COCA-COLA CONSOLIDATED, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations of CocaCola 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. All comparisons are to the corresponding period in the prior year unless specified otherwise. Each of the Company's quarters, other than the fourth quarter, ends on the Friday closest to the last day of the corresponding quarterly calendar period. The Company's fourth quarter and fiscal year end onDecember 31 regardless of the day of the week on whichDecember 31 falls. The condensed consolidated financial statements presented are: •The financial position as ofJuly 2, 2021 andDecember 31, 2020 . •The results of operations and comprehensive income for the three-month periods endedJuly 2, 2021 (the "second quarter" of fiscal 2021 ("2021")) andJune 28, 2020 (the "second quarter" of fiscal 2020 ("2020")) and the six-month periods endedJuly 2, 2021 (the "first half" of 2021) andJune 28, 2020 (the "first half" of 2020). •The changes in cash flows and equity for the first half of 2021 and the first half of 2020. The condensed consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries. During 2020,Piedmont Coca-Cola Bottling Partnership ("Piedmont") was the Company's only subsidiary that had a significant noncontrolling interest. OnDecember 9, 2020 , an indirect wholly owned subsidiary of the Company purchased the remaining 22.7% general partnership interest in Piedmont from an indirect wholly owned subsidiary of The CocaCola Company, and Piedmont became an indirect wholly owned subsidiary of the Company.
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 CocaCola bottler inthe United States . Approximately 83% of our total bottle/can sales volume to retail customers consists of products of The CocaCola 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 ("Monster Energy"). Our purpose is to honor God in all we do, serve others, pursue excellence and 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, including both sparkling and still beverages, designed to meet the demands of our consumers. Sparkling beverages are carbonated beverages and the Company's principal sparkling beverage is CocaCola. Still beverages include energy products and noncarbonated beverages such as bottled water, ready to drink tea, ready to drink coffee, enhanced water, juices and sports drinks. Our sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other CocaCola 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. The Company's products are sold and distributed inthe United States through various channels, which include selling directly to customers, including grocery stores, mass merchandise stores, club stores, convenience stores and drug stores, selling to on-premise locations, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, and selling through other channels such as vending machine outlets. The nonalcoholic beverage industry is highly competitive for both sparkling and still beverages. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of PepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper products. 25 -------------------------------------------------------------------------------- The principal methods of competition in the nonalcoholic beverage industry are new brand and product introductions, point-of-sale merchandising, new vending and dispensing equipment, packaging changes, pricing, sales promotions, product quality, retail space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition. Business seasonality results primarily from higher unit sales of the Company's products in the second and third quarters of the fiscal year, as sales of our products are typically correlated with warmer weather. We believe that we and other manufacturers from whom we purchase finished products have adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.
Executive Summary
Physical case volume increased 5.9% in the second quarter of 2021. Sparkling volume remained flat in the second quarter of 2021, while Still volume increased 20.9%. The Still category growth accelerated due to the re-openings of certain small stores and accounts where our products are consumed on-premise. The Still growth was driven primarily by BodyArmor, AHA and Monster brands. Sales of multi-serve packages in larger retail stores remained very strong, while single-serve sales improved in small stores and other immediate consumption channels. Physical case volume in the first half of 2021 increased 5.3%. Revenue increased 16.8% in the second quarter of 2021 driven by the significant increase in sales of Still beverages, which generally carry a higher selling price per case than Sparkling beverages. The re-opening of certain small store and other immediate consumption channels helped drive the growth in Still beverages as these channels have a higher mix of Still beverages than take-home outlets. In addition, the increase in revenue was driven by price realization on most Sparkling packages. Sales of multi-serve PET packages were especially strong in the quarter as we adjusted our commercial plans to emphasize these packages to complement our assortment of multi-serve can products in take-home outlets. Sales growth in on-premise channels is now outpacing take-home channels, but we continue to see strong demand for future consumption packages. Revenue from fountain syrup, which is primarily sold through restaurants, convenience stores, amusement parks, and other on-premise outlets, increased$20.8 million , or 92.4%, during the second quarter of 2021 as these outlets began to operate at higher levels of capacity. For the first half of 2021, revenue increased$302.7 million , or 12.6%. Gross profit in the second quarter of 2021 increased$65.6 million , or 15.3%, while gross margin decreased 50 basis points to 34.5%. The improvement in gross profit was primarily due to strong volume growth in our Still category and price realization within our Sparkling category. The decline in gross margin was driven primarily by the increased mix of Still beverages, which generally carry lower gross margins than Sparkling packages. In the first half of 2021, we experienced increases in our major input costs, including aluminum, PET resin and high fructose corn syrup, and we expect elevated prices to continue through the balance of the year. We currently plan to pass along price increases to our customers in the third quarter of this year in an effort to offset this cost pressure. Gross profit in the first half of 2021 increased$109.0 million , or 13.1%. Selling, delivery and administrative ("SD&A") expenses in the second quarter of 2021 increased$27.9 million , or 8.1%. SD&A expenses as a percentage of net sales decreased 210 basis points in the second quarter of 2021. The increase in SD&A expenses related primarily to an increase in labor costs as compared to the second quarter of 2020. As channels of business and local economies have re-opened compared to the prior year period, our labor expenses have increased. SD&A expenses in the first half of 2021 increased$9.9 million , or 1.4%. SD&A expenses as a percentage of net sales in the first half of 2021 decreased 290 basis points as compared to the first half of 2020. Income from operations in the second quarter of 2021 was$120.9 million , compared to$83.1 million in the second quarter of 2020, an increase of 45.4%. On an adjusted basis, as defined in the "Adjusted Non-GAAP Results" section below, income from operations in the second quarter of 2021 was$120.7 million , an increase of 47.8%. For the first half of 2021, income from operations increased$99.1 million to$215.0 million . Net income in the second quarter of 2021 was$48.2 million , compared to$39.6 million in the second quarter of 2020, an improvement of$8.6 million . Net income in the second quarter of 2021 was adversely impacted by fair value adjustments to our acquisition related contingent consideration liability, driven primarily by changes in future cash flow projections. Fair value adjustments to this liability are routine and non-cash in nature. Income tax expense in the second quarter of 2021 was$17.3 million , compared to$15.2 million in the second quarter of 2020. Net income increased$47.3 million in the first half of 2021 to$101.5 million as compared to the first half of 2020. 26 -------------------------------------------------------------------------------- Cash flows provided by operations for the first half of 2021 were$271.4 million , compared to$229.0 million for the first half of 2020. The significant increase in operating cash flows for the first half of 2021 was a result of our strong operating performance. The Company reduced outstanding indebtedness by$162 million during the first half of 2021. We remain focused on the effective management of our working capital and continue to invest in long-term strategic projects to optimize our supply chain and better serve our customers. COVID-19 Impact The Company continues to diligently monitor and manage through the impact of the ongoing COVID-19 pandemic on all aspects of its business, including the impact on its teammates and customers. The Company continues to implement its COVID-19 Response Program, including numerous actions to protect and promote the health and safety of its consumers, customers, teammates and communities, while it continues to manufacture and distribute products. Such actions include following prescribed Company and other accepted health and safety standards and protocols, including those adopted by theCenters for Disease Control and Prevention (the "CDC") and local health authorities, and working closely with local health departments and appropriate agencies to manage and monitor teammate cases and exposures. Risk mitigation and safety activities continue; examples include adhering to sanitation protocols and promoting hygiene practices recommended by theCDC ; implementing work-from-home routines for teammates whose work duties permit it; offering supplemental sick time for non-exempt teammates; and modifying our health, welfare and retirement plans for COVID-19-related events.
At this time and based on current trends, we do not currently expect the COVID-19 pandemic to materially impact our liquidity position or access to capital in 2021. We also have not experienced, and do not expect, any material impairments or adjustments to the fair values of our assets or the collectability of our receivables as a result of the COVID-19 pandemic.
We have assessed COVID-19-related circumstances around work routines, including remote work arrangements, and the impact on our internal controls over financial reporting. We have not identified, and do not anticipate, any material impact to our control procedures that would materially affect our internal controls over financial reporting. We will continue to monitor the impact of the COVID-19 pandemic on our business and make adjustments as needed.
Areas of Emphasis
Key priorities for the Company include commercial execution, revenue management, supply chain optimization and cash flow generation.
Commercial Execution: Our success is dependent on our ability to execute our commercial strategy within our customers' stores. Our ability to obtain shelf space within stores and remain in-stock across our portfolio of brands and packages in a profitable manner will have a significant impact on our results. We are focused on execution at every step in our supply chain, including raw material and finished product procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur. We continue to invest in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and drive long-term value in our business. Revenue Management: Our revenue management strategy focuses on pricing our brands and packages optimally within product categories and channels, creating effective working relationships with our customers and making disciplined fact-based decisions. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs, the roles certain brands play in our product portfolio and other market conditions. Supply Chain Optimization: In fiscal 2017, we completed a multi-year series of transactions through which we acquired and exchanged distribution territories and manufacturing plants. We are focused on optimizing our supply chain as we continue to integrate the acquired territories and facilities into our operations. During the second quarter of 2021, we opened a new, automated distribution center inWhitestown, Indiana , which allowed the Company to consolidate certain nearby warehousing and distribution operations into this one new facility. We believe the increased capacity and automation inWhitestown will allow the Company to optimize its supply chain and to better serve its customers and consumers inIndiana and the surrounding areas. In addition, the Company integrated itsMemphis, Tennessee manufacturing plant with itsWest Memphis, Arkansas operations, which is expected to greatly expand itsWest Memphis production capabilities and to reduce its overall production costs. We will continue to look for opportunities to invest in our supply chain to optimize our costs. 27 -------------------------------------------------------------------------------- Cash Flow Generation: 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. Results of Operations Second Quarter Results The Company's results of operations for the second quarter of 2021 and the second quarter of 2020 are highlighted in the table below and discussed in the following paragraphs. Second Quarter (in thousands) 2021 2020 Change Net sales$ 1,433,086 $ 1,227,215 $ 205,871 Cost of sales 938,146 797,914 140,232 Gross profit 494,940 429,301 65,639 Selling, delivery and administrative expenses 374,079 346,183 27,896 Income from operations 120,861 83,118 37,743 Interest expense, net 8,365 9,184 (819) Other expense, net 47,041 16,134 30,907 Income before income taxes 65,455 57,800 7,655 Income tax expense 17,275 15,187 2,088 Net income 48,180 42,613 5,567 Less: Net income attributable to noncontrolling interest - 3,044 (3,044)
Net income attributable to CocaCola Consolidated, Inc.
$ 48,180 $ 39,569 $ 8,611 Other comprehensive income, net of tax 1,324 971 353 Comprehensive income attributable to CocaCola Consolidated, Inc.$ 49,504 $ 40,540 $ 8,964 Net Sales Net sales increased$205.9 million , or 16.8%, to$1.43 billion in the second quarter of 2021, as compared to$1.23 billion in the second quarter of 2020. The increase in net sales was primarily attributable to the following (in millions): Second Quarter 2021 Attributable to: $ 96.5 Increase in net sales related to product mix and price increases. Approximately 60% of this increase was
related to the shift in product
mix to higher revenue still products in order to meet consumer
preferences, while approximately 40% was driven by an increase in
average bottle/can sales price per unit charged to retail customers.
77.2 Increase in net sales related to increased sales volume
22.2 Increase in net sales related to the increase in fountain syrup and
other related sales mainly sold in on-premise locations
8.6 Increase in net sales related to increased sales volume to other
Coca-Cola bottlers
1.4 Increase in net sales related to increased volume of external freight
revenue to external customers (other than nonalcoholic beverages)
$ 205.9 Total increase in net sales
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Net sales by product category were as follows:
Second Quarter
(in thousands) 2021 2020 % Change
Bottle/can sales:
Sparkling beverages $ 754,683 $ 694,162 8.7 %
Still beverages 498,990 397,045 25.7 %
Total bottle/can sales 1,253,673 1,091,207 14.9 %
Other sales:
Sales to other CocaCola bottlers 88,494 79,904 10.8 %
Post-mix and other 90,919 56,104 62.1 %
Total other sales 179,413 136,008 31.9 %
Total net sales $ 1,433,086 $ 1,227,215 16.8 %
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 Volume
Product Category 2021 2020 % Change
Sparkling beverages 68.0 % 72.0 % 0.0 %
Still beverages 32.0 % 28.0 % 20.9 %
Total bottle/can sales volume 100.0 % 100.0 % 5.9 %
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 products from manufacturing plants to distribution
centers, amortization expense of distribution rights, distribution fees of
certain products and marketing credits from brand companies. Raw material costs
represent approximately 20% of total cost of sales on an annual basis.
Cost of sales increased $140.2 million , or 17.6%, to $938.1 million in the
second quarter of 2021, as compared to $797.9 million in the second quarter
of 2020. The increase in cost of sales was primarily attributable to the
following (in millions):
Second Quarter 2021 Attributable to:
$ 61.0 Increase in cost of sales primarily related to increased input costs
and the change in product mix to meet consumer preferences
49.8 Increase in cost of sales related to increased sales volume
16.2 Increase in cost of sales related to the increase in fountain syrup
sales mainly sold in on-premise locations
9.1 Increase in cost of sales related toincreased sales volume to other
Coca-Cola bottlers
4.1 Increase in cost of sales related to increased volume of external
freight revenue to external customers (other than nonalcoholic
beverages)
$ 140.2 Total increase in cost of sales
The Company relies extensively on advertising and sales promotions in the
marketing of its products. The CocaCola Company and other beverage companies
that supply concentrates, syrups and finished products to the Company make
substantial marketing and advertising expenditures to develop their brand
identities and promote sales in the Company's territories. Certain of the
marketing expenditures by The CocaCola Company and other beverage companies are
made pursuant to annual arrangements. The Company also benefits from national
advertising programs conducted by The CocaCola Company and other beverage
29
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companies. Total marketing funding support from The CocaCola Company and other
beverage companies, which includes both direct payments to the Company and
payments to customers for marketing programs, was $35.7 million in the second
quarter of 2021 and $26.3 million in the second quarter of 2020.
Selling, Delivery and Administrative Expenses
SD&A expenses include the following: sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution center warehousing costs, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangible assets and administrative support labor and operating costs. SD&A expenses increased by$27.9 million , or 8.1%, to$374.1 million in the second quarter of 2021, as compared to$346.2 million in the second quarter of 2020. SD&A expenses as a percentage of net sales decreased to 26.1% in the second quarter of 2021 from 28.2% in the second quarter of 2020. The increase in SD&A expenses was primarily attributable to the following (in millions): Second Quarter 2021 Attributable to: $ 24.2 Increase in labor costs as channels of business and local economies have re-opened compared to the prior year. In addition, investments were made in the second quarter to attract, reward and retain front-line employees in this challenging labor environment. 3.7 Other $ 27.9 Total increase in SD&A expenses
Shipping and handling costs included in SD&A expenses were
Interest Expense, Net
Interest expense, net decreased$0.8 million , or 8.9%, to$8.4 million in the second quarter of 2021, as compared to$9.2 million in the second quarter of 2020. The decrease was primarily a result of lower average debt balances.
Other Expense, Net
A summary of other expense, net is as follows:
Second Quarter
(in thousands) 2021 2020
Increase in the fair value of the acquisition related contingent $ 45,983 $ 14,548
consideration liability
Non-service cost component of net periodic benefit cost 1,058 1,586
Total other expense, net $ 47,041 $ 16,134
Each reporting period, the Company adjusts its acquisition related 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 agreements, 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 future cash flow projections. The life of these distribution
assets is generally 40 years. The Company is required to pay the current portion
of the sub-bottling fee on a quarterly basis.
The increase in the fair value of the acquisition related contingent
consideration liability in the second quarter of 2021 as compared to the second
quarter of 2020 was primarily driven by higher projections of future cash flows
in the distribution territories subject to sub-bottling fees.
Income Tax Expense
The Company's effective income tax rate was 26.4% for the second quarter of 2021 and 26.3% for the second quarter of 2020. The Company's income tax expense increased$2.1 million , or 13.7%, to$17.3 million for the second quarter of 2021, as compared to$15.2 million for the second quarter of 2020. The increase in income tax expense was primarily attributable to improved financial results during the second quarter of 2021 compared to the second quarter of 2020. 30 --------------------------------------------------------------------------------
Noncontrolling Interest
The Company recorded net income attributable to noncontrolling interest of$3.0 million in the second quarter of 2020 related to the portion of Piedmont owned by The CocaCola Company prior to the purchase by an indirect wholly owned subsidiary of the Company of the remaining 22.7% general partnership interest in Piedmont onDecember 9, 2020 .
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was
First Half Results
Our results of operations for the first half of 2021 and the first half of 2020
are highlighted in the table below and discussed in the following paragraphs.
First Half
(in thousands) 2021 2020 Change
Net sales $ 2,702,943 $ 2,400,236 $ 302,707
Cost of sales 1,759,300 1,565,640 193,660
Gross profit 943,643 834,596 109,047
Selling, delivery and administrative expenses 728,598 718,657 9,941
Income from operations 215,045 115,939 99,106
Interest expense, net 17,111 18,745 (1,634)
Other expense, net 59,096 18,432 40,664
Income before income taxes 138,838 78,762 60,076
Income tax expense 37,295 20,548 16,747
Net income 101,543 58,214 43,329
Less: Net income attributable to noncontrolling
interest - 3,983 (3,983)
Net income attributable to CocaCola Consolidated, Inc.
$ 54,231 $ 47,312 Other comprehensive income, net of tax 2,656 921 1,735 Comprehensive income attributable to CocaCola Consolidated, Inc.$ 104,199 $ 55,152 $ 49,047 Net Sales Net sales increased$302.7 million , or 12.6%, to$2.70 billion in the first half of 2021, as compared to$2.40 billion in the first half of 2020. The increase in net sales was primarily attributable to the following (in millions): First Half 2021 Attributable to: $ 147.5 Increase in net sales related to price increases and product mix. Approximately 55% of this increase was driven by an increase in average bottle/can sales price per unit charged to retail customers, while approximately 45% was related to the shift in
product mix to higher revenue
still products in order to meet consumer preferences.
131.4 Increase in net sales related to increased sales volume
13.3 Increase in net sales related to the increase infountain syrup and other
related sales mainly sold in on-premise locations
5.5 Increase in net sales related to increased volume of external freight
revenue to external customers (other than nonalcoholic beverages)
5.0 Increase in net sales related to increased sales volume to other Coca-Cola
bottlers
$ 302.7 Total increase in net sales
31--------------------------------------------------------------------------------
Net sales by product category were as follows:
First Half
(in thousands) 2021 2020 % Change
Bottle/can sales:
Sparkling beverages $ 1,448,489 $ 1,324,854 9.3 %
Still beverages 919,070 769,849 19.4 %
Total bottle/can sales 2,367,559 2,094,703 13.0 %
Other sales:
Sales to other CocaCola bottlers 170,153 165,143 3.0 %
Post-mix and other 165,231 140,390 17.7 %
Total other sales 335,384 305,533 9.8 %
Total net sales $ 2,702,943 $ 2,400,236 12.6 %
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
First Half Bottle/Can Sales Volume
Product Category 2021 2020 % Change
Sparkling beverages 69.0 % 71.3 % 1.9 %
Still beverages 31.0 % 28.7 % 13.9 %
Total bottle/can sales volume 100.0 % 100.0 % 5.3 %
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
2021 2020
Approximate percent of the Company's total bottle/can sales
volume:
Wal-Mart Stores, Inc. 20 % 20 %
The Kroger Company 13 % 14 %Total approximate percent of the Company's total bottle/can sales volume
33 % 34 %
Approximate percent of the Company's total net sales: Wal-Mart Stores, Inc.
14 % 14 %
The Kroger Company 9 % 10 %
Total approximate percent of the Company's total net sales 23 % 24 %
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Cost of Sales
Cost of sales increased
First Half 2021 Attributable to: $ 92.7 Increase in cost of sales primarily related to
increased input costs and
the change in product mix to meet consumer preferences
82.5 Increase in cost of sales related to increased sales volume
6.8 Increase in cost of sales related to increasedvolume of external freight
revenue to external customers (other than nonalcoholic beverages)
6.6 Increase in cost of sales related to the increase in fountain syrup sales
mainly sold in on-premise locations
5.1 Increase in cost of sales related to increased sales volume to other
Coca-Cola bottlers
$ 193.7 Total increase in cost of sales
Total marketing funding support from The CocaCola Company and other beverage
companies was
Selling, Delivery and Administrative Expenses
SD&A expenses increased by$9.9 million , or 1.4%, to$728.6 million in the first half of 2021, as compared to$718.7 million in the first half of 2020. SD&A expenses as a percentage of net sales decreased to 27.0% in the first half of 2021 from 29.9% in the first half of 2020. The increase in SD&A expenses was primarily attributable to the following (in millions): First Half 2021 Attributable to: $ 16.2 Increase in labor costs as channels of business
and local economies have
re-opened compared to the prior year. In addition, investments were made in
the second quarter to attract, reward and retain front-line employees in
this challenging labor environment.
(4.4) Decrease in fleet-related repair expenses
(1.9) Other
$ 9.9 Total increase in SD&A expenses
Shipping and handling costs included in SD&A expenses were
Interest Expense, Net
Interest expense, net decreased$1.6 million , or 8.7%, to$17.1 million in the first half of 2021, as compared to$18.7 million in the first half of 2020. The decrease was primarily a result of lower average debt balances.
Other Expense, Net
A summary of other expense, net is as follows:
First Half
(in thousands) 2021 2020
Increase in the fair value of the acquisition related contingent $ 56,981 $ 15,260
consideration liability
Non-service cost component of net periodic benefit cost 2,115 3,172
Total other expense, net $ 59,096 $ 18,432
The increase in the fair value of the acquisition related contingent
consideration liability in the first half of 2021 as compared to the first half
of 2020 was primarily driven by higher projections of future cash flows in the
distribution territories subject to sub-bottling fees.
Income Tax Expense
The Company's effective income tax rate was 26.9% for the first half of 2021 and 26.1% for the first half of 2020. The Company's income tax expense increased$16.7 million , or 81.5%, to$37.3 million for the first half of 2021, as compared to 33 --------------------------------------------------------------------------------$20.5 million for the first half of 2020. The increase in income tax expense was primarily attributable to improved financial results during the first half of 2021 compared to the first half of 2020.
Noncontrolling Interest
The Company recorded net income attributable to noncontrolling interest of$4.0 million in the first half of 2020 related to the portion of Piedmont owned by The CocaCola Company prior to the purchase by an indirect wholly owned subsidiary of the Company of the remaining 22.7% general partnership interest in Piedmont onDecember 9, 2020 .
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was$2.7 million in the first half of 2021 and$0.9 million in the first half of 2020. The improvement was primarily related to the Company's interest rate swap on the 2016 Term Loan Facility, which matured onJune 7, 2021 .
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 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:
Second Quarter First Half
(in thousands) 2021 2020 2021 2020
Net sales:
Nonalcoholic Beverages $ 1,399,915 $1,195,524$ 2,635,005 $ 2,338,105 All Other 93,192 80,329 183,141 161,630 Eliminations(1) (60,021) (48,638) (115,203) (99,499) Consolidated net sales$ 1,433,086 $
1,227,215
Income from operations: Nonalcoholic Beverages$ 124,372 $ 83,907 $ 219,414 $ 119,524 All Other (3,511) (789) (4,369) (3,585) Consolidated income from operations$ 120,861 $
83,118
(1)The entire net sales elimination represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction. Adjusted Non-GAAP Results The Company reports its financial results in accordance with accounting principles generally accepted inthe United States ("GAAP"). However, management believes certain non-GAAP financial measures provide users of the financial statements 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. 34 --------------------------------------------------------------------------------
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 2021
Basic net
(in thousands, except per Gross SD&A Income from Income before Net income
share data) profit expenses operations income taxes income per share
Reported results (GAAP) $ 494,940 $ 374,079 $ 120,861 $ 65,455 $ 48,180 $ 5.14
Fair value adjustment of
acquisition related contingent
consideration(1) - - - 45,983 34,487 3.67
Fair value adjustments for
commodity derivative
instruments(2) (2,128) 505 (2,633) (2,633) (1,975) (0.21)
Supply chain optimization(3) 1,828 (652) 2,480 2,480 1,860 0.20
Total reconciling items (300) (147) (153) 45,830 34,372 3.66
Adjusted results (non-GAAP) $ 494,640 $ 373,932 $ 120,708 $ 111,285 $ 82,552 $ 8.80
Second Quarter 2020
Basic net
(in thousands, except per Gross SD&A Income from Income before Net income
share data) profit expenses operations income taxes 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 derivative
instruments(2) (1,266) 805 (2,071) (2,071) (1,557) (0.17)
Supply chain optimization(3) 671 30 641 641 482 0.05
Total reconciling items (595) 835 (1,430) 13,118 9,866 1.04
Adjusted results (non-GAAP) $ 428,706 $ 347,018 $ 81,688 $ 70,918 $ 49,435 $ 5.27
First Half 2021
Basic net
(in thousands, except per Gross SD&A Income from Income before Net income
share data) profit expenses operations income taxes income per share
Reported results (GAAP) $ 943,643 $ 728,598 $ 215,045 $ 138,838 $ 101,543 $ 10.83
Fair value adjustment of
acquisition related contingent
consideration(1) - - - 56,981 42,736 4.56
Fair value adjustments for
commodity derivative
instruments(2) (2,416) 1,065 (3,481) (3,481) (2,611) (0.28)
Supply chain optimization(3) 2,104 (758) 2,862 2,862 2,147 0.23
Total reconciling items (312) 307 (619) 56,362 42,272 4.51
Adjusted results (non-GAAP) $ 943,331 $ 728,905 $ 214,426 $ 195,200 $ 143,815 $ 15.34
First Half 2020
Basic net
(in thousands, except per Gross SD&A Income from Income before Net income
share data) profit expenses operations income taxes 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 derivative
instruments(2) 270 (1,524) 1,794 1,794 1,349 0.14
Supply chain optimization(3) 1,319 601 718 718 540 0.06
Total reconciling items 1,589 (923) 2,512 17,772 13,365 1.42
Adjusted results (non-GAAP)
35
--------------------------------------------------------------------------------Following is an explanation of non-GAAP adjustments:
(1)This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates and future cash flow projections of the distribution territories subject to sub-bottling fees. (2)The Company enters into commodity derivative instruments from time to time to hedge some or all of its projected purchases of aluminum, PET resin, diesel fuel and unleaded gasoline in order to mitigate commodity risk. The Company accounts for its commodity derivative instruments on a mark-to-market basis. (3)Adjustment reflects expenses within the Nonalcoholic Beverages segment as the Company continues to optimize efficiency opportunities across its business.
Financial Condition
Total assets were$3.28 billion as ofJuly 2, 2021 , which was an increase of$59.8 million fromDecember 31, 2020 . Net working capital, defined as current assets less current liabilities, was$182.9 million as ofJuly 2, 2021 , which was a decrease of$21.3 million fromDecember 31, 2020 .
Significant changes in net working capital as of
•An increase in accounts receivable of$56.6 million , driven primarily by increased sales volume and the timing of cash receipts. •An increase in accounts payable, trade of$65.9 million due to the extension of payment terms for certain vendors and the timing of cash payments. •An increase in accounts payable to The CocaCola Company of$32.6 million primarily as a result of the timing of cash payments. •An increase in other accrued liabilities of$17.9 million , driven primarily by the non-cash increase in the fair value of the current portion of the acquisition related contingent consideration liability. •A decrease in other accrued compensation of$19.8 million , primarily as a result of the timing of bonus and incentive payments in the first quarter of 2021 and 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. As ofJuly 2, 2021 , the Company had$54.2 million in cash and cash equivalents. The Company has obtained its long-term debt from public markets, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to finance its business plan, 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 access to capital. The Company's long-term debt as ofJuly 2, 2021 andDecember 31, 2020 was as follows: (in thousands) Maturity Date July 2, 2021 December 31, 2020 2016 Term Loan Facility(1) 6/7/2021 $ - $ 217,500 Senior notes 2/27/2023 125,000 125,000 2018 Revolving Credit Facility 6/8/2023 55,000 - Senior bonds and unamortized discount on senior bonds(2) 11/25/2025 349,961 349,957 Senior notes 10/10/2026 100,000 100,000 Senior notes 3/21/2030 150,000 150,000 Debt issuance costs (1,725) (1,992) Long-term debt$ 778,236 $ 940,465 (1)At the end of fiscal 2020, the Company intended to refinance outstanding principal payments due in the next 12 months under the 2016 Term Loan Facility using the 2018 Revolving Credit Facility (as defined below), which was classified as long-term debt, and the Company was not restricted by any subjective acceleration clause within the agreement for the 2018 Revolving Credit Facility. As such, the 2016 Term Loan Facility balance was classified as long term as ofDecember 31, 2020 . (2)The senior bonds due in 2025 were issued at 99.975% of par. 36 -------------------------------------------------------------------------------- OnJune 7, 2021 , the Company used a combination of cash on hand and borrowings under its revolving credit facility (the "2018 Revolving Credit Facility") to repay the remaining balance of the term loan facility (the "2016 Term Loan Facility") that matured on that date. Subsequent to the end of the second quarter of 2021, onJuly 9, 2021 , the Company entered into an agreement (the "2021 Revolving Credit Facility Agreement") providing for a five-year unsecured revolving credit facility with an aggregate maximum borrowing capacity of$500 million (the "2021 Revolving Credit Facility"), maturing onJuly 9, 2026 . Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2021 Revolving Credit Facility Agreement, at the Company's option, additional incremental revolving commitments of up to$250 million may be established under the 2021 Revolving Credit Facility to increase the aggregate revolving commitments under the 2021 Revolving Credit Facility to up to$750 million . The Company currently believes all banks participating in the 2021 Revolving Credit Facility have the ability to and will meet any funding requests from the Company. The 2021 Revolving Credit Facility Agreement replaced the 2018 Revolving Credit Facility. Also subsequent to the end of the second quarter of 2021, onJuly 9, 2021 , the Company entered into a three-year term loan agreement (the "2021 Term Loan Facility Agreement") for a senior unsecured term loan facility in the aggregate principal amount of$70 million (the "2021 Term Loan Facility"), maturing onJuly 9, 2024 . Subject to obtaining commitments from the lenders and satisfying other conditions specified in the 2021 Term Loan Facility Agreement, at the Company's option, additional incremental term loans of up to$50 million may be established under the 2021 Term Loan Facility to increase the aggregate principal amount of term loans under the 2021 Term Loan Facility to up to$120 million . The entire amount of the 2021 Term Loan Facility was fully drawn onJuly 9, 2021 . The Company used approximately$55 million of the proceeds to repay outstanding indebtedness under the 2018 Revolving Credit Facility and used the remaining proceeds for general corporate purposes. The indenture under which the Company's senior bonds were issued does not include financial covenants but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company's subsidiaries in excess of certain amounts. The agreements under which the Company's nonpublic debt was issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreement. The Company was in compliance with these covenants as ofJuly 2, 2021 . 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 Board of Directors has declared, and the Company has paid, dividends on the Common Stock and Class B Common Stock and each class of common stock has participated equally in all dividends each quarter for more than 25 years. The amount and frequency of future dividends will be determined by the Company's Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future. The Company's credit ratings are reviewed periodically by certain nationally recognized rating agencies. Changes in the Company's operating results or financial position could result in changes in the Company's credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material adverse impact on the Company's operating results or financial position. As ofJuly 2, 2021 , the Company's credit ratings and outlook for its long-term debt were as follows: Credit Rating Rating Outlook Standard & Poor's BBB Positive Moody's Baa1 Stable The Company is subject to interest rate risk on its variable rate debt, including the 2018 Revolving Credit 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 ofJuly 2, 2021 , interest expense for the next 12 months would increase by approximately$0.6 million . 37 --------------------------------------------------------------------------------
The Company's only Level 3 asset or liability is the acquisition related contingent consideration liability. There were no transfers from Level 1 or Level 2 in any period presented. Fair value adjustments were non-cash, and therefore did not impact the Company's liquidity or capital resources. Following is a summary of the Level 3 activity:
Second Quarter First Half
(in thousands) 2021 2020 2021 2020
Beginning balance - Level 3 liability $ 435,746 $ 437,094 $ 434,694 $ 446,684
Payments of acquisition related contingent
consideration (9,874) (10,079) (19,920) (20,531)
Reclassification to current payables 1,200 (450) 1,300 (300)
Increase in fair value 45,983 14,548 56,981 15,260
Ending balance - Level 3 liability $ 473,055 $ 441,113 $ 473,055 $ 441,113
Cash Sources and Uses
A summary of cash-based activity is as follows:
First Half
(in thousands) 2021 2020
Cash Sources:
Net cash provided by operating activities(1) $ 271,385 $ 229,003
Borrowings under revolving credit facility 55,000 235,000
Proceeds from the sale of property, plant and equipment 1,678 1,764 Total cash sources$ 328,063 $ 465,767 Cash Uses: Payments on term loan facility$ 217,500 $ 15,000 Additions to property, plant and equipment 80,308
72,886
Payments of acquisition related contingent consideration 19,920
20,531
Cash dividends paid 4,687
4,686
Payments on financing lease obligations 2,368
3,001
Other distribution agreements 1,998
-
Payments on revolving credit facility - 280,000 Other 1,871 1,727 Total cash uses$ 328,652 $ 397,831 Net increase (decrease) in cash during period$ (589)
(1)Net cash provided by operating activities included net income tax payments of$29.4 million in the first half of 2021 and$2.9 million in the first half of 2020.
Cash Flows From Operating Activities
During the first half of 2021, cash provided by operating activities was
Cash Flows From Investing Activities
During the first half of 2021, cash used in investing activities was$82.4 million , which was an increase of$9.6 million as compared to the first half of 2020. The increase was primarily a result of additions to property, plant and equipment, which were$80.3 million during the first half of 2021 and$72.9 million during the first half of 2020. There were$16.7 million and$11.9 million of additions to property, plant and equipment accrued in accounts payable, trade as ofJuly 2, 2021 andJune 28, 2020 , respectively. The Company anticipates additions to property, plant and equipment for the full year 2021 to be in the range of$180 million to$200 million , with remaining anticipated expenditures in the second half of 2021 of$100 million to$120 million . 38 --------------------------------------------------------------------------------
Cash Flows From Financing Activities
During the first half of 2021, cash used in financing activities was$189.6 million , which was an increase of$101.3 million as compared to the first half of 2020. The increase was primarily a result of the repayment of$217.5 million on the 2016 Term Loan Facility during the first half of 2021, partially offset by borrowings of$55 million under the 2018 Revolving Credit Facility. The Company had cash payments for acquisition related contingent consideration of$19.9 million during the first half of 2021 and$20.5 million during the first half of 2020. The Company anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to sub-bottling fees will be in the range of$31 million to$57 million .
Critical Accounting Policies
See Note 1 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 located inBishopville, South Carolina . All of SAC's shareholders are CocaCola bottlers and each has equal voting rights. As ofJuly 2, 2021 , the Company had guaranteed$14.7 million of SAC's debt. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company's guarantee. See Note 20 to the condensed consolidated financial statements for additional information.
Hedging Activities
The Company uses commodity derivative instruments to manage its exposure to
fluctuations in certain commodity prices. Fees paid by the Company for commodity
derivative instruments are amortized over the corresponding period of the
instrument. The Company accounts for its commodity derivative instruments on a
mark-to-market basis with any expense or income being reflected as an adjustment
to cost of sales or SD&A expenses, consistent with the expense classification of
the underlying hedged item.
The Company uses several different financial institutions for commodity
derivative instruments to minimize the concentration of credit risk. The Company
has master agreements with the counterparties to its commodity derivative
instruments that provide for net settlement of derivative transactions. The net
impact of the commodity derivative instruments on the condensed consolidated
statements of operations was as follows:
Second Quarter First Half
(in thousands) 2021 2020 2021 2020
Increase (decrease) in cost of sales$ (5,691) $ 378 $ (6,653) $ 2,592 Increase (decrease) in SD&A expenses (1,067) 219 (1,911) 2,995 Net impact$ (6,758) $ 597 $ (8,564) $ 5,587
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, net income 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.
39--------------------------------------------------------------------------------
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," "strive" 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 2020, as well as other factors discussed throughout this report, 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 theUnited States Securities and Exchange Commission .
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