rates, earnings per diluted share, dividends, pension plan contributions and
estimated acquisition related contingent consideration payments? statements
regarding the outcome or impact of certain recent accounting pronouncements and
pending or threatened litigation; or statements regarding the impact of the
COVID-19 pandemic on the Company's business, financial condition, results of
operations or cash flows.
46--------------------------------------------------------------------------------
These forward-looking statements may be identified by the use of the words "will," "may," "believe," "plan," "estimate," "expect," "anticipate," "probably," "should," "project," "intend," "continue," "could," and other similar terms and expressions. Various factors, risks and uncertainties may cause the Company's actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, risks and uncertainties that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for 2019 and in "Item 1A. Risk Factors" of this report and elsewhere herein, including, without limitation, the factors described under "Critical Accounting Policies" in Note 1 to the condensed consolidated financial statements, or in other filings or statements made by the Company. All of the forward-looking statements in this report and other documents or statements are qualified by these and other factors, risks and uncertainties. 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, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, 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 other reports and documents filed with theSecurities and Exchange Commission .
© Edgar Online, source
