NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Description of Business and Summary of Critical Accounting Policies
Description of Business
Coca‑Cola Consolidated, Inc. (the “Company”) distributes, markets and manufactures nonalcoholic beverages, primarily products of The Coca‑Cola Company, and is the largest Coca‑Cola bottler in the United States. Approximately 86% of the Company’s 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. The Company also distributes products for several other beverage companies, including Keurig Dr Pepper Inc. and Monster Energy Company.
The Company offers a range of nonalcoholic beverage products and flavors, including both sparkling and still beverages, designed to meet the demands of its consumers. Sparkling beverages are carbonated beverages and the Company’s principal sparkling beverage is Coca‑Cola. Still beverages include energy products and noncarbonated beverages such as bottled water, ready to drink tea, ready to drink coffee, enhanced water, juices and sports drinks.
The Company’s products are sold and distributed in the United States through various channels, which include selling directly to customers, including grocery stores, mass merchandise stores, club stores, convenience stores and drug stores, selling to on-premise locations, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, and selling through other channels such as vending machine outlets.
The Company manages its business on the basis of three operating segments. 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.”
Principles of Consolidation
The consolidated financial statements include the accounts and the consolidated operations of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements, in conformity with accounting principles generally accepted in the United States (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks and cash equivalents, which are highly liquid debt instruments with maturities of less than 90 days. The Company maintains cash deposits with major banks, which, from time to time, may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes the risk of any loss is minimal.
Accounts Receivable, Trade
The Company sells its products and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company evaluates the collectability of its trade accounts receivable based on a number of factors, including the Company’s historic collections pattern and changes to a specific customer’s ability to meet its financial obligations. The Company typically collects payment from customers within 30 days from the date of sale.
Allowance for Doubtful Accounts
The Company has established an allowance for doubtful accounts to adjust the recorded receivable to the estimated amount the Company believes will ultimately be collected. The Company’s allowance for doubtful accounts in the consolidated balance sheets includes a reserve for customer returns and an allowance for credit losses. The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers. Returned product is recognized as a reduction to net sales.
The Company estimates an allowance for credit losses, based on historic days’ sales outstanding trends, aged customer balances, previously written-off balances and expected recoveries up to balances previously written off, in order to present the net amount expected to be collected. Accounts receivable balances are written off when determined uncollectible and are recognized as a reduction to the allowance for credit losses.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined on the first-in, first-out method for finished products and manufacturing materials and on the average cost method for plastic shells, plastic pallets and other inventories.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leasehold improvements on operating leases are depreciated over the shorter of the estimated useful lives or the term of the lease, including renewal options the Company determines are reasonably assured. Additions and major replacements or betterments are added to the assets at cost. Maintenance and repair costs and minor replacements are charged to expense when incurred. When assets are replaced or otherwise disposed, the cost and accumulated depreciation are removed from the accounts and the gains or losses, if any, are reflected in the consolidated statements of operations. Gains or losses on the disposal of manufacturing equipment and manufacturing plants are included in cost of sales. Gains or losses on the disposal of all other property, plant and equipment are included in selling, delivery and administrative (“SD&A”) expenses.
The Company evaluates the recoverability of the carrying amount of its property, plant and equipment when events or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. These evaluations are performed at a level where independent cash flows may be attributed to either an asset or an asset group. If the Company determines the carrying amount of an asset or asset group is not recoverable based upon the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair values of the long-lived assets.
Leases
The Company leases office and warehouse space, machinery and other equipment under noncancelable operating lease agreements and also leases certain warehouse space under financing lease agreements. The Company uses the following policies and assumptions to evaluate its leases:
•Determining a lease: The Company assesses contracts at inception to determine whether an arrangement is or includes a lease, which conveys the Company’s right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets and associated liabilities are recognized at the commencement date and initially measured based on the present value of lease payments over the defined lease term.
•Allocating lease and non-lease components: The Company has elected the practical expedient to not separate lease and non-lease components for certain classes of underlying assets. The Company has equipment and vehicle lease agreements, which generally have the lease and associated non-lease components accounted for as a single lease component. The Company has real estate lease agreements with lease and non-lease components, which are accounted for separately where applicable.
•Calculating the discount rate: The Company calculates the discount rate based on the discount rate implicit in the lease, or if the implicit rate is not readily determinable from the lease, then the Company calculates an incremental borrowing rate using a portfolio approach. The incremental borrowing rate is calculated using the contractual lease term and the Company’s borrowing rate.
•Recognizing leases: The Company does not recognize leases with a contractual term of less than 12 months on its consolidated balance sheets. Lease expense for these short-term leases is expensed on a straight-line basis over the lease term.
•Including rent increases or escalation clauses: Certain leases contain scheduled rent increases or escalation clauses, which can be based on the Consumer Price Index or other rates. The Company assesses each contract individually and applies the appropriate variable payments based on the terms of the agreement.
•Including renewal options and/or purchase options: Certain leases include renewal options to extend the lease term and/or purchase options to purchase the leased asset. The Company assesses these options using a threshold of reasonably certain, which is a high threshold and, therefore, the majority of the Company’s leases do not include renewal periods or purchase options for the measurement of the right-of-use asset and the associated lease liability. For leases the Company is reasonably certain to renew or purchase, those options are included within the lease term and, therefore, included in the measurement of the right-of-use asset and the associated lease liability.
•Including options to terminate: Certain leases include the option to terminate the lease prior to its scheduled expiration. This allows a contractually bound party to terminate its obligation under the lease contract, typically in return for an agreed-upon financial consideration. The terms and conditions of the termination options vary by contract.
•Including residual value guarantees, restrictions or covenants: The Company’s lease agreements do not contain residual value guarantees, restrictions or covenants.
Internal Use Software
The Company capitalizes costs incurred in the development or acquisition of internal use software. The Company expenses costs incurred in the preliminary project planning stage. Costs, such as maintenance and training, are also expensed as incurred. Capitalized costs are amortized over their estimated useful lives using the straight-line method. Amortization expense for internal use software, which is included in depreciation expense, was $3.0 million in 2022, $5.4 million in 2021 and $6.7 million in 2020.
Goodwill
All business combinations are accounted for using the acquisition method. Goodwill is tested for impairment annually, or more frequently if facts and circumstances indicate such assets may be impaired. The Company performs its annual goodwill impairment test, which includes a qualitative assessment to determine whether it is more likely than not that the fair value of the goodwill is below its carrying value, as of the first day of the fourth quarter each year, and more often if there are significant changes in business conditions that could result in impairment.
All of the Company’s goodwill resides within one reporting unit within the Nonalcoholic Beverages reportable segment and, therefore, the Company has determined it has one reporting unit for the purpose of assessing goodwill for potential impairment. The Company uses its overall market capitalization as part of its estimate of fair value of the reporting unit and in assessing the reasonableness of the Company’s internal estimates of fair value.
When a quantitative analysis is considered necessary for the annual impairment analysis of goodwill, the Company develops an estimated fair value for the reporting unit considering three different approaches:
•market value, using the Company’s stock price plus outstanding debt;
•discounted cash flow analysis; and
•multiple of earnings before interest, taxes, depreciation and amortization based upon relevant industry data.
The estimated fair value of the reporting unit is then compared to its carrying amount, including goodwill. If the estimated fair value exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount, including goodwill, exceeds its estimated fair value, any excess of the carrying value of goodwill of the reporting unit over its fair value is recorded as an impairment.
To the extent the actual and projected cash flows decline in the future or if market conditions or market capitalization significantly deteriorate, the Company may be required to perform an interim impairment analysis that could result in an impairment of goodwill.
During 2022, 2021 and 2020, the Company performed its annual impairment test of goodwill and determined there was no impairment of the carrying value of these assets.
Distribution Agreements and Customer Lists
The Company’s definite-lived intangible assets consist of distribution agreements and customer lists, which have estimated useful lives of 20 to 40 years and five to 12 years, respectively. These assets are amortized on a straight-line basis over their estimated useful lives.
Acquisition Related Contingent Consideration Liability
The acquisition related contingent consideration liability consists of the estimated amounts due to The Coca‑Cola Company under the Company’s comprehensive beverage agreements (collectively, the “CBA”) with The Coca‑Cola Company and Coca‑Cola Refreshments USA, Inc. (“CCR”), a wholly owned subsidiary of The Coca‑Cola Company, over the useful life of the related distribution rights. The CBA relates to a multi-year series of transactions, which were completed in October 2017, through which the Company acquired and exchanged distribution territories and manufacturing plants (the “System Transformation”). Pursuant to the CBA, the Company is required to make quarterly acquisition related sub-bottling payments to CCR on a continuing basis in exchange for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in certain distribution territories the Company acquired from CCR. This acquisition related contingent consideration is valued
using a probability weighted discounted cash flow model based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data, which are considered Level 3 inputs.
Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to acquisition related sub-bottling payments to fair value by discounting future expected acquisition related sub-bottling payments required under the CBA using the Company’s estimated WACC. These future expected acquisition related sub-bottling payments extend through the life of the related distribution assets acquired in each distribution territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the acquisition related sub-bottling payments that will be made in the future under the CBA and current acquisition related sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration liability and could materially impact the amount of non-cash expense (or income) recorded each reporting period.
Pension and Postretirement Benefit Plans
There are two Company-sponsored pension plans. The primary Company-sponsored pension plan (the “Primary Plan”) was frozen as of June 30, 2006 and no benefits accrued to participants after that date. The second Company-sponsored pension plan (the “Bargaining Plan”) is for certain employees under collective bargaining agreements. Benefits under the Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes. The Company also sponsors a postretirement healthcare plan for employees meeting specified qualifying criteria.
The expense and liability amounts recorded for the benefit plans reflect estimates related to interest rates, investment returns, employee turnover and age at retirement, mortality rates and healthcare costs. Given the anticipated termination of the Primary Plan, the Company determined an appropriate discount rate for the Primary Plan in 2022 based on lump sum segment interest rates, expected lump sum election rates and estimated annuity purchase rates. See Note 16 for additional discussion of the anticipated termination of the Primary Plan. The Company determines an appropriate discount rate annually for the Bargaining Plan and the postretirement healthcare plan based on the Aon AA Above Median yield curve as of the measurement date and reviews the discount rate assumption at the end of each year. The service cost components of the net periodic benefit cost of the plans are charged to current operations, and the non-service cost components of the net periodic benefit cost of the plans are classified as other expense, net. In addition, certain other union employees are covered by plans provided by their respective union organizations and the Company expenses amounts as paid in accordance with union agreements.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating losses and tax credit carryforwards, as well as the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance will be provided against deferred tax assets if the Company determines it is more likely than not such assets will not ultimately be realized.
The Company does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50% likely to be realized. The Company records interest and penalties related to uncertain tax positions in income tax expense.
Revenue Recognition
The Company’s sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, post-mix sales, transportation revenue and equipment maintenance revenue. 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 contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Generally, the Company’s service contracts and contracts related to the delivery of specifically identifiable products have a single performance obligation. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time (“point in time”).
Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time (“over time”). Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the consolidated financial statements.
Marketing Programs and Sales Incentives
The Company participates in various sales programs with The Coca‑Cola Company, other beverage companies and customers to increase the sale of its products. Programs negotiated with customers include arrangements under which allowances can be earned for attaining agreed-upon sales levels. The cost of these various sales incentives is not considered a separate performance obligation and is included as a deduction to net sales.
Allowance payments made to customers can be conditional on the achievement of volume targets and/or marketing commitments. Payments made in advance are recorded as prepayments and amortized in the consolidated statements of operations over the relevant period for which the customer commitment is made. In the event there is no separate identifiable benefit or the fair value of such benefit cannot be established, the amortization of the prepayment is included as a deduction to net sales.
The nature of the Company’s contracts gives rise to several types of variable consideration, including prospective and retrospective rebates. The Company accounts for its prospective and retrospective rebates using the expected value method, which estimates the net price to the customer based on the customer’s expected annual sales volume projections.
Marketing Funding Support
The Company receives marketing funding support payments in cash from The Coca‑Cola Company and other beverage companies. Payments to the Company for marketing programs to promote bottle/can sales volume and fountain syrup sales volume are recognized as a reduction to cost of sales, primarily on a per unit basis, as the product is sold. Payments for periodic programs are recognized in the period during which they are earned.
Cash consideration received by a customer from a vendor is presumed to be a reduction of the price of the vendor’s products or services. As such, the cash received is accounted for as a reduction to cost of sales unless it is a specific reimbursement of costs or payments for services. Payments the Company receives from The Coca‑Cola Company and other beverage companies for marketing funding support are classified as a reduction to cost of sales.
Commodity Derivative Instruments
The Company is subject to the risk of increased costs arising from adverse changes in certain commodity prices. In the normal course of business, the Company manages this risk through a variety of strategies, including the use of commodity derivative instruments. The Company does not use commodity derivative instruments for trading or speculative purposes. These commodity derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company would be exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these counterparties.
Commodity derivative instruments held by the Company are marked to market on a monthly basis and recognized in earnings consistent with the expense classification of the underlying hedged item. The Company generally pays a fee for these commodity derivative instruments, which is amortized over the corresponding period of each commodity derivative instrument. Settlements of commodity derivative instruments are included in cash flows from operating activities in the consolidated statements of cash flows.
All commodity derivative instruments are recorded at fair value as either assets or liabilities in the consolidated balance sheets. The Company has master agreements with the counterparties to its commodity derivative instruments that provide for net settlement of derivative transactions. Accordingly, the net amounts of derivative assets are recognized in either prepaid expenses and other current
assets or other assets in the consolidated balance sheets and the net amounts of derivative liabilities are recognized in either other accrued liabilities or other liabilities in the consolidated balance sheets.
Risk Management Programs
The Company uses various insurance structures to manage costs related to workers’ compensation, auto liability, medical and other insurable risks. These structures consist of retentions, deductibles, limits and a diverse group of insurers that serve to strategically finance, transfer and mitigate the financial impact of losses to the Company. Losses are accrued using assumptions and procedures followed in the insurance industry, then adjusted for company-specific history and expectations.
Cost of Sales
Inputs representing a substantial portion of the Company’s cost of sales include: (i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles, carbon dioxide and sweetener, (iii) concentrate costs and (iv) manufacturing costs, including labor, overhead and warehouse costs. In addition, cost of sales includes shipping, handling and fuel costs related to the movement of finished products from manufacturing plants to distribution centers, amortization expense of distribution rights, distribution fees of certain products and marketing credits from brand companies.
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.
Shipping and Handling Costs
Shipping and handling costs related to the movement of finished products from manufacturing plants to distribution centers are included in cost of sales. Shipping and handling costs related to the movement of finished products from distribution centers to customer locations, including distribution center warehousing costs, are included in SD&A expenses and totaled $756.9 million in 2022, $674.3 million in 2021 and $622.1 million in 2020.
Stock Compensation
The Company has a long-term performance equity plan (the “Long-Term Performance Equity Plan”) under which awards are earned and granted to Mr. Harrison based on the Company’s attainment during a performance period of performance measures specified by the Compensation Committee of the Company’s Board of Directors. Mr. Harrison may elect to have awards earned under the Long‑Term Performance Equity Plan settled in cash and/or shares of the Company’s Class B Common Stock. See Note 2 for additional information on the Long‑Term Performance Equity Plan.
Common Stock and Class B Common Stock
The Company has two classes of common stock outstanding, Common Stock and Class B Common Stock. The Common Stock is traded on The Nasdaq Global Select Market under the symbol COKE. There is no established public trading market for the Class B Common Stock. Shares of Class B Common Stock are convertible on a share-for-share basis into shares of Common Stock at any time at the option of the holder.
Each share of Common Stock is entitled to one vote per share and each share of Class B Common Stock is entitled to 20 votes per share at all meetings of the Company’s stockholders. Except as otherwise required by law, holders of the Common Stock and the Class B Common Stock vote together as a single class on all matters submitted to the Company’s stockholders, including the election of the Board of Directors. As a result, the holders of the Class B Common Stock control approximately 71% of the total voting power of the stockholders of the Company and control the election of the Board of Directors. In the event of liquidation, there is no preference between the two classes of common stock.
Dividends
No cash dividend or dividend of property or stock other than stock of the Company, as specifically described in the Company’s Restated Certificate of Incorporation, as amended (the “Restated Certificate of Incorporation”), may be declared and paid on the Class B Common Stock unless an equal or greater dividend is declared and paid on the Common Stock. Under the Restated Certificate of Incorporation, the Board of Directors may declare dividends on the Common Stock without declaring equal or any dividends on the
Class B Common Stock. Notwithstanding this provision, the Class B Common Stock has voting and conversion rights that allow the Class B Common Stock to participate equally on a per share basis with the Common Stock.
The Board of Directors has declared, and the Company has paid, dividends on the Common Stock and the Class B Common Stock and each class of common stock has participated equally in all dividends declared by the Board of Directors and paid by the Company since 1994. During 2022, dividends of $4.50 per share were declared and dividends of $1.00 per share were paid on both the Common Stock and the Class B Common Stock. The remaining $3.50 per share of dividends declared but not yet paid as of December 31, 2022 were paid on February 10, 2023 to stockholders of record of the Common Stock and the Class B Common Stock as of the close of business on January 27, 2023. During 2021 and 2020, dividends of $1.00 per share were declared and paid on both the Common Stock and the Class B Common Stock. Total cash dividends paid were $9.4 million per year in 2022, 2021 and 2020.
Net Income Per Share
The Company applies the two-class method for calculating and presenting net income per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared or accumulated and participation rights in undistributed earnings. Under this method:
(i)Income from continuing operations (“net income”) is reduced by the amount of dividends declared in the current period for each class of stock and by the contractual amount of dividends that must be paid for the current period.
(ii)The remaining earnings (“undistributed earnings”) are allocated to the Common Stock and the Class B Common Stock to the extent each security may share in earnings as if all the earnings for the period had been distributed. The total earnings allocated to each security is determined by adding together the amount allocated for dividends and the amount allocated for a participation feature.
(iii)The total earnings allocated to each security is then divided by the number of outstanding shares of the security to which the earnings are allocated to determine the earnings per share for the security.
(iv)Basic and diluted net income per share data are presented for each class of common stock.
In applying the two-class method, the Company determined undistributed earnings should be allocated equally on a per share basis between the Common Stock and the Class B Common Stock due to the aggregate participation rights of the Class B Common Stock (i.e., the voting and conversion rights) and the Company’s history of paying dividends equally on a per share basis on the Common Stock and the Class B Common Stock.
The Class B Common Stock conversion rights allow the Class B Common Stock to participate in dividends equally with the Common Stock. Class B Common Stock is convertible into Common Stock on a one-for-one per share basis at any time at the option of the holder. Accordingly, the holders of the Class B Common Stock can participate equally in any dividends declared on the Common Stock by exercising their conversion rights.
Basic net income per share excludes potential common shares that were dilutive and is computed by dividing net income available for common stockholders by the weighted average number of Common and Class B Common shares outstanding. Diluted net income per share for Common Stock and Class B Common Stock gives effect to all securities representing potential common shares that were dilutive and outstanding during the period. The Company does not have anti-dilutive shares.
Recently Issued Accounting Pronouncements
In September 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2022-04, “Liabilities-Supplier Finance Programs,” which requires additional quantitative and qualitative disclosures related to a Company’s supplier finance programs to enhance the transparency of these programs. The new guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, except for the amendment on rollforward information, which is effective for fiscal years beginning after December 15, 2023. The Company evaluated the impact ASU 2022-04 will have on its consolidated financial statements and does not expect a material impact upon adoption in 2023.
2.Related Party Transactions
The Coca‑Cola Company
The Company’s business consists primarily of the distribution, marketing and manufacture of nonalcoholic beverages of The Coca‑Cola Company, which is the sole owner of the formulas under which the primary components of its soft drink products, either concentrate or syrup, are manufactured.
On March 17, 2022, the Company entered into a stockholder conversion agreement (the “Stockholder Conversion Agreement”) with the JFH Family Limited Partnership—SW1, the Anne Lupton Carter Trust f/b/o Sue Anne H. Wells, the JFH Family Limited Partnership—DH1 and the Anne Lupton Carter Trust f/b/o Deborah S. Harrison (collectively, the “Converting Stockholders”), pursuant to which the Company and the Converting Stockholders agreed upon the process for converting an aggregate of 1,227,546 shares of the Company’s Class B Common Stock owned by the Converting Stockholders on a one share for one share basis into shares of the Company’s Common Stock, effective as of March 17, 2022 (the “Converted Shares”). In the Stockholder Conversion Agreement, the Company agreed to cause the Converted Shares to be registered for resale pursuant to the Company’s existing automatic shelf registration statement and the Converting Stockholders agreed to certain restrictions on their resale of the Converted Shares, including a trade volume limitation that prohibits the sale of more than 175,000 of the Converted Shares in the aggregate during any three-consecutive month period. On June 21, 2022, the Company filed a prospectus supplement with the SEC pursuant to the Company’s existing automatic shelf registration statement, registering the Converted Shares for resale by the Converting Stockholders. The Company will not receive any proceeds from any resale of the Converted Shares by the Converting Stockholders.
As of December 31, 2022, J. Frank Harrison, III, Chairman of the Board of Directors and Chief Executive Officer of the Company, controlled 1,004,394 shares of the Company’s Class B Common Stock, which represented approximately 71% of the total voting power of the Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis.
As of December 31, 2022, The Coca‑Cola Company owned shares of the Company’s Common Stock representing approximately 9% of the total voting power of the Company’s outstanding Common Stock and Class B Common Stock on a consolidated basis. The number of shares of the Company’s Common Stock currently held by The Coca‑Cola Company gives it the right to have a designee proposed by the Company for nomination to the Company’s Board of Directors in the Company’s annual proxy statement. J. Frank Harrison, III and the trustees of certain trusts established for the benefit of certain relatives of the late J. Frank Harrison, Jr. have agreed to vote the shares of the Company’s Common Stock and Class B Common Stock that they control in favor of such designee. The Coca‑Cola Company does not own any shares of the Company’s Class B Common Stock.
The following table summarizes the significant cash transactions between the Company and The Coca‑Cola Company:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Payments made by the Company to The Coca-Cola Company(1) | | $ | 1,867,727 | | | $ | 1,558,784 | | | $ | 1,444,492 | |
Payments made by The Coca-Cola Company to the Company | | 256,333 | | | 207,073 | | | 128,749 | |
(1)This excludes acquisition related sub-bottling payments made by the Company to Coca-Cola Refreshments USA, Inc., a wholly owned subsidiary of The Coca‑Cola Company, but includes the purchase price of certain additional BODYARMOR distribution rights, each as discussed below.
On January 1, 2022, the Company entered into an agreement to acquire $30.1 million of additional BODYARMOR distribution rights with an estimated useful life of 40 years.
More than 80% of the payments made by the Company to The Coca‑Cola Company were for concentrate, syrup, sweetener and other finished goods products, which were recorded in cost of sales in the consolidated statements of operations and represent the primary components of the soft drink products the Company manufactures and distributes. Payments made by the Company to The Coca‑Cola Company also included payments for marketing programs associated with large, national customers managed by The Coca‑Cola Company on behalf of the Company, which were recorded as a reduction to net sales in the consolidated statements of operations. Other payments made by the Company to The Coca‑Cola Company related to cold drink equipment parts, fees associated with the rights to distribute certain brands and other customary items.
Payments made by The Coca‑Cola Company to the Company included annual funding in connection with the Company’s agreement to support certain business initiatives developed by The Coca‑Cola Company and funding associated with the delivery of post-mix products to various customers, both of which were recorded as a reduction to cost of sales in the consolidated statements of operations. Payments made by The Coca‑Cola Company to the Company also included transportation services and fountain product delivery and equipment repair services performed by the Company on The Coca‑Cola Company’s equipment, all of which were recorded in net sales in the consolidated statements of operations.
Coca‑Cola Refreshments USA, Inc.
The CBA requires the Company to make quarterly acquisition related sub-bottling payments to CCR on a continuing basis in exchange for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in certain distribution territories the Company acquired from CCR. These acquisition related sub-bottling
payments are based on gross profit derived from the Company’s sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, a beverage product or certain cross-licensed brands applicable to the System Transformation.
Acquisition related sub-bottling payments to CCR were $36.5 million in 2022, $39.1 million in 2021 and $43.4 million in 2020. The following table summarizes the liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future expected acquisition related sub‑bottling payments to CCR:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Current portion of acquisition related contingent consideration | | $ | 40,060 | | | $ | 51,518 | |
Noncurrent portion of acquisition related contingent consideration | | 501,431 | | | 490,587 | |
Total acquisition related contingent consideration | | $ | 541,491 | | | $ | 542,105 | |
Southeastern Container (“Southeastern”)
The Company is a shareholder of Southeastern, a plastic bottle manufacturing cooperative. The Company accounts for Southeastern as an equity method investment. The Company’s investment in Southeastern, which was classified as other assets in the consolidated balance sheets, was $21.2 million as of December 31, 2022 and $21.7 million as of December 31, 2021.
South Atlantic Canners, Inc. (“SAC”)
The Company is a shareholder of SAC, a manufacturing cooperative located in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights. The Company accounts for SAC as an equity method investment. The Company’s investment in SAC, which was classified as other assets in the consolidated balance sheets, was $8.2 million as of both December 31, 2022 and December 31, 2021. The Company also guarantees a portion of SAC’s debt; see Note 19 for additional information.
The Company receives a fee for managing the day-to-day operations of SAC pursuant to a management agreement. Proceeds from management fees received from SAC, which were recorded as a reduction to cost of sales in the consolidated statements of operations, were $8.9 million in 2022, $8.7 million in 2021 and $9.0 million in 2020.
Coca‑Cola Bottlers’ Sales & Services Company LLC (“CCBSS”)
Along with all other Coca‑Cola bottlers in the United States and Canada, the Company is a member of CCBSS, a company formed to provide certain procurement and other services with the intention of enhancing the efficiency and competitiveness of the Coca‑Cola bottling system. The Company accounts for CCBSS as an equity method investment and its investment in CCBSS is not material.
CCBSS negotiates the procurement for the majority of the Company’s raw materials, excluding concentrate, and the Company receives a rebate from CCBSS for the purchase of these raw materials. The Company had rebates due from CCBSS of $25.7 million on December 31, 2022 and $7.9 million on December 31, 2021, which were classified as accounts receivable, other in the consolidated balance sheets. Changes in rebates receivable relate to volatility in raw material prices and the timing of cash receipts of rebates.
In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $2.4 million in 2022, $2.9 million in 2021 and $2.5 million in 2020, which were classified as SD&A expenses in the consolidated statements of operations.
CONA Services LLC (“CONA”)
Along with certain other Coca‑Cola bottlers, the Company is a member of CONA, an entity formed to provide business process and information technology services to its members. The Company accounts for CONA as an equity method investment. The Company’s investment in CONA, which was classified as other assets in the consolidated balance sheets, was $16.9 million as of December 31, 2022 and $13.7 million as of December 31, 2021.
Pursuant to an amended and restated master services agreement with CONA, the Company is authorized to use the Coke One North America system (the “CONA System”), a uniform information technology system developed to promote operational efficiency and uniformity among North American Coca‑Cola bottlers. In exchange for the Company’s rights to use the CONA System and receive CONA-related services, it is charged service fees by CONA. The Company incurred service fees to CONA of $25.7 million in 2022, $24.1 million in 2021 and $22.0 million in 2020.
Related Party Leases
The Company leases its headquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation, of which J. Frank Harrison, III is the majority stockholder and Morgan H. Everett, Vice Chair of the Company’s Board of Directors, is a minority stockholder. The annual base rent the Company is obligated to pay under this lease is subject to an adjustment for an inflation factor and the lease expires on December 31, 2029. The principal balance outstanding under this lease was $25.5 million on December 31, 2022 and $28.2 million on December 31, 2021.
The Company previously leased the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina (together, the “Snyder Production Center”) from Harrison Limited Partnership One (“HLP”), which is directly and indirectly owned by trusts of which J. Frank Harrison, III and Sue Anne H. Wells, a former director of the Company, are trustees and beneficiaries and of which Morgan H. Everett is a permissible, discretionary beneficiary. On March 17, 2022, CCBCC Operations, LLC (“Operations”), a wholly owned subsidiary of the Company, entered into a definitive purchase and sale agreement with HLP, pursuant to which Operations purchased the Snyder Production Center from HLP on such date for a purchase price of $60.0 million. This lease, which was scheduled to expire on December 31, 2035, was terminated in connection with the purchase of the Snyder Production Center by Operations. There was no principal balance outstanding under this lease on December 31, 2022 and there was a principal balance outstanding under this lease of $59.1 million on December 31, 2021.
A summary of rental payments for these leases related to 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Company headquarters | | $ | 3,854 | | | $ | 3,778 | | | $ | 3,304 | |
Snyder Production Center | | 927 | | | 4,451 | | | 4,451 | |
Long-Term Performance Equity Plan
The Long-Term Performance Equity Plan compensates J. Frank Harrison, III based on the Company’s performance. Awards granted to Mr. Harrison under the Long-Term Performance Equity Plan are earned based on the Company’s attainment during a performance period of certain performance measures, each as specified by the Compensation Committee of the Company’s Board of Directors. These awards may be settled in cash and/or shares of the Company’s Class B Common Stock, based on the average of the closing prices of shares of the Company’s Common Stock during the last 20 trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which was included in SD&A expenses in the consolidated statements of operations, was $10.1 million in 2022, $9.8 million in 2021 and $9.2 million in 2020.
3.Revenue Recognition
The Company’s sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, post-mix sales, transportation revenue and equipment maintenance revenue.
The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Generally, the Company’s service contracts and contracts related to the delivery of specifically identifiable products have a single performance obligation. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time. Point in time sales accounted for approximately 97% of the Company’s net sales in each of 2022, 2021 and 2020.
Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time. Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the consolidated financial statements.
The following table represents a disaggregation of revenue from contracts with customers:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Point in time net sales: | | | | | | |
Nonalcoholic Beverages - point in time | | $ | 6,034,914 | | | $ | 5,389,444 | | | $ | 4,842,934 | |
Total point in time net sales | | $ | 6,034,914 | | | $ | 5,389,444 | | | $ | 4,842,934 | |
| | | | | | |
Over time net sales: | | | | | | |
Nonalcoholic Beverages - over time | | $ | 46,443 | | | $ | 43,225 | | | $ | 36,236 | |
All Other - over time | | 119,600 | | | 130,045 | | | 128,187 | |
Total over time net sales | | $ | 166,043 | | | $ | 173,270 | | | $ | 164,423 | |
| | | | | | |
Total net sales | | $ | 6,200,957 | | | $ | 5,562,714 | | | $ | 5,007,357 | |
The Company’s allowance for doubtful accounts in the consolidated balance sheets includes a reserve for customer returns and an allowance for credit losses. The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers. Returned product is recognized as a reduction to net sales. The Company’s reserve for customer returns was $3.0 million as of both December 31, 2022 and December 31, 2021.
The Company estimates an allowance for credit losses, based on historic days’ sales outstanding trends, aged customer balances, previously written-off balances and expected recoveries up to balances previously written off, in order to present the net amount expected to be collected. Accounts receivable balances are written off when determined uncollectible and are recognized as a reduction to the allowance for credit losses. Following is a summary of activity for the allowance for credit losses during 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Beginning balance - allowance for credit losses | | $ | 14,336 | | | $ | 18,070 | | | $ | 10,232 | |
Additions charged to expenses and as a reduction to net sales | | 4,326 | | | 4,638 | | | 14,265 | |
Deductions | | (5,543) | | | (8,372) | | | (6,427) | |
Ending balance - allowance for credit losses | | $ | 13,119 | | | $ | 14,336 | | | $ | 18,070 | |
4.Segments
The Company evaluates segment reporting in accordance with FASB 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:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Net sales: | | | | | | |
Nonalcoholic Beverages | | $ | 6,081,357 | | | $ | 5,432,669 | | | $ | 4,879,170 | |
All Other | | 399,359 | | | 366,855 | | | 332,728 | |
Eliminations(1) | | (279,759) | | | (236,810) | | | (204,541) | |
Consolidated net sales | | $ | 6,200,957 | | | $ | 5,562,714 | | | $ | 5,007,357 | |
(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.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Income from operations: | | | | | | |
Nonalcoholic Beverages | | $ | 639,136 | | | $ | 456,713 | | | $ | 324,716 | |
All Other | | 1,911 | | | (17,542) | | | (11,338) | |
Consolidated income from operations | | $ | 641,047 | | | $ | 439,171 | | | $ | 313,378 | |
| | | | | | |
Depreciation and amortization: | | | | | | |
Nonalcoholic Beverages | | $ | 159,845 | | | $ | 168,206 | | | $ | 167,355 | |
All Other | | 11,745 | | | 12,359 | | | 11,662 | |
Consolidated depreciation and amortization | | $ | 171,590 | | | $ | 180,565 | | | $ | 179,017 | |
5.Net Income Per Share
The following table sets forth the computation of basic net income per share and diluted net income per share under the two-class method. See Note 1 for additional information related to net income per share.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands, except per share data) | | 2022 | | 2021 | | 2020 |
Numerator for basic and diluted net income per Common Stock and Class B Common Stock share: | | | | | | |
Net income attributable to Coca-Cola Consolidated, Inc. | | $ | 430,158 | | | $ | 189,580 | | | $ | 172,493 | |
Less dividends: | | | | | | |
Common Stock | | 8,062 | | | 7,141 | | | 7,141 | |
Class B Common Stock | | 1,312 | | | 2,233 | | | 2,233 | |
Total undistributed earnings | | $ | 420,784 | | | $ | 180,206 | | | $ | 163,119 | |
| | | | | | |
Common Stock undistributed earnings – basic | | $ | 364,359 | | | $ | 137,293 | | | $ | 124,275 | |
Class B Common Stock undistributed earnings – basic | | 56,425 | | | 42,913 | | | 38,844 | |
Total undistributed earnings – basic | | $ | 420,784 | | | $ | 180,206 | | | $ | 163,119 | |
| | | | | | |
Common Stock undistributed earnings – diluted | | $ | 363,158 | | | $ | 136,899 | | | $ | 123,563 | |
Class B Common Stock undistributed earnings – diluted | | 57,626 | | | 43,307 | | | 39,556 | |
Total undistributed earnings – diluted | | $ | 420,784 | | | $ | 180,206 | | | $ | 163,119 | |
| | | | | | |
Numerator for basic net income per Common Stock share: | | | | | | |
Dividends on Common Stock | | $ | 8,062 | | | $ | 7,141 | | | $ | 7,141 | |
Common Stock undistributed earnings – basic | | 364,359 | | | 137,293 | | | 124,275 | |
Numerator for basic net income per Common Stock share | | $ | 372,421 | | | $ | 144,434 | | | $ | 131,416 | |
| | | | | | |
Numerator for basic net income per Class B Common Stock share: | | | | | | |
Dividends on Class B Common Stock | | $ | 1,312 | | | $ | 2,233 | | | $ | 2,233 | |
Class B Common Stock undistributed earnings – basic | | 56,425 | | | 42,913 | | | 38,844 | |
Numerator for basic net income per Class B Common Stock share | | $ | 57,737 | | | $ | 45,146 | | | $ | 41,077 | |
| | | | | | |
Numerator for diluted net income per Common Stock share: | | | | | | |
Dividends on Common Stock | | $ | 8,062 | | | $ | 7,141 | | | $ | 7,141 | |
Dividends on Class B Common Stock assumed converted to Common Stock | | 1,312 | | | 2,233 | | | 2,233 | |
Common Stock undistributed earnings – diluted | | 420,784 | | | 180,206 | | | 163,119 | |
Numerator for diluted net income per Common Stock share | | $ | 430,158 | | | $ | 189,580 | | | $ | 172,493 | |
| | | | | | |
Numerator for diluted net income per Class B Common Stock share: | | | | | | |
Dividends on Class B Common Stock | | $ | 1,312 | | | $ | 2,233 | | | $ | 2,233 | |
Class B Common Stock undistributed earnings – diluted | | 57,626 | | | 43,307 | | | 39,556 | |
Numerator for diluted net income per Class B Common Stock share | | $ | 58,938 | | | $ | 45,540 | | | $ | 41,789 | |
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands, except per share data) | | 2022 | | 2021 | | 2020 |
Denominator for basic net income per Common Stock and Class B Common Stock share: | | | | | | |
Common Stock weighted average shares outstanding – basic | | 8,117 | | | 7,141 | | | 7,141 | |
Class B Common Stock weighted average shares outstanding – basic | | 1,257 | | | 2,232 | | | 2,232 | |
| | | | | | |
Denominator for diluted net income per Common Stock and Class B Common Stock share: | | | | | | |
Common Stock weighted average shares outstanding – diluted (assumes conversion of Class B Common Stock to Common Stock) | | 9,405 | | | 9,400 | | | 9,427 | |
Class B Common Stock weighted average shares outstanding – diluted | | 1,288 | | | 2,259 | | | 2,286 | |
| | | | | | |
Basic net income per share: | | | | | | |
Common Stock | | $ | 45.88 | | | $ | 20.23 | | | $ | 18.40 | |
Class B Common Stock | | $ | 45.93 | | | $ | 20.23 | | | $ | 18.40 | |
| | | | | | |
Diluted net income per share: | | | | | | |
Common Stock | | $ | 45.74 | | | $ | 20.17 | | | $ | 18.30 | |
Class B Common Stock | | $ | 45.76 | | | $ | 20.16 | | | $ | 18.28 | |
NOTES TO TABLE
(1)For purposes of the diluted net income per share computation for Common Stock, all shares of Class B Common Stock are assumed to be converted; therefore, 100% of undistributed earnings is allocated to Common Stock.
(2)For purposes of the diluted net income per share computation for Class B Common Stock, weighted average shares of Class B Common Stock are assumed to be outstanding for the entire period and not converted.
(3)For periods presented during which the Company has net income, the denominator for diluted net income per share for Common Stock and Class B Common Stock includes the dilutive effect of shares relative to the Long-Term Performance Equity Plan. For periods presented during which the Company has net loss, the unvested performance units granted pursuant to the Long-Term Performance Equity Plan are excluded from the computation of diluted net loss per share, as the effect would have been anti-dilutive. See Note 2 for additional information on the Long-Term Performance Equity Plan.
(4)The Long-Term Performance Equity Plan awards may be settled in cash and/or shares of the Company’s Class B Common Stock. Once an election has been made to settle an award in cash, the dilutive effect of shares relative to such award is prospectively removed from the denominator in the computation of diluted net income per share.
(5)The Company did not have anti-dilutive shares for any periods presented.
(6)1,227,546 shares of the Company’s Class B Common Stock were converted on a one share for one share basis into shares of the Company’s Common Stock, effective as of March 17, 2022. See Note 2 for additional information on the Stockholder Conversion Agreement.
6.Inventories
Inventories consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Finished products | | $ | 211,089 | | | $ | 181,751 | |
Manufacturing materials | | 89,300 | | | 81,183 | |
Plastic shells, plastic pallets and other inventories | | 47,156 | | | 39,917 | |
Total inventories | | $ | 347,545 | | | $ | 302,851 | |
7.Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Repair parts | | $ | 35,088 | | | $ | 26,643 | |
Prepaid taxes | | 7,829 | | | 4,079 | |
Prepaid software | | 7,398 | | | 7,038 | |
Commodity hedges at fair market value | | 4,808 | | | 7,714 | |
Prepaid marketing | | 4,303 | | | 4,380 | |
Other prepaid expenses and other current assets | | 34,837 | | | 28,214 | |
Total prepaid expenses and other current assets | | $ | 94,263 | | | $ | 78,068 | |
8.Property, Plant and Equipment, Net
The principal categories and estimated useful lives of property, plant and equipment, net were as follows:
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 | | Estimated Useful Lives |
Land | | $ | 88,185 | | | $ | 80,261 | | | |
Buildings | | 352,114 | | | 265,070 | | | 8-50 years |
Machinery and equipment | | 462,640 | | | 443,592 | | | 5-20 years |
Transportation equipment | | 515,752 | | | 466,238 | | | 3-20 years |
Furniture and fixtures | | 102,099 | | | 95,062 | | | 3-10 years |
Cold drink dispensing equipment | | 438,879 | | | 436,954 | | | 3-17 years |
Leasehold and land improvements | | 177,940 | | | 178,809 | | | 5-20 years |
Software for internal use | | 48,581 | | | 47,982 | | | 3-10 years |
Construction in progress | | 103,803 | | | 23,496 | | | |
Total property, plant and equipment, at cost | | 2,289,993 | | | 2,037,464 | | | |
Less: Accumulated depreciation and amortization | | 1,106,263 | | | 1,006,776 | | | |
Property, plant and equipment, net | | $ | 1,183,730 | | | $ | 1,030,688 | | | |
During 2022, 2021 and 2020, the Company performed periodic reviews of property, plant and equipment and determined no material impairment existed.
9.Leases
Following is a summary of the weighted average remaining lease term and the weighted average discount rate for the Company’s leases:
| | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
Weighted average remaining lease term: | | | | |
Operating leases | | 7.2 years | | 8.3 years |
Financing leases | | 4.3 years | | 12.5 years |
Weighted average discount rate: | | | | |
Operating leases | | 3.6 | % | | 3.6 | % |
Financing leases | | 5.2 | % | | 3.1 | % |
On March 17, 2022, the Company terminated its financing lease for the Snyder Production Center, which was scheduled to expire on December 31, 2035. See Note 2 for additional information on the lease termination.
Following is a summary of the Company’s leases within the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Operating lease costs | | $ | 30,484 | | | $ | 26,385 | | | $ | 24,823 | |
Short-term and variable leases | | 15,065 | | | 17,245 | | | 15,305 | |
Depreciation expense from financing leases | | 2,315 | | | 5,656 | | | 4,678 | |
Interest expense on financing lease obligations | | 884 | | | 2,301 | | | 1,728 | |
Total lease cost | | $ | 48,748 | | | $ | 51,587 | | | $ | 46,534 | |
The future minimum lease payments related to the Company’s leases include renewal options the Company has determined to be reasonably certain and exclude payments to landlords for real estate taxes and common area maintenance. Following is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of December 31, 2022:
| | | | | | | | | | | | | | |
(in thousands) | | Operating Leases | | Financing Leases |
2023 | | $ | 31,697 | | | $ | 2,750 | |
2024 | | 27,663 | | | 2,808 | |
2025 | | 21,628 | | | 2,869 | |
2026 | | 19,036 | | | 1,233 | |
2027 | | 17,227 | | | 338 | |
Thereafter | | 51,372 | | | 966 | |
Total minimum lease payments including interest | | $ | 168,623 | | | $ | 10,964 | |
Less: Amounts representing interest | | 22,225 | | | 1,142 | |
Present value of minimum lease principal payments | | 146,398 | | | 9,822 | |
Less: Current portion of lease liabilities - operating and financing leases | | 27,635 | | | 2,303 | |
Noncurrent portion of lease liabilities - operating and financing leases | | $ | 118,763 | | | $ | 7,519 | |
Following is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of December 31, 2021:
| | | | | | | | | | | | | | |
(in thousands) | | Operating Leases | | Financing Leases |
2022 | | $ | 26,026 | | | $ | 7,145 | |
2023 | | 24,893 | | | 7,201 | |
2024 | | 20,639 | | | 7,396 | |
2025 | | 16,740 | | | 7,593 | |
2026 | | 15,575 | | | 6,100 | |
Thereafter | | 65,695 | | | 49,728 | |
Total minimum lease payments including interest | | $ | 169,568 | | | $ | 85,163 | |
Less: Amounts representing interest | | 25,474 | | | 14,097 | |
Present value of minimum lease principal payments | | 144,094 | | | 71,066 | |
Less: Current portion of lease liabilities - operating and financing leases | | 22,048 | | | 6,060 | |
Noncurrent portion of lease liabilities - operating and financing leases | | $ | 122,046 | | | $ | 65,006 | |
Following is a summary of the Company’s leases within the consolidated statements of cash flows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Cash flows from operating activities impact: | | | | | | |
Operating leases | | $ | 28,891 | | | $ | 27,642 | | | $ | 24,718 | |
Interest payments on financing lease obligations | | 884 | | | 2,301 | | | 1,728 | |
Total cash flows from operating activities impact | | $ | 29,775 | | | $ | 29,943 | | | $ | 26,446 | |
| | | | | | |
Cash flows from financing activities impact: | | | | | | |
Principal payments on financing lease obligations | | $ | 2,988 | | | $ | 4,778 | | | $ | 5,861 | |
Total cash flows from financing activities impact | | $ | 2,988 | | | $ | 4,778 | | | $ | 5,861 | |
The Company did not enter into any material operating lease commitments subsequent to year-end.
10.Distribution Agreements, Net
Distribution agreements, net, which are amortized on a straight-line basis and have an estimated useful life of 20 to 40 years, consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Distribution agreements at cost | | $ | 990,191 | | | $ | 960,042 | |
Less: Accumulated amortization | | 148,156 | | | 123,265 | |
Distribution agreements, net | | $ | 842,035 | | | $ | 836,777 | |
Following is a summary of activity for distribution agreements, net during 2022 and 2021:
| | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 |
Beginning balance - distribution agreements, net | | $ | 836,777 | | | $ | 853,753 | |
Other distribution agreements | | 30,149 | | | 7,509 | |
Additional accumulated amortization | | (24,891) | | | (24,485) | |
Ending balance - distribution agreements, net | | $ | 842,035 | | | $ | 836,777 | |
Assuming no impairment of distribution agreements, net, amortization expense in future years based upon recorded amounts as of December 31, 2022 will be approximately $25 million for each fiscal year 2023 through 2027.
11.Customer Lists, Net
Customer lists, net, which are amortized on a straight-line basis and have an estimated useful life of five to 12 years, consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Customer lists at cost | | $ | 25,288 | | | $ | 25,288 | |
Less: Accumulated amortization | | 16,123 | | | 14,322 | |
Customer lists, net | | $ | 9,165 | | | $ | 10,966 | |
Assuming no impairment of customer lists, net, amortization expense in future years based upon recorded amounts as of December 31, 2022 will be approximately $2 million for each fiscal year 2023 through 2027.
12.Other Accrued Liabilities
Other accrued liabilities consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Accrued insurance costs | | $ | 54,180 | | | $ | 51,645 | |
Current portion of acquisition related contingent consideration | | 40,060 | | | 51,518 | |
Accrued marketing costs | | 33,375 | | | 32,249 | |
Employee and retiree benefit plan accruals | | 31,711 | | | 32,007 | |
Accrued taxes (other than income taxes) | | 7,127 | | | 6,638 | |
Current portion of deferred payroll taxes under CARES Act | | — | | | 18,739 | |
All other accrued expenses | | 31,847 | | | 33,973 | |
Total other accrued liabilities | | $ | 198,300 | | | $ | 226,769 | |
The Company took advantage of certain provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which allowed an employer to defer the deposit and payment of the employer’s portion of social security taxes that would otherwise have been due on or after March 27, 2020 and before January 1, 2021. The law permits an employer to deposit half of these deferred payments by December 31, 2021 and the other half by December 31, 2022. The Company repaid a portion of the deferred payroll taxes during 2021 and repaid the remaining portion of the deferred payroll taxes during 2022.
13.Commodity Derivative Instruments
The Company is subject to the risk of increased costs arising from adverse changes in certain commodity prices. In the normal course of business, the Company manages this risk through a variety of strategies, including the use of commodity derivative instruments. The Company does not use commodity derivative instruments for trading or speculative purposes. These commodity derivative instruments are not designated as hedging instruments under GAAP and are used as “economic hedges” to manage certain commodity price risk. The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. While the Company would be exposed to credit loss in the event of nonperformance by these counterparties, the Company does not anticipate nonperformance by these counterparties.
Commodity derivative instruments held by the Company are marked to market on a monthly basis and are recognized in earnings consistent with the expense classification of the underlying hedged item. The Company generally pays a fee for these commodity derivative instruments, which is amortized over the corresponding period of each commodity derivative instrument. Settlements of commodity derivative instruments are included in cash flows from operating activities in the consolidated statements of cash flows. The following table summarizes pre-tax changes in the fair values of the Company’s commodity derivative instruments and the classification of such changes in the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Cost of sales | | $ | (3,333) | | | $ | 3,469 | | | $ | 1,996 | |
Selling, delivery and administrative expenses | | 427 | | | 1,772 | | | 791 | |
Total gain (loss) | | $ | (2,906) | | | $ | 5,241 | | | $ | 2,787 | |
All commodity derivative instruments are recorded at fair value as either assets or liabilities in the consolidated balance sheets. The Company has master agreements with the counterparties to its commodity derivative instruments that provide for net settlement of derivative transactions. Accordingly, the net amounts of derivative assets are recognized in either prepaid expenses and other current assets or other assets in the consolidated balance sheets and the net amounts of derivative liabilities are recognized in either other accrued liabilities or other liabilities in the consolidated balance sheets. The following table summarizes the fair values of the Company’s commodity derivative instruments and the classification of such instruments in the consolidated balance sheets:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Prepaid expenses and other current assets | | $ | 4,808 | | | $ | 7,714 | |
Total assets | | $ | 4,808 | | | $ | 7,714 | |
The following table summarizes the Company’s gross commodity derivative instrument assets and gross commodity derivative instrument liabilities in the consolidated balance sheets:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Gross commodity derivative instrument assets | | $ | 4,808 | | | $ | 9,200 | |
Gross commodity derivative instrument liabilities | | — | | | 1,486 | |
The following table summarizes the Company’s outstanding commodity derivative instruments:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Notional amount of outstanding commodity derivative instruments | | $ | 61,128 | | | $ | 74,558 | |
Latest maturity date of outstanding commodity derivative instruments | | December 2023 | | December 2022 |
14.Fair Values of Financial Instruments
GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data.
The below methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were no transfers of assets or liabilities between levels in any period presented.
| | | | | | | | | | | | | | |
Financial Instrument | | Fair Value Level | | Methods and Assumptions |
Deferred compensation plan assets and liabilities | | Level 1 | | The fair value of the Company’s nonqualified deferred compensation plan for certain executives and other highly compensated employees is based on the fair values of associated assets and liabilities, which are held in mutual funds and are based on the quoted market values of the securities held within the mutual funds. |
Pension plan assets | | Level 1 | | The fair values of the Company’s Level 1 pension plan assets, which are equity securities and fixed income investment vehicles, are valued using the quoted market prices of those securities which are actively traded on national exchanges. |
Pension plan assets | | Level 2 | | The fair values of the Company’s Level 2 pension plan assets, which are investments that are pooled with other investments in a commingled fund, are valued using the net asset value produced by the fund manager. The assets within the commingled funds have a readily determinable fair market value. |
Commodity derivative instruments | | Level 2 | | The fair values of the Company’s commodity derivative instruments are based on current settlement values at each balance sheet date, which represent the estimated amounts the Company would have received or paid upon termination of these instruments. The Company’s credit risk related to the commodity derivative instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair values of commodity derivative instruments. |
Long-term debt | | Level 2 | | The carrying amounts of the Company’s variable rate debt approximate the fair values due to variable interest rates with short reset periods. The fair values of the Company’s fixed rate debt are based on estimated current market prices. |
Acquisition related contingent consideration | | Level 3 | | The fair value of the Company’s acquisition related contingent consideration is based on internal forecasts and the WACC derived from market data. |
The following tables summarize the carrying amounts and the fair values by level of the Company’s deferred compensation plan assets and liabilities, pension plan assets, commodity derivative instruments, long-term debt and acquisition related contingent consideration:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
(in thousands) | | Carrying Amount | | Total Fair Value | | Fair Value Level 1 | | Fair Value Level 2 | | Fair Value Level 3 |
Assets: | | | | | | | | | | |
Deferred compensation plan assets | | $ | 51,257 | | | $ | 51,257 | | | $ | 51,257 | | | $ | — | | | $ | — | |
Pension plan assets | | 261,942 | | | 261,942 | | | 242,639 | | | 19,303 | | | — | |
Commodity derivative instruments | | 4,808 | | | 4,808 | | | — | | | 4,808 | | | — | |
Liabilities: | | | | | | | | | | |
Deferred compensation plan liabilities | | 51,257 | | | 51,257 | | | 51,257 | | | — | | | — | |
Long-term debt | | 598,817 | | | 575,900 | | | — | | | 575,900 | | | — | |
Acquisition related contingent consideration | | 541,491 | | | 541,491 | | | — | | | — | | | 541,491 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
(in thousands) | | Carrying Amount | | Total Fair Value | | Fair Value Level 1 | | Fair Value Level 2 | | Fair Value Level 3 |
Assets: | | | | | | | | | | |
Deferred compensation plan assets | | $ | 60,461 | | | $ | 60,461 | | | $ | 60,461 | | | $ | — | | | $ | — | |
Pension plan assets | | 328,250 | | | 328,250 | | | 313,893 | | | 14,357 | | | — | |
Commodity derivative instruments | | 7,714 | | | 7,714 | | | — | | | 7,714 | | | — | |
Liabilities: | | | | | | | | | | |
Deferred compensation plan liabilities | | 60,461 | | | 60,461 | | | 60,461 | | | — | | | — | |
Long-term debt | | 723,443 | | | 772,600 | | | — | | | 772,600 | | | — | |
Acquisition related contingent consideration | | 542,105 | | | 542,105 | | | — | | | — | | | 542,105 | |
The acquisition related contingent consideration was valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to acquisition related sub-
bottling payments to fair value by discounting future expected acquisition related sub-bottling payments required under the CBA using the Company’s estimated WACC.
The future expected acquisition related sub-bottling payments extend through the life of the related distribution assets acquired in each distribution territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of acquisition related sub-bottling payments that will be made in the future under the CBA, and current acquisition related sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration liability and could materially impact the amount of non-cash expense (or income) recorded each reporting period.
The acquisition related contingent consideration liability is the Company’s only Level 3 asset or liability. A summary of the Level 3 activity is as follows:
| | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 |
Beginning balance - Level 3 liability | | $ | 542,105 | | | $ | 434,694 | |
Payments of acquisition related contingent consideration | | (36,515) | | | (39,097) | |
Reclassification to current payables | | 3,600 | | | 200 | |
Increase in fair value | | 32,301 | | | 146,308 | |
Ending balance - Level 3 liability | | $ | 541,491 | | | $ | 542,105 | |
As of December 31, 2022 and December 31, 2021, discount rates of 9.1% and 7.5%, respectively, were utilized in the valuation of the Company’s acquisition related contingent consideration liability. The increase in the fair value of the acquisition related contingent consideration liability in 2022 was primarily driven by higher projections of future cash flows in the distribution territories subject to acquisition related sub-bottling payments, partially offset by an increase in the discount rate used to calculate fair value. This fair value adjustment was recorded in other expense, net in the consolidated statement of operations for 2022.
The Company anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to acquisition related sub-bottling payments will be in the range of $42 million to $74 million.
15.Income Taxes
The current income tax provision represents the estimated amount of income taxes paid or payable for the year, as well as changes in estimates from prior years. The deferred income tax provision represents the change in deferred tax liabilities and assets. The following table presents the significant components of the provision for income taxes:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Current: | | | | | | |
Federal | | $ | 109,899 | | | $ | 59,308 | | | $ | 38,665 | |
State | | 26,053 | | | 15,444 | | | 11,541 | |
Total current provision | | $ | 135,952 | | | $ | 74,752 | | | $ | 50,206 | |
| | | | | | |
Deferred: | | | | | | |
Federal | | $ | 7,478 | | | $ | (4,966) | | | $ | 8,052 | |
State | | 1,499 | | | (4,217) | | | 685 | |
Total deferred provision (benefit) | | $ | 8,977 | | | $ | (9,183) | | | $ | 8,737 | |
| | | | | | |
Income tax expense | | $ | 144,929 | | | $ | 65,569 | | | $ | 58,943 | |
The Company’s effective income tax rate, calculated by dividing income tax expense by income before taxes, was 25.2% for 2022, 25.7% for 2021 and 24.5% for 2020. The following table provides a reconciliation of income tax expense at the statutory federal rate to actual income tax expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2022 | | 2021 | | 2020 |
(in thousands) | | Income tax expense | | % pre-tax income | | Income tax expense | | % pre-tax income | | Income tax expense | | % pre-tax income |
Statutory expense | | $ | 120,768 | | | 21.0 | % | | $ | 53,581 | | | 21.0 | % | | $ | 50,618 | | | 21.0 | % |
State income taxes, net of federal benefit | | 21,572 | | | 3.8 | | | 9,522 | | | 3.7 | | | 9,258 | | | 3.8 | |
Nondeductible compensation | | 4,005 | | | 0.7 | | | 3,545 | | | 1.4 | | | 3,007 | | | 1.3 | |
Meals, entertainment and travel expense | | 1,694 | | | 0.3 | | | 2,028 | | | 0.8 | | | 1,476 | | | 0.6 | |
Adjustment for uncertain tax positions | | (1,351) | | | (0.2) | | | (984) | | | (0.4) | | | 114 | | | — | |
Valuation allowance change | | (932) | | | (0.2) | | | (902) | | | (0.4) | | | (1,900) | | | (0.8) | |
Noncontrolling interest – Piedmont | | — | | | — | | | — | | | — | | | (2,447) | | | (1.0) | |
Other, net | | (827) | | | (0.2) | | | (1,221) | | | (0.4) | | | (1,183) | | | (0.4) | |
Income tax expense | | $ | 144,929 | | | 25.2 | % | | $ | 65,569 | | | 25.7 | % | | $ | 58,943 | | | 24.5 | % |
The Company’s effective income tax rate, calculated by dividing income tax expense by income before taxes minus net income attributable to noncontrolling interest, was 25.5% for 2020. The Company had no net income attributable to noncontrolling interest during 2022 or 2021.
The Company records liabilities for uncertain tax positions related to income tax positions. These liabilities reflect the Company’s best estimate of the ultimate income tax liability based on known facts and information. Material changes in facts or information, as well as the expiration of statutes of limitations and/or settlements with individual tax jurisdictions, may result in material adjustments to these estimates in the future.
The Company recognizes potential interest and penalties related to uncertain tax positions in income tax expense. During 2022, 2021 and 2020, the interest and penalties related to uncertain tax positions recognized in income tax expense were not material. In addition, the amount of interest and penalties accrued at December 31, 2022 and December 31, 2021 were not material.
The Company had uncertain tax positions, including accrued interest, of $0.3 million on December 31, 2022 and $1.7 million on December 31, 2021, all of which would affect the Company’s effective income tax rate if recognized. While it is expected the amount of uncertain tax positions may change in the next 12 months, the Company does not expect such change would have a material impact on the consolidated financial statements.
A reconciliation of uncertain tax positions, excluding accrued interest, is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Beginning balance - gross uncertain tax positions | | $ | 1,254 | | | $ | 2,161 | | | $ | 2,283 | |
Increase as a result of tax positions taken in the current year | | 105 | | | 59 | | | 61 | |
Increase as a result of tax positions taken in a prior year | | — | | | — | | | 504 | |
Reduction as a result of the expiration of the applicable statute of limitations | | (1,074) | | | (966) | | | (687) | |
Ending balance - gross uncertain tax positions | | $ | 285 | | | $ | 1,254 | | | $ | 2,161 | |
Deferred income taxes are recorded based upon temporary differences between the financial statement and tax bases of assets and liabilities and available net operating loss and tax credit carryforwards. Temporary differences and carryforwards that comprised deferred income tax assets and liabilities were as follows:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Acquisition related contingent consideration | | $ | 132,535 | | | $ | 133,114 | |
Operating lease liabilities | | 35,832 | | | 35,382 | |
Accrued liabilities | | 30,064 | | | 26,253 | |
Deferred revenue | | 27,976 | | | 26,852 | |
Deferred compensation | | 23,102 | | | 24,018 | |
Postretirement benefits | | 11,511 | | | 13,969 | |
Transactional costs | | 3,532 | | | 3,976 | |
Pension | | 808 | | | 4,617 | |
Financing lease agreements | | 614 | | | 1,820 | |
Net operating loss carryforwards | | 532 | | | 1,418 | |
Other | | 3,875 | | | 3,830 | |
Deferred income tax assets | | $ | 270,381 | | | $ | 275,249 | |
Less: Valuation allowance for deferred tax assets | | 3,428 | | | 4,372 | |
Net deferred income tax asset | | $ | 266,953 | | | $ | 270,877 | |
| | | | |
Depreciation | | $ | (182,174) | | | $ | (173,124) | |
Intangible assets | | (173,560) | | | (177,214) | |
Right-of-use assets - operating leases | | (34,410) | | | (34,347) | |
Inventory | | (14,603) | | | (13,481) | |
Prepaid expenses | | (9,193) | | | (6,774) | |
Patronage dividend | | (3,235) | | | (2,369) | |
Deferred income tax liabilities | | $ | (417,175) | | | $ | (407,309) | |
| | | | |
Net deferred income tax liability | | $ | (150,222) | | | $ | (136,432) | |
The Company’s deferred income tax assets and liabilities are subject to adjustment in future periods based on the Company’s ongoing evaluations of such deferred assets and liabilities and new information available to the Company.
Valuation allowances are recognized on deferred tax assets if the Company believes it is more likely than not that some or all of the deferred tax assets will not be realized. The Company believes the majority of the deferred tax assets will be realized due to the reversal of certain significant temporary differences and anticipated future taxable income from operations.
The valuation allowance of $3.4 million on December 31, 2022 and $4.4 million on December 31, 2021 was established primarily for certain loss carryforwards and deferred compensation.
As of December 31, 2022, the Company had no federal net operating losses and $12.0 million of state net operating losses available to reduce future income taxes, which expire in varying amounts through 2042.
Prior tax years beginning in year 2019 remain open to examination by the Internal Revenue Service, and various tax years beginning in year 1999 remain open to examination by certain state tax jurisdictions due to loss carryforwards.
16.Benefit Plans
Executive Benefit Plans
In addition to the Company’s Director Deferral Plan, the Company has four executive benefit plans: the Supplemental Savings Incentive Plan, the Long-Term Retention Plan, the Officer Retention Plan and the Long-Term Performance Plan. The Company also has a Long-Term Performance Equity Plan, as discussed in Note 2.
Pursuant to the Supplemental Savings Incentive Plan, as amended and restated effective November 1, 2011, and as further amended thereafter, eligible participants may elect to defer a portion of their annual salary and bonus. Participants are immediately vested in all deferred contributions they make and become fully vested in Company contributions upon completion of five years of service with the Company, termination of employment due to death or retirement or a change in control. Participant deferrals and Company
contributions made in years prior to 2006 are invested in either a fixed benefit option or certain investment funds determined by the participant. Beginning in 2010, the Company may elect at its discretion to match up to 50% of the first 6% of salary, excluding bonuses, deferred by the participant. During 2022, 2021 and 2020, the Company matched 50% of the first 6% of salary, excluding bonuses, deferred by the participant. The Company may also make discretionary contributions to participants’ accounts.
Under the Director Deferral Plan, as amended and restated effective January 1, 2014, non-employee directors may defer payment of all or a portion of their annual retainer and meeting fees. There is no Company matching contribution under the Director Deferral Plan. The liability under these two deferral plans was as follows:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Current liabilities | | $ | 8,147 | | | $ | 10,111 | |
Noncurrent liabilities | | 74,976 | | | 84,664 | |
Total liability - Supplemental Savings Incentive Plan and Director Deferral Plan | | $ | 83,123 | | | $ | 94,775 | |
Under the Long-Term Retention Plan, effective March 5, 2014, and as amended thereafter, the Company accrues a defined amount each year for an eligible participant based upon an award schedule. Amounts awarded may earn an investment return based on certain investment funds specified by the Company. Benefits under the Long-Term Retention Plan are 50% vested until age 51. Beginning at age 51, the vesting percentage increases by 5% each year until the benefits are fully vested at age 60. Participants receive payments from the plan upon retirement or, in certain instances, upon termination of employment. Payments are made in the form of monthly installments over a period of 10, 15 or 20 years. The liability under this plan was as follows:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Current liabilities | | $ | 173 | | | $ | 178 | |
Noncurrent liabilities | | 7,249 | | | 6,815 | |
Total liability - Long-Term Retention Plan | | $ | 7,422 | | | $ | 6,993 | |
Under the Officer Retention Plan, as amended and restated effective January 1, 2007, and as further amended thereafter, eligible participants may elect to receive an annuity payable in equal monthly installments over a 10-, 15- or 20-year period commencing at retirement or, in certain instances, upon termination of employment. The benefits under the Officer Retention Plan increase with each year of participation as set forth in an agreement between the participant and the Company. Benefits under the Officer Retention Plan are 50% vested until age 51. Beginning at age 51, the vesting percentage increases by 5% each year until the benefits are fully vested at age 60. The liability under this plan was as follows:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Current liabilities | | $ | 3,730 | | | $ | 4,036 | |
Noncurrent liabilities | | 35,959 | | | 37,008 | |
Total liability - Officer Retention Plan | | $ | 39,689 | | | $ | 41,044 | |
Under the Long-Term Performance Plan, as amended and restated effective January 1, 2018, and as further amended thereafter, the Compensation Committee of the Company’s Board of Directors establishes dollar amounts to which a participant shall be entitled upon attainment of the applicable performance measures. Bonus awards under the Long-Term Performance Plan are made based on the relative achievement of performance measures in terms of the Company-sponsored objectives or objectives related to the performance of the individual participant or of the subsidiary, division, department, region or function in which the participant is employed. The liability under this plan was as follows:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Current liabilities | | $ | 7,738 | | | $ | 8,247 | |
Noncurrent liabilities | | 9,673 | | | 7,675 | |
Total liability - Long-Term Performance Plan | | $ | 17,411 | | | $ | 15,922 | |
Pension Plans
There are two Company-sponsored pension plans. The Primary Plan was frozen as of June 30, 2006 and no benefits accrued to participants after that date. The Bargaining Plan is for certain employees under collective bargaining agreements. Benefits under the Bargaining Plan are determined in accordance with negotiated formulas for the respective participants. Contributions to the plans are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes. The Company
updates its mortality assumptions used in the calculation of its pension liability each year using The Society of Actuaries’ latest mortality tables and mortality projection scales.
During 2022, the Company began the process of terminating the Primary Plan. During 2023, the Company expects to offer a lump sum benefit payout option to certain plan participants prior to completing the purchase of group annuity contracts that will transfer the pension benefit obligation to an insurance company. The assumptions used to estimate the fair value during the annual measurement reflect the incremental cost to terminate the Primary Plan.
The following tables set forth pertinent information for the two Company-sponsored pension plans:
| | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 |
Beginning balance - projected benefit obligation | | $ | 359,475 | | | $ | 368,245 | |
Service cost | | 6,586 | | | 7,529 | |
Interest cost | | 10,642 | | | 9,846 | |
Plan amendments | | 154 | | | — | |
Actuarial gain | | (93,626) | | | (12,735) | |
Benefits paid | | (13,088) | | | (13,410) | |
Ending balance - projected benefit obligation | | $ | 270,143 | | | $ | 359,475 | |
Changes in Projected Benefit Obligation
The projected benefit obligation and the accumulated benefit obligation for both Company-sponsored pension plans were in excess of plan assets as of December 31, 2022 and December 31, 2021. The accumulated benefit obligation was $270.1 million on December 31, 2022 and $359.5 million on December 31, 2021.
The increase in the discount rates for both the Primary Plan and the Bargaining Plan, as compared to the previous years, was the primary driver of the actuarial gains in both 2022 and 2021. The actuarial gains, net of tax, were recorded in accumulated other comprehensive loss in the consolidated balance sheets.
Change in Plan Assets
| | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 |
Beginning balance - plan assets at fair value | | $ | 328,250 | | | $ | 319,699 | |
Actual return on plan assets | | (76,683) | | | 16,427 | |
Employer contributions | | 26,000 | | | 6,800 | |
Benefits and expenses paid | | (15,625) | | | (14,676) | |
Ending balance - plan assets at fair value | | $ | 261,942 | | | $ | 328,250 | |
Funded Status
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Projected benefit obligation | | $ | (270,143) | | | $ | (359,475) | |
Plan assets at fair value | | 261,942 | | | 328,250 | |
Net funded status | | $ | (8,201) | | | $ | (31,225) | |
Amounts Recognized in the Consolidated Balance Sheets
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Current liabilities | | $ | — | | | $ | — | |
Noncurrent liabilities | | (8,201) | | | (31,225) | |
Total liability - pension plans | | $ | (8,201) | | | $ | (31,225) | |
Net Periodic Pension Cost
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Service cost | | $ | 6,586 | | | $ | 7,529 | | | $ | 6,331 | |
Interest cost | | 10,642 | | | 9,846 | | | 10,957 | |
Expected return on plan assets | | (8,143) | | | (13,000) | | | (13,617) | |
Recognized net actuarial loss | | 3,990 | | | 4,954 | | | 4,619 | |
Amortization of prior service costs | | — | | | 3 | | | 19 | |
Net periodic pension cost | | $ | 13,075 | | | $ | 9,332 | | | $ | 8,309 | |
Significant Assumptions
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2022 | | 2021 | | 2020 |
Projected benefit obligation at the measurement date: | | | | | | |
Discount rate - Primary Plan | | 5.33 | % | | 2.97 | % | | 2.66 | % |
Discount rate - Bargaining Plan | | 5.34 | % | | 3.31 | % | | 3.12 | % |
Weighted average rate of compensation increase | | N/A | | N/A | | N/A |
Net periodic pension cost for the fiscal year: | | | | | | |
Discount rate - Primary Plan | | 2.97 | % | | 2.66 | % | | 3.36 | % |
Discount rate - Bargaining Plan | | 3.31 | % | | 3.12 | % | | 3.61 | % |
Weighted average expected long-term rate of return of plan assets - Primary Plan(1) | | 3.00 | % | | 4.75 | % | | 5.50 | % |
Weighted average expected long-term rate of return of plan assets - Bargaining Plan(1) | | 5.50 | % | | 5.75 | % | | 6.25 | % |
Weighted average rate of compensation increase | | N/A | | N/A | | N/A |
(1)The weighted average expected long-term rate of return assumption for the pension plan assets, which was used to compute net periodic pension cost, is based upon target asset allocation and is determined using forward-looking performance and duration assumptions set at the beginning of each fiscal year.
Cash Flows
| | | | | | | | |
(in thousands) | | Anticipated Future Pension Benefit Payments for the Fiscal Years |
2023 | | $ | 237,899 | |
2024 | | 1,053 | |
2025 | | 1,241 | |
2026 | | 1,470 | |
2027 | | 1,689 | |
2028 - 2032 | | 11,892 | |
The anticipated future pension benefit payments for 2023 include the payments associated with the termination of the Primary Plan, which will be made from the related plan assets. The remaining anticipated future pension benefit payments for 2023, and all anticipated future pension benefit payments beyond 2023, relate to the Bargaining Plan.
The Company expects to make cash contributions of approximately $5 million to $10 million to the Primary Plan during 2023 to fund the termination of the Primary Plan. The Company also expects to make cash contributions of approximately $5 million to $10 million to the Bargaining Plan during 2023 to fund the ongoing projected benefit obligation of the Bargaining Plan.
Plan Assets
All assets in the Company’s pension plans are invested in institutional investment funds managed by professional investment advisors which hold U.S. equities, international equities and debt securities. The objective of the Company’s investment philosophy is to earn the plans’ targeted rate of return over longer periods without assuming excess investment risk. The weighted average expected long-term rate of return assumption for the pension plan assets, which will be used to compute 2023 net periodic pension cost, is based upon target asset allocation and is determined using forward-looking performance and duration assumptions in the context of historical returns and volatilities for each asset class. The Company evaluates the rate of return assumption on an annual basis. The Company’s
actual asset allocation at December 31, 2022 and December 31, 2021 and target asset allocation for 2023 by asset category for the Primary Plan were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Percentage of Plan Assets at Fiscal Year-End | | Target Asset Allocation |
| | 2022 | | 2021 | | 2023 |
U.S. debt securities | | 84 | % | | 87 | % | | 64 | % |
U.S. equity securities | | — | % | | — | % | | — | % |
International debt securities | | 10 | % | | 10 | % | | — | % |
International equity securities | | — | % | | — | % | | — | % |
Cash and cash equivalents | | 6 | % | | 3 | % | | 36 | % |
Total | | 100 | % | | 100 | % | | 100 | % |
The Company’s actual asset allocation at December 31, 2022 and December 31, 2021 and target asset allocation for 2023 by asset category for the Bargaining Plan were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Percentage of Plan Assets at Fiscal Year-End | | Target Asset Allocation |
| | 2022 | | 2021 | | 2023 |
U.S. debt securities | | 56 | % | | 46 | % | | 41 | % |
U.S. equity securities | | 32 | % | | 40 | % | | 46 | % |
International debt securities | | 2 | % | | 2 | % | | — | % |
International equity securities | | 10 | % | | 11 | % | | 12 | % |
Cash and cash equivalents | | — | % | | 1 | % | | 1 | % |
Total | | 100 | % | | 100 | % | | 100 | % |
The expected long-term rate of return on assets for the Primary Plan and the Bargaining Plan as of December 31, 2022 were 5.00% and 7.00%, respectively.
Debt securities as of December 31, 2022 were comprised primarily of investments in government and corporate bonds with a weighted average maturity of approximately 12 years for the Primary Plan and approximately 19 years for the Bargaining Plan. U.S. equity securities in the Bargaining Plan as of December 31, 2022 included: (i) large-capitalization domestic equity funds as represented by the S&P 500 index, (ii) mid-capitalization domestic equity funds as represented by the Russell Mid Cap Growth and Value indexes, (iii) small-capitalization domestic equity funds as represented by the Russell Small Cap Growth and Value indexes and (iv) alternative investment funds as represented by the HFRX Global index and the MSCI US REIT index. International equity securities in the Bargaining Plan as of December 31, 2022 included companies from both developed and emerging markets outside the United States. Cash and cash equivalents have a weighted average duration of less than one year.
The following table summarizes the Company’s pension plan assets, which are classified as Level 1 and Level 2 for fair value measurement. The Company does not have any Level 3 pension plan assets. See Note 14 for additional information.
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Pension plan assets - fixed income | | $ | 232,578 | | | $ | 300,670 | |
Pension plan assets - equity securities | | 16,194 | | | 18,867 | |
Pension plan assets - cash and cash equivalents | | 13,170 | | | 8,713 | |
Total pension plan assets | | $ | 261,942 | | | $ | 328,250 | |
401(k) Savings Plan
The Company provides a 401(k) Savings Plan for substantially all of its employees who are not part of collective bargaining agreements and for certain employees under collective bargaining agreements. The Company’s matching contribution for employees who are not part of collective bargaining agreements is discretionary, with the option to match contributions for eligible participants up to 5% based on the Company’s financial results. For all years presented, the Company matched the maximum 5% of participants’ contributions. The Company’s matching contribution for employees who are part of collective bargaining agreements is determined in accordance with negotiated formulas for the respective employees. The total expense for the Company’s matching contributions to the 401(k) Savings Plan was $26.8 million in 2022, $24.8 million in 2021 and $22.7 million in 2020.
Postretirement Benefits
The Company provides postretirement benefits for employees meeting specified qualifying criteria. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service. The Company does not prefund these benefits and has the right to modify or terminate certain of these benefits in the future.
The following tables set forth pertinent information for the Company’s postretirement benefit plan:
Reconciliation of Activity
| | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 |
Benefit obligation at beginning of year | | $ | 65,156 | | | $ | 67,665 | |
Service cost | | 1,458 | | | 1,516 | |
Interest cost | | 1,923 | | | 1,772 | |
Plan participants’ contributions | | 657 | | | 930 | |
Actuarial gain | | (10,138) | | | (3,414) | |
Benefits paid | | (3,757) | | | (3,313) | |
Benefit obligation at end of year | | $ | 55,299 | | | $ | 65,156 | |
The increase in the discount rate for the postretirement benefit plan, as compared to the previous years, was the primary driver of the actuarial gain in both 2022 and 2021. The actuarial gain, net of tax, was recorded in accumulated other comprehensive loss in the consolidated balance sheets.
Reconciliation of Plan Assets Fair Value
| | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 |
Fair value of plan assets at beginning of year | | $ | — | | | $ | — | |
Employer contributions | | 3,100 | | | 2,383 | |
Plan participants’ contributions | | 657 | | | 930 | |
Benefits paid | | (3,757) | | | (3,313) | |
Fair value of plan assets at end of year | | $ | — | | | $ | — | |
Funded Status
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Current liabilities | | $ | (3,177) | | | $ | (2,990) | |
Noncurrent liabilities | | (52,122) | | | (62,166) | |
Total liability - postretirement benefits | | $ | (55,299) | | | $ | (65,156) | |
Net Periodic Postretirement Benefit Cost
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Service cost | | $ | 1,458 | | | $ | 1,516 | | | $ | 1,454 | |
Interest cost | | 1,923 | | | 1,772 | | | 2,031 | |
Recognized net actuarial loss | | 444 | | | 682 | | | 383 | |
Net periodic postretirement benefit cost | | $ | 3,825 | | | $ | 3,970 | | | $ | 3,868 | |
Significant Assumptions
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2022 | | 2021 | | 2020 |
Benefit obligation at the measurement date: | | | | | | |
Weighted average healthcare cost trend rate - Pre-Medicare | | 6.58 | % | | 6.04 | % | | 6.26 | % |
Weighted average healthcare cost trend rate - Post-Medicare | | 6.89 | % | | 6.29 | % | | 6.54 | % |
Benefit obligation discount rate | | 5.19 | % | | 2.98 | % | | 2.70 | % |
Net periodic postretirement benefit cost discount rate for fiscal year | | 2.98 | % | | 2.70 | % | | 3.32 | % |
| | | | | | |
Postretirement benefit expense - Pre-Medicare: | | | | | | |
Weighted average healthcare cost trend rate | | 6.04 | % | | 6.26 | % | | 6.53 | % |
Trend rate graded down to ultimate rate | | 4.50 | % | | 4.50 | % | | 4.50 | % |
Ultimate rate year | | 2029 | | 2029 | | 2028 |
| | | | | | |
Postretirement benefit expense - Post-Medicare: | | | | | | |
Weighted average healthcare cost trend rate | | 6.29 | % | | 6.54 | % | | 6.73 | % |
Trend rate graded down to ultimate rate | | 4.50 | % | | 4.50 | % | | 4.50 | % |
Ultimate rate year | | 2029 | | 2029 | | 2028 |
Cash Flows
| | | | | | | | |
(in thousands) | | Anticipated Future Postretirement Benefit Payments Reflecting Expected Future Service |
2023 | | $ | 3,177 | |
2024 | | 3,489 | |
2025 | | 3,655 | |
2026 | | 4,012 | |
2027 | | 4,364 | |
2028 - 2032 | | 22,825 | |
A reconciliation of the gross amounts in accumulated other comprehensive loss not yet recognized as components of net periodic benefit cost is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | December 31, 2021 | | Actuarial Gain (Loss) | | Reclassification Adjustments | | December 31, 2022 |
Pension Plans: | | | | | | | | |
Actuarial loss | | $ | (127,813) | | | $ | 6,263 | | | $ | 3,990 | | | $ | (117,560) | |
Prior service costs | | (4) | | | (154) | | | — | | | (158) | |
Postretirement Medical: | | | | | | | | |
Actuarial gain (loss) | | (9,812) | | | 10,138 | | | 444 | | | 770 | |
Total within accumulated other comprehensive loss | | $ | (137,629) | | | $ | 16,247 | | | $ | 4,434 | | | $ | (116,948) | |
Multiemployer Pension Plans
Certain employees of the Company whose employment is covered under collective bargaining agreements participate in a multiemployer pension plan, the Employers-Teamsters Local Union Nos. 175 and 505 Pension Fund (the “Teamsters Plan”). The Company makes monthly contributions to the Teamsters Plan on behalf of such employees. The collective bargaining agreements covering the Teamsters Plan expire at various times through 2025. The Company expects these agreements will be re-negotiated.
Participating in the Teamsters Plan involves certain risks in addition to the risks associated with single employer pension plans, as contributed assets are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the Teamsters Plan, the unfunded obligations of the Teamsters Plan may be borne by the remaining participating employers. If the Company chooses to stop participating in the Teamsters Plan, the Company could be required to pay the Teamsters Plan a withdrawal liability based on the underfunded status of the Teamsters Plan. The Company does not anticipate withdrawing from the Teamsters Plan.
In 2015, the Company increased its contribution rates to the Teamsters Plan, with additional increases occurring annually, as part of a rehabilitation plan, which was incorporated into the renewal of collective bargaining agreements with the unions effective April 28, 2014 and adopted by the Company as a rehabilitation plan effective January 1, 2015. This is a result of the Teamsters Plan being certified by its actuary as being in “critical” status for the plan year beginning January 1, 2013.
The Company’s participation in the Teamsters Plan is outlined in the table below. A red zone represents less than 80% funding and requires a financial improvement plan (“FIP”) or rehabilitation plan (“RP”).
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Pension Protection Act Zone Status | | Red | | Red | | Red |
FIP or RP pending or implemented | | Yes | | Yes | | Yes |
Surcharge imposed | | Yes | | Yes | | Yes |
Contribution | | $ | 959 | | | $ | 933 | | | $ | 924 | |
According to the Teamsters Plan’s Form 5500 for both the plan years ended December 31, 2021 and December 31, 2020, the Company was not listed as providing more than 5% of the total contributions. At the date these consolidated financial statements were issued, a Form 5500 was not available for the plan year ended December 31, 2022.
The Company has a liability recorded for withdrawing from a multiemployer pension plan in 2008 and is required to make payments of approximately $1 million to this multiemployer pension plan each year through 2028. As of December 31, 2022, the Company had $4.6 million remaining on this liability.
17.Other Liabilities
Other liabilities consisted of the following:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2022 | | December 31, 2021 |
Noncurrent portion of acquisition related contingent consideration | | $ | 501,431 | | | $ | 490,587 | |
Accruals for executive benefit plans | | 137,771 | | | 147,135 | |
Noncurrent deferred proceeds from related parties | | 103,240 | | | 106,304 | |
Other | | 10,915 | | | 14,584 | |
Total other liabilities | | $ | 753,357 | | | $ | 758,610 | |
In 2017, The Coca‑Cola Company agreed to provide the Company a fee to compensate the Company for the net economic impact of changes made by The Coca‑Cola Company to the authorized pricing on sales of covered beverages produced at certain manufacturing plants owned by the Company (the “Legacy Facilities Credit”), which was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years.
Also in 2017, upon the conversion of the Company’s then-existing bottling agreements pursuant to the CBA, the Company received a fee from CCR (the “Territory Conversion Fee”), which was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years. Together, the Legacy Facilities Credit and the Territory Conversion Fee are “deferred proceeds from related parties.”
18.Long-Term Debt
Following is a summary of the Company’s long-term debt:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Maturity Date | | Interest Rate | | Interest Paid | | Public / Nonpublic | | December 31, 2022 | | December 31, 2021 |
Senior notes(1) | | 2/27/2023 | | 3.28% | | Semi-annually | | Nonpublic | | $ | — | | | $ | 125,000 | |
Senior bonds(2) | | 11/25/2025 | | 3.80% | | Semi-annually | | Public | | 350,000 | | | 350,000 | |
Revolving Credit Facility | | 7/9/2026 | | Variable | | Varies | | Nonpublic | | — | | | — | |
Senior notes | | 10/10/2026 | | 3.93% | | Quarterly | | Nonpublic | | 100,000 | | | 100,000 | |
Senior notes | | 3/21/2030 | | 3.96% | | Quarterly | | Nonpublic | | 150,000 | | | 150,000 | |
Unamortized discount on senior bonds(2) | | 11/25/2025 | | | | | | | | (26) | | | (34) | |
Debt issuance costs | | | | | | | | | | (1,157) | | | (1,523) | |
Total long-term debt | | | | | | | | | | $ | 598,817 | | | $ | 723,443 | |
(1)On September 13, 2022, the Company used cash on hand to repay the $125 million of senior notes with a stated maturity date of February 27, 2023. There was no penalty for the early repayment of the senior notes.
(2)The senior bonds due in 2025 were issued at 99.975% of par.
The principal maturities of debt outstanding on December 31, 2022 were as follows:
| | | | | | | | |
(in thousands) | | Debt Maturities |
2023 | | $ | — | |
2024 | | — | |
2025 | | 350,000 | |
2026 | | 100,000 | |
2027 | | — | |
Thereafter | | 150,000 | |
Long-term debt | | $ | 600,000 | |
The Company mitigates its financing risk by using multiple financial institutions and only entering into credit arrangements with institutions with investment grade credit ratings. The Company monitors counterparty credit ratings on an ongoing basis.
The indenture under which the Company’s senior bonds were issued does not include financial covenants but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The agreements under which the Company’s nonpublic debt was issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreement. The Company was in compliance with these covenants as of December 31, 2022. These covenants have not restricted, and are not expected to restrict, the Company’s liquidity or capital resources.
All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s long-term debt.
19.Commitments and Contingencies
Manufacturing Cooperatives
The Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories from Southeastern. The Company is also obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. The Company purchased 26.9 million cases, 28.0 million cases and 28.3 million cases of finished product from SAC in 2022, 2021 and 2020, respectively.
The following table summarizes the Company’s purchases from these manufacturing cooperatives:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Purchases from Southeastern | | $ | 153,967 | | | $ | 125,142 | | | $ | 125,659 | |
Purchases from SAC | | 193,261 | | | 169,399 | | | 155,858 | |
Total purchases from manufacturing cooperatives | | $ | 347,228 | | | $ | 294,541 | | | $ | 281,517 | |
The Company guarantees a portion of SAC’s debt, which expires in 2024. The amount guaranteed was $9.5 million on both December 31, 2022 and December 31, 2021. 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 the selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee.
The Company holds no assets as collateral against the SAC guarantee, the fair value of which is immaterial to the consolidated financial statements. The Company monitors its investment in SAC and would be required to write down its investment if an impairment, other than a temporary impairment, was identified. No impairment of the Company’s investment in SAC was identified as of December 31, 2022, and there was no impairment identified in 2022, 2021 or 2020.
Other Commitments and Contingencies
The Company has standby letters of credit, primarily related to its property and casualty insurance programs. These letters of credit totaled $37.6 million on both December 31, 2022 and December 31, 2021.
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of December 31, 2022, the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $128.8 million.
The Company is involved in various claims and legal proceedings which have arisen in the ordinary course of its business. Although it is difficult to predict the ultimate outcome of these claims and legal proceedings, management believes the ultimate disposition of these matters will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company. No material amount of loss in excess of recorded amounts is believed to be reasonably possible as a result of these claims and legal proceedings.
The Company is subject to audits by tax authorities in jurisdictions where it conducts business. These audits may result in assessments that are subsequently resolved with the authorities or potentially through the courts. Management believes the Company has adequately provided for any assessments likely to result from these audits; however, final assessments, if any, could be different than the amounts recorded in the consolidated financial statements.
20.Risks and Uncertainties
Approximately 86% of the Company’s total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which is the sole supplier of these products or of the concentrates or syrups required to manufacture these products. The remaining bottle/can sales volume to retail customers consists of products of other beverage companies. The Company has beverage agreements with The Coca‑Cola Company and other beverage companies under which it has various requirements. Failure to meet the requirements of these beverage agreements could result in the loss of distribution rights for the respective products.
The Company faces concentration risks related to a few customers comprising a large portion of the Company’s annual sales volume and net sales. 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, which are included in the Nonalcoholic Beverages segment, that such volume represents. No other customer represented greater than 10% of the Company’s total net sales for any years presented.
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
| | 2022 | | 2021 | | 2020 |
Approximate percent of the Company’s total bottle/can sales volume | | | | | | |
Wal-Mart Stores, Inc. | | 20 | % | | 20 | % | | 19 | % |
The Kroger Company | | 12 | % | | 13 | % | | 13 | % |
Total approximate percent of the Company’s total bottle/can sales volume | | 32 | % | | 33 | % | | 32 | % |
| | | | | | |
Approximate percent of the Company’s total net sales | | | | | | |
Wal-Mart Stores, Inc. | | 16 | % | | 14 | % | | 14 | % |
The Kroger Company | | 10 | % | | 9 | % | | 10 | % |
Total approximate percent of the Company’s total net sales | | 26 | % | | 23 | % | | 24 | % |
The Company purchases all of the plastic bottles used in its manufacturing plants from Southeastern and Western Container, two manufacturing cooperatives the Company co-owns with several other Coca‑Cola bottlers, and all of its aluminum cans from two domestic suppliers. See Note 2 and Note 19 for additional information.
The Company is exposed to price risk on commodities such as aluminum, corn and PET resin (a petroleum- or plant-based product), which affects the cost of raw materials used in the production of its finished products. The Company both produces and procures these finished products. Examples of the raw materials affected are aluminum cans and plastic bottles used for packaging and high fructose corn syrup used as a product ingredient. Further, the Company is exposed to commodity price risk on crude oil, which impacts the Company’s cost of fuel used in the movement and delivery of the Company’s products. The Company participates in commodity hedging and risk mitigation programs, including programs administered by CCBSS and programs we administer.
Certain liabilities of the Company, including retirement benefit obligations and the Company’s pension liability, are subject to risk of changes in both long-term and short-term interest rates.
The Company’s contingent consideration liability resulting from the acquisition of certain distribution territories is subject to risk as a result of changes in the Company’s probability weighted discounted cash flow model, which is based on internal forecasts, and changes in the Company’s WACC, which is derived from market data.
Approximately 13% of the Company’s workforce is covered by collective bargaining agreements. The Company’s collective bargaining agreements, which generally have three- to five-year terms, expire at various dates through 2027. Terms and conditions of new labor union agreements could increase the Company’s exposure to work interruptions or stoppages.
21.Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (“AOCI(L)”) is comprised of adjustments to the Company’s pension and postretirement medical benefit plans and the foreign currency translation for a subsidiary of the Company that performs data analysis and provides consulting services outside the United States.
Following is a summary of AOCI(L) for 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gains (Losses) During the Period | | Reclassification to Income | | |
(in thousands) | | December 31, 2021 | | Pre-tax Activity | | Tax Effect | | Pre-tax Activity | | Tax Effect | | December 31, 2022 |
Net pension activity: | | | | | | | | | | | | |
Actuarial loss | | $ | (78,882) | | | $ | 6,263 | | | $ | (1,533) | | | $ | 3,990 | | | $ | (978) | | | $ | (71,140) | |
Prior service credits (costs) | | 11 | | | (154) | | | 38 | | | — | | | — | | | (105) | |
Net postretirement benefits activity: | | | | | | | | | | | | |
Actuarial gain (loss) | | (1,239) | | | 10,138 | | | (2,481) | | | 444 | | | (110) | | | 6,752 | |
Prior service costs | | (624) | | | — | | | — | | | — | | | — | | | (624) | |
Foreign currency translation adjustment | | (9) | | | — | | | — | | | 11 | | | (2) | | | — | |
Reclassification of stranded tax effects | | (19,720) | | | — | | | — | | | — | | | — | | | (19,720) | |
Total AOCI(L) | | $ | (100,463) | | | $ | 16,247 | | | $ | (3,976) | | | $ | 4,445 | | | $ | (1,090) | | | $ | (84,837) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gains (Losses) During the Period | | Reclassification to Income | | |
(in thousands) | | December 31, 2020 | | Pre-tax Activity | | Tax Effect | | Pre-tax Activity | | Tax Effect | | December 31, 2021 |
Net pension activity: | | | | | | | | | | | | |
Actuarial loss | | $ | (93,847) | | | $ | 14,897 | | | $ | (3,658) | | | $ | 4,954 | | | $ | (1,228) | | | $ | (78,882) | |
Prior service credits | | 8 | | | — | | | — | | | 3 | | | — | | | 11 | |
Net postretirement benefits activity: | | | | | | | | | | | | |
Actuarial loss | | (4,328) | | | 3,414 | | | (838) | | | 682 | | | (169) | | | (1,239) | |
Prior service costs | | (624) | | | — | | | — | | | — | | | — | | | (624) | |
Interest rate swap(1) | | (556) | | | — | | | — | | | 739 | | | (183) | | | — | |
Foreign currency translation adjustment | | 14 | | | — | | | — | | | (32) | | | 9 | | | (9) | |
Reclassification of stranded tax effects | | (19,720) | | | — | | | — | | | — | | | — | | | (19,720) | |
Total AOCI(L) | | $ | (119,053) | | | $ | 18,311 | | | $ | (4,496) | | | $ | 6,346 | | | $ | (1,571) | | | $ | (100,463) | |
(1)In 2019, the Company entered into a $100 million fixed rate swap to hedge a portion of the interest rate risk on its previous term loan facility, both of which matured on June 7, 2021. This interest rate swap was designated as a cash flow hedging instrument and changes in its fair value were not material to the consolidated balance sheets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Gains (Losses) During the Period | | Reclassification to Income | | |
(in thousands) | | December 29, 2019 | | Pre-tax Activity | | Tax Effect | | Pre-tax Activity | | Tax Effect | | December 31, 2020 |
Net pension activity: | | | | | | | | | | | | |
Actuarial loss | | $ | (93,174) | | | $ | (5,521) | | | $ | 1,369 | | | $ | 4,619 | | | $ | (1,140) | | | $ | (93,847) | |
Prior service credits (costs) | | (7) | | | — | | | — | | | 19 | | | (4) | | | 8 | |
Net postretirement benefits activity: | | | | | | | | | | | | |
Actuarial loss | | (1,191) | | | (4,555) | | | 1,129 | | | 383 | | | (94) | | | (4,328) | |
Prior service costs | | (624) | | | — | | | — | | | — | | | — | | | (624) | |
Interest rate swap | | (270) | | | — | | | — | | | (378) | | | 92 | | | (556) | |
Foreign currency translation adjustment | | (16) | | | — | | | — | | | 41 | | | (11) | | | 14 | |
Reclassification of stranded tax effects | | (19,720) | | | — | | | — | | | — | | | — | | | (19,720) | |
Total AOCI(L) | | $ | (115,002) | | | $ | (10,076) | | | $ | 2,498 | | | $ | 4,684 | | | $ | (1,157) | | | $ | (119,053) | |
Following is a summary of the impact of AOCI(L) on the consolidated statements of operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2022 |
(in thousands) | | Net Pension Activity | | Net Postretirement Benefits Activity | | | Foreign Currency Translation Adjustment | | Total |
Cost of sales | | $ | 1,364 | | | $ | 276 | | | | $ | — | | | $ | 1,640 | |
Selling, delivery and administrative expenses | | 2,626 | | | 168 | | | | 11 | | | 2,805 | |
Subtotal pre-tax | | 3,990 | | | 444 | | | | 11 | | | 4,445 | |
Income tax expense | | 978 | | | 110 | | | | 2 | | | 1,090 | |
Total after tax effect | | $ | 3,012 | | | $ | 334 | | | | $ | 9 | | | $ | 3,355 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2021 |
(in thousands) | | Net Pension Activity | | Net Postretirement Benefits Activity | | Interest Rate Swap | | Foreign Currency Translation Adjustment | | Total |
Cost of sales | | $ | 1,341 | | | $ | 496 | | | $ | — | | | $ | — | | | $ | 1,837 | |
Selling, delivery and administrative expenses | | 3,616 | | | 186 | | | 739 | | | (32) | | | 4,509 | |
Subtotal pre-tax | | 4,957 | | | 682 | | | 739 | | | (32) | | | 6,346 | |
Income tax expense | | 1,228 | | | 169 | | | 183 | | | (9) | | | 1,571 | |
Total after tax effect | | $ | 3,729 | | | $ | 513 | | | $ | 556 | | | $ | (23) | | | $ | 4,775 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year 2020 |
(in thousands) | | Net Pension Activity | | Net Postretirement Benefits Activity | | Interest Rate Swap | | Foreign Currency Translation Adjustment | | Total |
Cost of sales | | $ | 1,393 | | | $ | 146 | | | $ | — | | | $ | — | | | $ | 1,539 | |
Selling, delivery and administrative expenses | | 3,245 | | | 237 | | | (378) | | | 41 | | | 3,145 | |
Subtotal pre-tax | | 4,638 | | | 383 | | | (378) | | | 41 | | | 4,684 | |
Income tax expense | | 1,144 | | | 94 | | | (92) | | | 11 | | | 1,157 | |
Total after tax effect | | $ | 3,494 | | | $ | 289 | | | $ | (286) | | | $ | 30 | | | $ | 3,527 | |
22.Supplemental Disclosures of Cash Flow Information
Changes in current assets and current liabilities affecting cash were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Accounts receivable, trade | | $ | (59,777) | | | $ | (46,825) | | | $ | 8,107 | |
Allowance for doubtful accounts | | (1,217) | | | (4,284) | | | 7,838 | |
Accounts receivable from The Coca-Cola Company | | 21,951 | | | (8,534) | | | 13,208 | |
Accounts receivable, other | | (20,753) | | | 3,206 | | | 6,010 | |
Inventories | | (44,694) | | | (77,094) | | | 169 | |
Prepaid expenses and other current assets | | (16,201) | | | (3,922) | | | (4,685) | |
Accounts payable, trade | | 23,417 | | | 84,959 | | | 31,378 | |
Accounts payable to The Coca-Cola Company | | 17,112 | | | 38,490 | | | (1,518) | |
Other accrued liabilities | | (9,230) | | | 21,161 | | | (22,399) | |
Accrued compensation | | 16,027 | | | 23,286 | | | (205) | |
Accrued interest payable | | (1,419) | | | 152 | | | (1,002) | |
Change in current assets less current liabilities | | $ | (74,784) | | | $ | 30,595 | | | $ | 36,901 | |
The Company had the following net cash payments during the period for interest and income taxes:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Income taxes | | $ | 140,988 | | | $ | 70,988 | | | $ | 55,755 | |
Interest | | 28,086 | | | 29,142 | | | 34,257 | |
The Company had the following significant non-cash investing and financing activities:
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year |
(in thousands) | | 2022 | | 2021 | | 2020 |
Additions (reductions) to leased property under financing leases | | $ | (55,465) | | | $ | — | | | $ | 61,121 | |
Additions to property, plant and equipment accrued and recorded in accounts payable, trade | | 44,775 | | | 35,809 | | | 17,025 | |
Dividends declared but not yet paid | | 32,808 | | | — | | | — | |
Right-of-use assets obtained in exchange for operating lease obligations | | 25,130 | | | 26,907 | | | 42,698 | |
Management’s Report on Internal Control over Financial Reporting
Management of Coca-Cola Consolidated, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s chief executive and chief financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States. The Company’s internal control over financial reporting includes policies and procedures that:
(i)pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets of the Company;
(ii)provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and
(iii)provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As of December 31, 2022, management assessed the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management determined that the Company’s internal control over financial reporting as of December 31, 2022 was effective.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, has been audited by PricewaterhouseCoopers LLP (PCAOB ID 238), an independent registered public accounting firm, which is included in Item 8 of this report.
February 22, 2023