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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________________
FORM 10-Q
______________________________________________________________________________________________
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 0-9286
______________________________________________________________________________________________
COCA-COLA CONSOLIDATED, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________________________________________
Delaware
56-0950585
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
4100 Coca‑Cola Plaza

Charlotte, NC
28211
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (704) 557-4400
______________________________________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $1.00 Par Value
Trading Symbol(s)
COKE
Name of each exchange on which registered
The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒ No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   ☒ No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No  ☒
As of October 25, 2020, there were 7,141,447 shares of the registrant’s Common Stock, $1.00 par value, and 2,232,242 shares of the registrant’s Class B Common Stock, $1.00 par value, outstanding.



COCA‑COLA CONSOLIDATED, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 2020
TABLE OF CONTENTS

i

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Third Quarter First Nine Months
(in thousands, except per share data) 2020 2019 2020 2019
Net sales $ 1,328,484  $ 1,271,029  $ 3,728,720  $ 3,647,600 
Cost of sales 856,046  838,805  2,421,686  2,390,289 
Gross profit 472,438  432,224  1,307,034  1,257,311 
Selling, delivery and administrative expenses 368,594  378,378  1,087,251  1,116,097 
Income from operations 103,844  53,846  219,783  141,214 
Interest expense, net 9,033  10,965  27,778  35,846 
Other expense, net 21,394  20,711  39,826  67,743 
Income before income taxes 73,417  22,170  152,179  37,625 
Income tax expense 18,363  6,624  38,911  10,801 
Net income 55,054  15,546  113,268  26,824 
Less: Net income attributable to noncontrolling interest 3,170  2,540  7,153  5,279 
Net income attributable to Coca‑Cola Consolidated, Inc. $ 51,884  $ 13,006  $ 106,115  $ 21,545 
Basic net income per share based on net income attributable to Coca‑Cola Consolidated, Inc.:
Common Stock $ 5.53  $ 1.39  $ 11.32  $ 2.30 
Weighted average number of Common Stock shares outstanding 7,141  7,141  7,141  7,141 
Class B Common Stock $ 5.53  $ 1.39  $ 11.32  $ 2.30 
Weighted average number of Class B Common Stock shares outstanding 2,232  2,232  2,232  2,228 
Diluted net income per share based on net income attributable to Coca‑Cola Consolidated, Inc.:
Common Stock $ 5.51  $ 1.38  $ 11.25  $ 2.29 
Weighted average number of Common Stock shares outstanding – assuming dilution 9,430  9,413  9,430  9,409 
Class B Common Stock $ 5.51  $ 1.38  $ 11.24  $ 2.28 
Weighted average number of Class B Common Stock shares outstanding – assuming dilution 2,289  2,272  2,289  2,268 
Cash dividends per share:
Common Stock $ 0.25  $ 0.25  $ 0.75  $ 0.75 
Class B Common Stock $ 0.25  $ 0.25  $ 0.75  $ 0.75 





See accompanying notes to condensed consolidated financial statements.
1

COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Net income $ 55,054  $ 15,546  $ 113,268  $ 26,824 
Other comprehensive income, net of tax:
Defined benefit plans reclassification including pension costs:
Actuarial gains 896  679  2,689  2,037 
Prior service benefits 4  4  11  13 
Postretirement benefits reclassification included in benefits costs:
Actuarial gains 66  148  198  443 
Prior service costs —  (244) —  (731)
Interest rate swap 303  (374) (710) (374)
Foreign currency translation adjustment 11  (17) 13  (21)
Other comprehensive income, net of tax 1,280  196  2,201  1,367 
Comprehensive income 56,334  15,742  115,469  28,191 
Less: Comprehensive income attributable to noncontrolling interest 3,170  2,540  7,153  5,279 
Comprehensive income attributable to Coca‑Cola Consolidated, Inc. $ 53,164  $ 13,202  $ 108,316  $ 22,912 































See accompanying notes to condensed consolidated financial statements.
2

COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data) September 27, 2020 December 29, 2019
ASSETS
Current Assets:
Cash and cash equivalents $ 164,823  $ 9,614 
Accounts receivable, trade 453,402  433,552 
Allowance for doubtful accounts (25,050) (13,782)
Accounts receivable from The Coca‑Cola Company 54,516  62,411 
Accounts receivable, other 44,569  43,094 
Inventories 207,773  225,926 
Prepaid expenses and other current assets 69,829  69,461 
Assets held for sale 7,036  — 
Total current assets 976,898  830,276 
Property, plant and equipment, net 979,210  997,403 
Right-of-use assets - operating leases 135,559  111,376 
Leased property under financing leases, net 71,281  17,960 
Other assets 111,775  113,269 
Goodwill 165,903  165,903 
Distribution agreements, net 859,003  876,096 
Customer lists and other identifiable intangible assets, net 13,264  14,643 
Total assets $ 3,312,893  $ 3,126,926 
LIABILITIES AND EQUITY
Current Liabilities:
Current portion of obligations under operating leases $ 18,812  $ 15,024 
Current portion of obligations under financing leases 5,814  9,403 
Accounts payable, trade 234,715  187,476 
Accounts payable to The Coca‑Cola Company 135,656  108,699 
Other accrued liabilities 207,522  208,834 
Accrued compensation 74,778  87,813 
Accrued interest payable 6,693  4,946 
Total current liabilities 683,990  622,195 
Deferred income taxes 131,218  125,130 
Pension and postretirement benefit obligations 103,431  114,831 
Other liabilities 679,361  668,566 
Noncurrent portion of obligations under operating leases 121,288  97,765 
Noncurrent portion of obligations under financing leases 71,183  17,403 
Long-term debt 962,867  1,029,920 
Total liabilities 2,753,338  2,675,810 
Commitments and Contingencies
Equity:
Common Stock, $1.00 par value: 30,000,000 shares authorized; 10,203,821 shares issued
10,204  10,204 
Class B Common Stock, $1.00 par value: 10,000,000 shares authorized; 2,860,356 shares issued
2,860  2,860 
Capital in excess of par value 128,983  128,983 
Retained earnings 480,246  381,161 
Accumulated other comprehensive loss (112,801) (115,002)
Treasury stock, at cost:  Common Stock – 3,062,374 shares
(60,845) (60,845)
Treasury stock, at cost:  Class B Common Stock – 628,114 shares
(409) (409)
Total equity of Coca‑Cola Consolidated, Inc. 448,238  346,952 
Noncontrolling interest 111,317  104,164 
Total equity 559,555  451,116 
Total liabilities and equity $ 3,312,893  $ 3,126,926 


See accompanying notes to condensed consolidated financial statements.
3

COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

First Nine Months
(in thousands) 2020 2019
Cash Flows from Operating Activities:
Net income $ 113,268  $ 26,824 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense from property, plant and equipment and financing leases 117,203  119,145 
Amortization of intangible assets and deferred proceeds, net 17,286  17,271 
Fair value adjustment of acquisition related contingent consideration 35,068  62,017 
Impairment of property, plant and equipment 7,908  4,144 
Deferred income taxes 5,302  5,254 
Loss on sale of property, plant and equipment 3,656  5,474 
Amortization of debt costs 778  1,032 
Stock compensation expense —  2,045 
Change in current assets less current liabilities 69,975  (54,263)
Change in other noncurrent assets 16,360  12,581 
Change in other noncurrent liabilities (11,451) 2,611 
Other 1,048  448 
Total adjustments 263,133  177,759 
Net cash provided by operating activities $ 376,401  $ 204,583 
Cash Flows from Investing Activities:
Additions to property, plant and equipment $ (110,717) $ (96,747)
Proceeds from the sale of property, plant and equipment 2,397  1,028 
Investment in CONA Services LLC (1,770) (1,713)
Other distribution agreements —  (4,654)
Net cash used in investing activities $ (110,090) $ (102,086)
Cash Flows from Financing Activities:
Payments on revolving credit facility $ (280,000) $ (376,339)
Borrowings under revolving credit facility 235,000  331,339 
Payments on term loan facility and senior notes (22,500) (132,500)
Proceeds from issuance of senior notes —  100,000 
Payments of acquisition related contingent consideration (31,999) (18,784)
Cash dividends paid (7,030) (7,026)
Payments on financing lease obligations (4,428) (6,441)
Debt issuance fees (145) (305)
Net cash used in financing activities $ (111,102) $ (110,056)
Net increase (decrease) in cash during period $ 155,209  $ (7,559)
Cash at beginning of period 9,614  13,548 
Cash at end of period $ 164,823  $ 5,989 
Significant non-cash investing and financing activities:
Additions to leased property under financing leases $ 61,121  $ — 
Right-of-use assets obtained in exchange for operating lease obligations 38,317  39,213 
Additions to property, plant and equipment accrued and recorded in accounts payable, trade 25,477  8,909 
Issuance of Class B Common Stock in connection with stock award —  4,776 



See accompanying notes to condensed consolidated financial statements.
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COCA‑COLA CONSOLIDATED, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited)

(in thousands, except share data)
Common
Stock
Class B
Common
Stock
Capital
in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Treasury
Stock - Common
Stock
Treasury
Stock - Class B
Common
Stock
Total
Equity
of Coca‑Cola
Consolidated,
Inc.
Non-
controlling
Interest
Total
Equity
Balance on December 30, 2018 $ 10,204  $ 2,839  $ 124,228  $ 359,435  $ (77,265) $ (60,845) $ (409) $ 358,187  $ 96,979  $ 455,166 
Net income —  —  —  21,545  —  —  —  21,545  5,279  26,824 
Other comprehensive income, net of tax —  —  —  —  1,367  —  —  1,367  —  1,367 
Cash dividends paid:
Common Stock
($0.75 per share)
—  —  —  (5,356) —  —  —  (5,356) —  (5,356)
Class B Common Stock
($0.75 per share)
—  —  —  (1,670) —  —  —  (1,670) —  (1,670)
Issuance of 19,224 shares of Class B Common Stock
—  21  4,755  —  —  —  —  4,776  —  4,776 
Reclassification of stranded tax effects —  —  —  19,720  (19,720) —  —  —  —  — 
Balance on September 29, 2019 $ 10,204  $ 2,860  $ 128,983  $ 393,674  $ (95,618) $ (60,845) $ (409) $ 378,849  $ 102,258  $ 481,107 
Balance on December 29, 2019 $ 10,204  $ 2,860  $ 128,983  $ 381,161  $ (115,002) $ (60,845) $ (409) $ 346,952  $ 104,164  $ 451,116 
Net income —  —  —  106,115  —  —  —  106,115  7,153  113,268 
Other comprehensive loss, net of tax —  —  —  —  2,201  —  —  2,201  —  2,201 
Cash dividends paid:
Common Stock
($0.75 per share)
—  —  —  (5,356) —  —  —  (5,356) —  (5,356)
Class B Common Stock
($0.75 per share)
—  —  —  (1,674) —  —  —  (1,674) —  (1,674)
Balance on September 27, 2020 $ 10,204  $ 2,860  $ 128,983  $ 480,246  $ (112,801) $ (60,845) $ (409) $ 448,238  $ 111,317  $ 559,555 

























See accompanying notes to condensed consolidated financial statements.
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COCA‑COLA CONSOLIDATED, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.    Critical Accounting Policies and Recent Accounting Pronouncements

The condensed consolidated financial statements include the accounts of Coca‑Cola Consolidated, Inc. and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements reflect all adjustments, including normal, recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results for the interim periods presented:

•The financial position as of September 27, 2020 and December 29, 2019.
•The results of operations and comprehensive income for the 13-week periods ended September 27, 2020 (the “third quarter” of fiscal 2020 (“2020”)) and September 29, 2019 (the “third quarter” of fiscal 2019 (“2019”)), and the 39-week periods ended September 27, 2020 (the “first nine months” of 2020) and September 29, 2019 (the “first nine months” of 2019).
•The changes in cash flows and equity for the first nine months of 2020 and the first nine months of 2019.

The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. The accounting policies followed in the presentation of interim financial results are consistent with those followed on an annual basis. These policies are presented in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for 2019 filed with the Securities and Exchange Commission.

The preparation of condensed consolidated financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Critical Accounting Policies

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of its results of operations and financial position in the preparation of its condensed consolidated financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in its Annual Report on Form 10-K for 2019 under the caption “Discussion of Critical Accounting Policies and Estimates and Recent Accounting Pronouncements” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” a discussion of the Company’s most critical accounting policies, which are those the Company believes to be the most important to the portrayal of its financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Company’s Board of Directors during the quarter in which a change is contemplated and prior to making such change.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments,” which requires measurement and recognition of expected credit losses at the point a loss is probable to occur, rather than expected to occur, which will generally result in earlier recognition of allowances for credit losses. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company adopted ASU 2016-13 in the first quarter of 2020 and the adoption did not have a material impact on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement,” which removes, modifies and adds certain disclosure requirements in Accounting Standards Codification Topic 820, Fair Value Measurement. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Certain amendments must be applied prospectively while others are to be applied on a retrospective basis to all periods presented. The Company adopted ASU 2018-13 in the first quarter of 2020. See Note 15 for additional information.

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Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-14, “Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans,” which is effective for fiscal years ending after December 15, 2020. Under this guidance, disclosures will be removed for the amounts in accumulated other comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, the amount and timing of assets expected to be returned to the employer, certain related party disclosures, and the effects of a one-percentage-point change in the assumed health care cost trend rates. Additional disclosures will include the weighted average interest crediting rate for plans with promised crediting interest rates and an explanation of the reasons for significant gains and losses related to the benefit obligation for the period.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes,” which will simplify the accounting for income taxes by removing certain exceptions to the general principles in income tax accounting and improve consistent application of and simplify GAAP for other areas of income tax accounting by clarifying and amending existing guidance. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2019-12 will have on its condensed consolidated financial statements.

2.    Related Party Transactions

The Coca‑Cola Company

The Company’s business consists primarily of the production, marketing and distribution 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.

J. Frank Harrison, III, the Chairman of the Board of Directors and Chief Executive Officer of the Company, together with the trustees of certain trusts established for the benefit of certain relatives of the late J. Frank Harrison, Jr., control shares representing approximately 86% of the total voting power of the Company’s total outstanding Common Stock and Class B Common Stock on a consolidated basis.

As of September 27, 2020, The Coca‑Cola Company owned approximately 27% of the Company’s total outstanding Common Stock and Class B Common Stock on a consolidated basis, representing approximately 5% of the total voting power of the Company’s Common Stock and Class B Common Stock voting together. As long as The Coca‑Cola Company holds the number of shares of the Company’s Common Stock it currently owns, it has the right to have its designee proposed by the Company for nomination to the Company’s Board of Directors, and J. Frank Harrison, III and the trustees of the J. Frank Harrison, Jr. family trusts described above, have agreed to vote the shares of the Company’s Class B Common Stock which 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 transactions between the Company and The Coca‑Cola Company:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Payments made by the Company to The Coca‑Cola Company for:
Concentrate, syrup, sweetener and other purchases $ 324,312  $ 306,588  $ 873,827  $ 893,123 
Customer marketing programs 34,550  36,597  99,941  109,110 
Cold drink equipment parts 5,965  4,519  16,345  18,568 
Brand investment programs 4,359  3,616  11,609  10,209 
Payments made by The Coca‑Cola Company to the Company for:
Marketing funding support payments $ 21,187  $ 25,931  $ 58,182  $ 74,954 
Fountain delivery and equipment repair fees 7,555  10,873  22,990  31,507 
Presence marketing funding support on the Company’s behalf 565  2,879  6,445  7,816 
Facilitating the distribution of certain brands and packages to other Coca‑Cola bottlers 1,151  1,602  3,469  3,952 

In fiscal 2017 (“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 facilities owned by the Company (the “Legacy Facilities Credit”). The Company immediately recognized
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the portion of the Legacy Facilities Credit applicable to a regional manufacturing facility divested in 2017 and the remaining balance of the Legacy Facilities Credit will be amortized as a reduction to cost of sales over a period of 40 years. The portion of the deferred liability that is expected to be amortized in the next 12 months is classified as current.

Coca‑Cola Refreshments USA, Inc. (“CCR”)

The Company, The Coca‑Cola Company and CCR, a wholly owned subsidiary of The Coca‑Cola Company, entered into a comprehensive beverage agreement in 2017 (as amended, the “CBA”). Pursuant to the CBA, the Company is required to make quarterly sub-bottling payments to CCR on a continuing basis in exchange for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in certain distribution territories the Company acquired from CCR. These sub-bottling payments are based on gross profit derived from sales of certain beverages and beverage products that are sold under the same trademarks that identify a covered beverage, beverage product or certain cross-licensed brands.

Sub-bottling payments to CCR were $32.0 million during the first nine months of 2020 and $18.8 million during the first nine months of 2019. The following table summarizes the liability recorded by the Company to reflect the estimated fair value of contingent consideration related to future sub-bottling payments to CCR:

(in thousands) September 27, 2020 December 29, 2019
Current portion of acquisition related contingent consideration $ 41,912  $ 41,087 
Noncurrent portion of acquisition related contingent consideration 406,741  405,597 
Total acquisition related contingent consideration $ 448,653  $ 446,684 

Upon the conversion of the Company’s then-existing bottling agreements in 2017 pursuant to the CBA, the Company received a fee from CCR (the “Territory Conversion Fee”). The Territory Conversion Fee was recorded as a deferred liability and will be amortized as a reduction to cost of sales over a period of 40 years. The portion of the deferred liability that is expected to be amortized in the next 12 months is classified as current.

Southeastern Container (“Southeastern”)

The Company is a shareholder of Southeastern, a plastic bottle manufacturing cooperative. The Company accounts for Southeastern as an equity method investment. The Company’s investment in Southeastern, which was classified as other assets in the condensed consolidated balance sheets, was $22.8 million as of September 27, 2020 and $23.2 million as of December 29, 2019.

South Atlantic Canners, Inc. (“SAC”)

The Company is a shareholder of SAC, a manufacturing cooperative in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights. The Company accounts for SAC as an equity method investment. The Company’s investment in SAC, which was classified as other assets in the condensed consolidated balance sheets, was $8.0 million as of September 27, 2020 and $8.2 million as of December 29, 2019.

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 classified as a reduction to cost of sales in the condensed consolidated statements of operations, were $6.9 million in the first nine months of 2020 and $7.0 million in the first nine months of 2019.

Coca‑Cola Bottlers’ Sales and Services Company, LLC (“CCBSS”)

Along with 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 $13.8 million on September 27, 2020 and $10.0 million on December 29, 2019, which were classified as accounts receivable, other in the condensed consolidated balance sheets.

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In addition, the Company pays an administrative fee to CCBSS for its services. The Company incurred administrative fees to CCBSS of $2.1 million in the first nine months of 2020 and $1.7 million in the first nine months of 2019, which were classified as selling, delivery and administrative (“SD&A”) expenses in the condensed consolidated statements of operations.

CONA Services LLC (“CONA”)

The Company is a member of CONA, an entity formed with The Coca‑Cola Company and certain other Coca‑Cola bottlers to provide business process and information technology services to its members. The Company accounts for CONA as an equity method investment. The Company’s investment in CONA, which was classified as other assets in the condensed consolidated balance sheets, was $11.5 million as of September 27, 2020 and $10.5 million as of December 29, 2019.

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 CONA service fees of $17.4 million in the first nine months of 2020 and $17.7 million in the first nine months of 2019.

Related Party Leases

The Company leases its headquarters office facility and an adjacent office facility in Charlotte, North Carolina from Beacon Investment Corporation (“Beacon”), 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. During the first quarter of 2020, the Company entered into a new lease agreement, effective January 1, 2020, with Beacon to continue to lease its corporate facilities. The new lease expires on December 31, 2029. The principal balance outstanding under the new operating lease was $31.3 million on September 27, 2020 and the principal balance outstanding under the previous financing lease, which was replaced by the new operating lease, was $6.8 million on December 29, 2019.

The Company leases the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina 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 director of the Company, are trustees and beneficiaries and of which Morgan H. Everett is a permissible, discretionary beneficiary. During the third quarter of 2020, the Company entered into an amendment to this lease, effective June 30, 2020, with HLP to extend the term of the original lease agreement by 15 years from December 31, 2020 through December 31, 2035. The principal balance outstanding under the amended lease was $62.6 million on September 27, 2020 and the principal balance outstanding under the lease, prior to being amended, was $4.3 million on December 29, 2019.

A summary of rental payments related to these leases is as follows:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Company headquarters $ 826  $ 1,132  $ 2,478  $ 3,393 
Snyder Production Center 1,112  1,080  3,338  3,241 

Long-Term Performance Equity Plan

The Long-Term Performance Equity Plan compensates J. Frank Harrison, III based on the Company’s performance. Awards granted 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 the Company’s Common Stock during the last 20 trading days of the performance period. Compensation expense for the Long-Term Performance Equity Plan, which was included in SD&A expenses in the condensed consolidated statements of operations, was $7.2 million in the first nine months of 2020 and $10.3 million in the first nine months of 2019.

3.    Revenue Recognition

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, tea, ready to drink coffee, enhanced water, juices and sports drinks.
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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” accounts, 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 typically collects payment from customers within 30 days from the date of sale.

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” products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.

The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Generally, the Company’s service contracts and contracts related to the delivery of specifically identifiable products have a single performance obligation. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time (“point in time”). Point in time sales accounted for approximately 97% of the Company’s net sales in the first nine months of 2020 and approximately 96% of the Company’s net sales in the first nine months of 2019.

Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time (“over time”). Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the condensed consolidated financial statements.

The following table represents a disaggregation of revenue from contracts with customers:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Point in time net sales:
Nonalcoholic Beverages - point in time $ 1,286,542  $ 1,224,653  $ 3,607,502  $ 3,512,901 
Total point in time net sales $ 1,286,542  $ 1,224,653  $ 3,607,502  $ 3,512,901 
Over time net sales:
Nonalcoholic Beverages - over time $ 8,729  $ 11,608  $ 25,874  $ 34,472 
All Other - over time 33,213  34,768  95,344  100,227 
Total over time net sales $ 41,942  $ 46,376  $ 121,218  $ 134,699 
Total net sales $ 1,328,484  $ 1,271,029  $ 3,728,720  $ 3,647,600 

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 condensed 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.

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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 has established an allowance for doubtful accounts to adjust the recorded receivable to the estimated amount the Company believes will ultimately be collected.

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.

The Company’s allowance for doubtful accounts in the condensed consolidated balance sheets includes a reserve for customer returns and an allowance for credit losses. The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers. Returned product is recognized as a reduction to net sales. The Company’s reserve for customer returns was $3.6 million as of both September 27, 2020 and December 29, 2019.

The Company estimates an allowance for credit losses, based on historic days’ sales outstanding trends, aged customer balances, previously written-off balances and expected recoveries up to balances previously written off, in order to present the net amount expected to be collected. Accounts receivable balances are written off when determined uncollectible and are recognized as a reduction to the allowance for credit losses. Following is a summary of activity for the allowance for credit losses during the first nine months of 2020:

(in thousands) First Nine Months 2020
Balance at beginning of year - allowance for credit losses $ 10,232 
Additions charged to costs and expenses(1)
14,238 
Write-offs, net of recoveries (2,970)
Balance at end of period - allowance for credit losses $ 21,500 

(1)Includes an allowance for credit losses for COVID-19-related collectability risk.

4.    Segments

The Company evaluates segment reporting in accordance with the 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.”

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The Company’s segment results are as follows:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Net sales:
Nonalcoholic Beverages $ 1,295,271  $ 1,236,261  $ 3,633,376  $ 3,547,373 
All Other 84,776  92,501  246,406  275,358 
Eliminations(1)
(51,563) (57,733) (151,062) (175,131)
Consolidated net sales $ 1,328,484  $ 1,271,029  $ 3,728,720  $ 3,647,600 
Income from operations:
Nonalcoholic Beverages $ 108,035  $ 48,248  $ 227,559  $ 120,613 
All Other (4,191) 5,598  (7,776) 20,601 
Consolidated income from operations $ 103,844  $ 53,846  $ 219,783  $ 141,214 
Depreciation and amortization:
Nonalcoholic Beverages $ 45,066  $ 43,067  $ 125,733  $ 128,986 
All Other 3,027  2,521  8,756  7,430 
Consolidated depreciation and amortization $ 48,093  $ 45,588  $ 134,489  $ 136,416 

(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.

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:

Third Quarter First Nine Months
(in thousands, except per share data) 2020 2019 2020 2019
Numerator for basic and diluted net income per Common Stock and Class B Common Stock share:
Net income attributable to Coca‑Cola Consolidated, Inc. $ 51,884  $ 13,006  $ 106,115  $ 21,545 
Less dividends:
Common Stock 1,785  1,786  5,356  5,356 
Class B Common Stock 559  558  1,674  1,670 
Total undistributed earnings $ 49,540  $ 10,662  $ 99,085  $ 14,519 
Common Stock undistributed earnings – basic $ 37,743  $ 8,123  $ 75,490  $ 11,066 
Class B Common Stock undistributed earnings – basic 11,797  2,539  23,595  3,453 
Total undistributed earnings – basic $ 49,540  $ 10,662  $ 99,085  $ 14,519 
Common Stock undistributed earnings – diluted $ 37,515  $ 8,089  $ 75,034  $ 11,019 
Class B Common Stock undistributed earnings – diluted 12,025  2,573  24,051  3,500 
Total undistributed earnings – diluted $ 49,540  $ 10,662  $ 99,085  $ 14,519 
Numerator for basic net income per Common Stock share:
Dividends on Common Stock $ 1,785  $ 1,786  $ 5,356  $ 5,356 
Common Stock undistributed earnings – basic 37,743  8,123  75,490  11,066 
Numerator for basic net income per Common Stock share $ 39,528  $ 9,909  $ 80,846  $ 16,422 
Numerator for basic net income per Class B Common Stock share:
Dividends on Class B Common Stock $ 559  $ 558  $ 1,674  $ 1,670 
Class B Common Stock undistributed earnings – basic 11,797  2,539  23,595  3,453 
Numerator for basic net income per Class B Common Stock share $ 12,356  $ 3,097  $ 25,269  $ 5,123 

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Third Quarter First Nine Months
(in thousands, except per share data) 2020 2019 2020 2019
Numerator for diluted net income per Common Stock share:
Dividends on Common Stock $ 1,785  $ 1,786  $ 5,356  $ 5,356 
Dividends on Class B Common Stock assumed converted to Common Stock 559  558  1,674  1,670 
Common Stock undistributed earnings – diluted 49,540  10,662  99,085  14,519 
Numerator for diluted net income per Common Stock share $ 51,884  $ 13,006  $ 106,115  $ 21,545 
Numerator for diluted net income per Class B Common Stock share:
Dividends on Class B Common Stock $ 559  $ 558  $ 1,674  $ 1,670 
Class B Common Stock undistributed earnings – diluted 12,025  2,573  24,051  3,500 
Numerator for diluted net income per Class B Common Stock share $ 12,584  $ 3,131  $ 25,725  $ 5,170 
Denominator for basic net income per Common Stock and Class B Common Stock share:
Common Stock weighted average shares outstanding – basic 7,141  7,141  7,141  7,141 
Class B Common Stock weighted average shares outstanding – basic 2,232  2,232  2,232  2,228 
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) 9,430  9,413  9,430  9,409 
Class B Common Stock weighted average shares outstanding – diluted 2,289  2,272  2,289  2,268 
Basic net income per share:
Common Stock $ 5.53  $ 1.39  $ 11.32  $ 2.30 
Class B Common Stock $ 5.53  $ 1.39  $ 11.32  $ 2.30 
Diluted net income per share:
Common Stock $ 5.51  $ 1.38  $ 11.25  $ 2.29 
Class B Common Stock $ 5.51  $ 1.38  $ 11.24  $ 2.28 

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 had 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 had net loss, the unvested shares 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.    Inventories

Inventories consisted of the following:

(in thousands)
September 27, 2020 December 29, 2019
Finished products
$ 125,388  $ 142,363 
Manufacturing materials
45,425  45,267 
Plastic shells, plastic pallets and other inventories
36,960  38,296 
Total inventories
$ 207,773  $ 225,926 
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7.    Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

(in thousands) September 27, 2020 December 29, 2019
Repair parts $ 28,342  $ 28,967 
Prepaid taxes 8,099  4,359 
Prepaid software 6,462  5,850 
Prepaid marketing 6,134  5,658 
Prepayments for sponsorship contracts 2,462  8,696 
Other prepaid expenses and other current assets 18,330  15,931 
Total prepaid expenses and other current assets $ 69,829  $ 69,461 

8.    Assets Held for Sale

The Company is in the process of integrating its Memphis, Tennessee manufacturing plant with its West Memphis, Arkansas operations, which is expected to greatly expand its West Memphis production capabilities and to reduce its overall production costs. Additionally, the Company is planning to open a new, automated distribution center in Whitestown, Indiana by the spring of 2021, which will allow the Company to consolidate its Anderson, Bloomington, Lafayette, Shelbyville and Speedway, Indiana warehousing and distribution operations into this one new facility. The increased capacity and automation in Whitestown will allow the Company to optimize its supply chain and to better serve its customers and consumers in Indiana and the surrounding areas.

As of September 27, 2020, certain locations of the Company, which are primarily those included in the Company’s supply chain optimization discussed above, met the accounting guidance criteria to be classified as assets held for sale. All locations classified as held for sale are included in the Nonalcoholic Beverages segment. There are not any liabilities held for sale associated with these locations and none meet the accounting guidance criteria to be classified as discontinued operations.

Following is a summary of the assets held for sale:

(in thousands) September 27, 2020
Land $ 2,017 
Buildings and leasehold and land improvements 5,019 
Assets held for sale $ 7,036 

An impairment of $1.6 million was recorded for these locations as a result of the net book value exceeding the agreed upon purchase price of one of the locations. This impairment was recorded within cost of sales on the condensed consolidated statements of operations and within impairment of property, plant and equipment on the condensed consolidated statements of cash flows.
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9.    Property, Plant and Equipment, Net

The principal categories and estimated useful lives of property, plant and equipment, net were as follows:

(in thousands) September 27, 2020 December 29, 2019 Estimated Useful Lives
Land $ 81,151  $ 76,860 
Buildings 232,828  223,500 
8-50 years
Machinery and equipment 370,116  355,575 
5-20 years
Transportation equipment 436,604  417,532 
4-20 years
Furniture and fixtures 97,298  92,059 
3-10 years
Cold drink dispensing equipment 471,607  489,050 
5-17 years
Leasehold and land improvements 150,800  145,341 
5-20 years
Software for internal use 129,429  128,792 
3-10 years
Construction in progress 37,234  29,369 
Total property, plant and equipment, at cost 2,007,067  1,958,078 
Less:  Accumulated depreciation and amortization 1,027,857  960,675 
Property, plant and equipment, net $ 979,210  $ 997,403 

10.    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 generally 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 condensed 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.

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Following is a summary of the weighted average remaining lease term and the weighted average discount rate for the Company’s leases:

September 27, 2020 December 29, 2019
Weighted average remaining lease term:
Operating leases 9.7 years 10.2 years
Financing leases 13.6 years 4.8 years
Weighted average discount rate:
Operating leases 4.0  % 4.1  %
Financing leases 3.2  % 5.7  %

As of September 27, 2020, the Company had one real estate and two vehicle operating lease commitments that had not yet commenced. These lease commitments are expected to commence during the fourth quarter of 2020 and have lease terms of approximately three years. The additional lease liability associated with these lease commitments is expected to be $2.1 million.

Following is a summary of the Company’s leases within the condensed consolidated statements of operations:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Cost of sales impact:
Operating lease costs $ 1,397  $ 1,356  $ 4,167  $ 4,039 
Short-term and variable leases 3,711  2,814  9,368  7,393 
Depreciation expense from financing leases 643  353  1,350  1,060 
Total cost of sales impact $ 5,751  $ 4,523  $ 14,885  $ 12,492 
SD&A expenses impact:
Operating lease costs $ 4,846  $ 3,717  $ 14,225  $ 9,639 
Short-term and variable leases 271  838  1,612  2,676 
Depreciation expense from financing leases 772  1,139  1,914  3,415 
Total SD&A expenses impact $ 5,889  $ 5,694  $ 17,751  $ 15,730 
Interest expense, net impact:
Interest expense on financing lease obligations $ 613  $ 666  $ 1,120  $ 2,083 
Total interest expense, net impact $ 613  $ 666  $ 1,120  $ 2,083 
Total lease cost $ 12,253  $ 10,883  $ 33,756  $ 30,305 

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 September 27, 2020:

(in thousands) Operating
Leases 		Financing
Leases 		Total
Remainder of 2020 $ 5,882  $ 1,760  $ 7,642 
2021 22,603  7,079  29,682 
2022 19,535  7,145  26,680 
2023 16,839  7,201  24,040 
2024 15,336  7,396  22,732 
Thereafter 91,125  63,421  154,546 
Total minimum lease payments including interest $ 171,320  $ 94,002  $ 265,322 
Less:  Amounts representing interest 31,220  17,005  48,225 
Present value of minimum lease principal payments 140,100  76,997  217,097 
Less:  Current portion of lease liabilities - operating and financing leases 18,812  5,814  24,626 
Noncurrent portion of lease liabilities - operating and financing leases $ 121,288  $ 71,183  $ 192,471 

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Following is a summary of future minimum lease payments for all noncancelable operating leases and financing leases as of December 29, 2019:

(in thousands) Operating
Leases 		Financing
Leases 		Total
2020 $ 19,236  $ 10,611  $ 29,847 
2021 16,815  6,215  23,030 
2022 14,016  2,694  16,710 
2023 11,704  2,750  14,454 
2024 10,989  2,808  13,797 
Thereafter 67,556  5,406  72,962 
Total minimum lease payments including interest $ 140,316  $ 30,484  $ 170,800 
Less:  Amounts representing interest 27,527  3,678  31,205 
Present value of minimum lease principal payments 112,789  26,806  139,595 
Less:  Current portion of lease liabilities - operating and financing leases 15,024  9,403  24,427 
Noncurrent portion of lease liabilities - operating and financing leases $ 97,765  $ 17,403  $ 115,168 

Following is a summary of the Company’s leases within the condensed consolidated statements of cash flows:

First Nine Months
(in thousands) 2020 2019
Cash flows from operating activities impact:
Operating leases $ 14,134  $ 13,576 
Interest payments on financing lease obligations 1,120  2,083 
Total cash flows from operating activities impact $ 15,254  $ 15,659 
Cash flows from financing activities impact:
Principal payments on financing lease obligations $ 4,428  $ 6,441 
Total cash flows from financing activities impact $ 4,428  $ 6,441 

11.    Distribution Agreements, Net

Distribution agreements, net, which are amortized on a straight-line basis and have an estimated useful life of 10 to 40 years, consisted of the following:

(in thousands)
September 27, 2020 December 29, 2019
Distribution agreements at cost
$ 951,677  $ 950,549 
Less: Accumulated amortization
92,674  74,453 
Distribution agreements, net
$ 859,003  $ 876,096 

12.    Customer Lists and Other Identifiable Intangible Assets, Net

Customer lists and other identifiable intangible assets, 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)
September 27, 2020 December 29, 2019
Customer lists and other identifiable intangible assets at cost
$ 25,288  $ 25,288 
Less: Accumulated amortization
12,024  10,645 
Customer lists and other identifiable intangible assets, net
$ 13,264  $ 14,643 

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13.    Other Accrued Liabilities

Other accrued liabilities consisted of the following:

(in thousands) September 27, 2020 December 29, 2019
Accrued insurance costs $ 47,775  $ 44,584 
Current portion of acquisition related contingent consideration 41,912  41,087 
Accrued marketing costs 35,906  34,947 
Employee and retiree benefit plan accruals 27,819  33,699 
Current portion of deferred payroll taxes under CARES Act 12,324  — 
Accrued taxes (other than income taxes) 9,076  6,366 
Checks and transfers yet to be presented for payment from zero balance cash accounts 3,140  20,199 
Current deferred proceeds from Territory Conversion Fee 2,286  2,286 
Commodity derivative instruments at fair market value 1,376  1,174 
Federal income taxes —  1,651 
All other accrued expenses 25,908  22,841 
Total other accrued liabilities $ 207,522  $ 208,834 

The Company has taken advantage of certain provisions of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which allow an employer to defer the deposit and payment of the employer’s portion of social security taxes that would otherwise be 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 intends to repay a portion of the deferred payroll taxes in the next 12 months and has classified this portion as current.

14.    Derivative Financial 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 these risks 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 parties.

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. Settlements of commodity derivative instruments are included in cash flows from operating activities in the condensed 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 condensed consolidated statements of operations:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Cost of sales $ 1,194  $ 487  $ 924  $ (482)
Selling, delivery and administrative expenses 575  (74) (949) 2,575 
Total gain (loss) $ 1,769  $ 413  $ (25) $ 2,093 

All commodity derivative instruments are recorded at fair value as either assets or liabilities in the condensed 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 condensed consolidated balance sheets and the net amounts of derivative liabilities are recognized in either other accrued liabilities or other liabilities in the condensed consolidated balance sheets. The
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following table summarizes the fair values of the Company’s commodity derivative instruments and the classification of such instruments in the condensed consolidated balance sheets:

(in thousands) September 27, 2020 December 29, 2019
Assets:
Prepaid expenses and other current assets $ 1,049  $ 1,007 
Total assets $ 1,049  $ 1,007 
Liabilities:
Other accrued liabilities $ 1,376  $ 1,174 
Total liabilities $ 1,376  $ 1,174 

The following table summarizes the Company’s gross commodity derivative instrument assets and gross commodity derivative instrument liabilities in the condensed consolidated balance sheets:

(in thousands) September 27, 2020 December 29, 2019
Gross commodity derivative instrument assets $ 1,049  $ 3,298 
Gross commodity derivative instrument liabilities 1,376  3,465 

The following table summarizes the Company’s outstanding commodity derivative instruments:

(in thousands) September 27, 2020 December 29, 2019
Notional amount of outstanding commodity derivative instruments $ 73,010  $ 171,699 
Latest maturity date of outstanding commodity derivative instruments December 2020 December 2020

15.    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.
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.
Nonpublic variable rate debt Level 2 The carrying amounts of the Company’s nonpublic variable rate debt approximate the fair values due to variable interest rates with short reset periods.
Nonpublic fixed rate debt Level 2 The fair values of the Company’s nonpublic fixed rate debt are based on estimated current market prices.
Public debt securities Level 2 The fair values of the Company’s public debt securities 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 weighted average cost of capital (“WACC”) derived from market data.
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The following tables summarize the carrying amounts and fair values by level of the Company’s deferred compensation plan, commodity derivative instruments, debt and acquisition related contingent consideration:

September 27, 2020
(in thousands)
Carrying
Amount
Total
Fair Value
Fair Value
Level 1
Fair Value
Level 2
Fair Value
Level 3
Assets:
Deferred compensation plan assets $ 46,602  $ 46,602  $ 46,602  $ —  $ — 
Commodity derivative instruments 1,049  1,049  —  1,049  — 
Liabilities:
Deferred compensation plan liabilities 46,602  46,602  46,602  —  — 
Commodity derivative instruments 1,376  1,376  —  1,376  — 
Nonpublic variable rate debt 239,882  240,000  —  240,000  — 
Nonpublic fixed rate debt 374,747  402,500  —  402,500  — 
Public debt securities 348,238  390,200  —  390,200  — 
Acquisition related contingent consideration 448,653  448,653  —  —  448,653 

December 29, 2019
(in thousands) Carrying
Amount 		Total
Fair Value 		Fair Value
Level 1 		Fair Value
Level 2 		Fair Value
Level 3
Assets:
Deferred compensation plan assets $ 42,543  $ 42,543  $ 42,543  $ —  $ — 
Commodity derivative instruments 1,007  1,007  —  1,007  — 
Liabilities:
Deferred compensation plan liabilities 42,543  42,543  42,543  —  — 
Commodity derivative instruments 1,174  1,174  —  1,174  — 
Nonpublic variable rate debt 307,250  307,500  —  307,500  — 
Nonpublic fixed rate debt 374,723  383,900  —  383,900  — 
Public debt securities 347,947  367,300  —  367,300  — 
Acquisition related contingent consideration 446,684  446,684  —  —  446,684 

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 to fair value by discounting future expected sub-bottling payments required under the CBA using the Company’s estimated WACC.

The future expected sub-bottling payments extend through the life of applicable distribution assets acquired from CCR, 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 amounts that will be paid in the future under the CBA, and current 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 income or expense 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:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Beginning balance - Level 3 liability $ 441,113  $ 412,450  $ 446,684  $ 382,898 
Payments of acquisition related contingent consideration (11,468) (5,948) (31,999) (18,784)
Reclassification to current payables (800) (60) (1,100) (940)
Increase in fair value 19,808  18,749  35,068  62,017 
Ending balance - Level 3 liability $ 448,653  $ 425,191  $ 448,653  $ 425,191 

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The increase in the fair value of the acquisition related contingent consideration liability during the first nine months of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees, partially offset by an increase in the discount rate used to calculate the fair value. The increase in the fair value of the acquisition related contingent consideration liability during the first nine months of 2019 was primarily driven by a decrease in the discount rate used to calculate the fair value and changes in future cash flow projections of the distribution territories subject to sub-bottling fees. These fair value adjustments were recorded in other expense, net in the condensed consolidated statements of operations.

The anticipated amount the Company could pay annually under acquisition related contingent consideration arrangements is expected to be in the range of $28 million to $53 million.

16.    Income Taxes

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 25.6% for the first nine months of 2020 and 28.7% for the first nine months of 2019. The decrease in the effective income tax rate was primarily driven by improved financial results.

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 26.8% for the first nine months of 2020 and 33.4% for the first nine months of 2019.

The Company had uncertain tax positions, including accrued interest, of $3.4 million on September 27, 2020 and $2.5 million on December 29, 2019, 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 significant impact on the condensed consolidated financial statements.

Prior tax years beginning in year 2002 remain open to examination by the Internal Revenue Service, and various tax years beginning in year 1998 remain open to examination by certain state taxing authorities.

17.    Pension and Postretirement Benefit Obligations

Pension Plans

There are two Company-sponsored pension plans. The primary Company-sponsored pension plan was frozen as of June 30, 2006 and no benefits accrued to participants after this 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 amounts currently deductible for income tax purposes.

The components of net periodic pension cost were as follows:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Service cost $ 1,659  $ 1,207  $ 4,976  $ 3,620 
Interest cost 2,760  3,063  8,280  9,188 
Expected return on plan assets (3,382) (2,574) (10,148) (7,722)
Recognized net actuarial loss 1,189  901  3,568  2,702 
Amortization of prior service cost 5  5  14  17 
Net periodic pension cost $ 2,231  $ 2,602  $ 6,690  $ 7,805 

The Company contributed $16.3 million to the two Company-sponsored pension plans during the first nine months of 2020 and does not anticipate making additional contributions during the fourth quarter of 2020.

Postretirement Benefits

The Company provides postretirement benefits for employees meeting specified 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 pre-fund these benefits and has the right to modify or terminate certain of these benefits in the future.

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The components of net periodic postretirement benefit cost were as follows:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Service cost $ 376  $ 389  $ 1,128  $ 1,167 
Interest cost 504  694  1,511  2,080 
Recognized net actuarial loss 88  196  263  587 
Amortization of prior service cost —  (324) —  (970)
Net periodic postretirement benefit cost $ 968  $ 955  $ 2,902  $ 2,864 

18.    Other Liabilities

Other liabilities consisted of the following:

(in thousands) September 27, 2020 December 29, 2019
Noncurrent portion of acquisition related contingent consideration $ 406,741  $ 405,597 
Accruals for executive benefit plans 140,795  141,380 
Noncurrent deferred proceeds from Territory Conversion Fee 81,162  82,877 
Noncurrent deferred proceeds from Legacy Facilities Credit 28,970  29,569 
Noncurrent portion of deferred payroll taxes under CARES Act 12,324  — 
Other 9,369  9,143 
Total other liabilities
$ 679,361  $ 668,566 

19.    Long-Term Debt

Following is a summary of the Company’s long-term debt:

(in thousands) Maturity
Date 		Interest
Rate 		Interest
Paid 		Public or
Nonpublic 		September 27,
2020 		December 29,
2019
Term loan facility(1)
6/7/2021 Variable Varies Nonpublic $ 240,000  $ 262,500 
Senior notes 2/27/2023 3.28% Semi-annually Nonpublic 125,000  125,000 
Revolving credit facility(2)
6/8/2023 Variable Varies Nonpublic —  45,000 
Senior notes 11/25/2025 3.80% Semi-annually Public 350,000  350,000 
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 notes(3)
11/25/2025 (45) (52)
Debt issuance costs (2,088) (2,528)
Long-term debt $ 962,867  $ 1,029,920 

(1)The Company intends to refinance principal payments due in the next 12 months under the term loan facility, and has the capacity to do so under its revolving credit facility, which is classified as long-term debt. As such, any amounts due in the next 12 months were classified as noncurrent.
(2)The Company’s revolving credit facility has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. The Company currently believes all banks participating in the revolving credit facility have the ability to and will meet any funding requests from the Company.
(3)The senior notes due in 2025 were issued at 99.975% of par.

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.

In 2019, the Company entered into a $100 million fixed rate swap maturing June 7, 2021, to hedge a portion of the interest rate risk on the Company’s term loan facility. This interest rate swap is designated as a cash flow hedging instrument and changes in its fair value are not expected to be material to the condensed consolidated balance sheets. Changes in the fair value of this interest rate swap were classified as accumulated other comprehensive loss on the condensed consolidated balance sheets and included in the condensed consolidated statements of comprehensive income.

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The indenture under which the Company’s public debt was 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 September 27, 2020. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s debt.

20.    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 21.9 million cases and 22.2 million cases of finished product from SAC in the first nine months of 2020 and the first nine months of 2019, respectively.

The following table summarizes the Company’s purchases from these manufacturing cooperatives:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Purchases from Southeastern $ 31,196  $ 31,178  $ 94,835  $ 102,118 
Purchases from SAC 37,006  42,870  119,225  120,309 
Total purchases from manufacturing cooperatives $ 68,202  $ 74,048  $ 214,060  $ 222,427 

The Company guarantees a portion of SAC’s debt, which expires at various dates through 2024. The amount guaranteed was $14.7 million on both September 27, 2020 and December 29, 2019. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee.

The Company holds no assets as collateral against the SAC guarantee, the fair value of which is immaterial to the condensed 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 September 27, 2020, and there was no impairment identified in 2019.

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 September 27, 2020 and $35.6 million on December 29, 2019.

The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of September 27, 2020, the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $168.1 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 condensed consolidated financial statements.
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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, the interest rate swap on the Company’s term loan facility 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 the third quarter of 2020 and the third quarter of 2019:

(in thousands) June 28, 2020 Pre-tax Activity Tax Effect September 27, 2020
Net pension activity:
Actuarial loss $ (91,381) $ 1,189  $ (293) $ (90,485)
Prior service costs —  5  (1) 4 
Net postretirement benefits activity:
Actuarial loss (1,059) 88  (22) (993)
Prior service costs (624) —  —  (624)
Interest rate swap (1,283) 402  (99) (980)
Foreign currency translation adjustment (14) 15  (4) (3)
Reclassification of stranded tax effects (19,720) —  —  (19,720)
Total AOCI(L) $ (114,081) $ 1,699  $ (419) $ (112,801)

(in thousands) June 30, 2019 Pre-tax Activity Tax Effect September 29, 2019
Net pension activity:
Actuarial loss $ (71,332) $ 901  $ (222) $ (70,653)
Prior service costs (15) 5  (1) (11)
Net postretirement benefits activity:
Actuarial loss (4,607) 196  (48) (4,459)
Prior service costs (136) (324) 80  (380)
Interest rate swap —  (496) 122  (374)
Foreign currency translation adjustment (4) (23) 6  (21)
Reclassification of stranded tax effects (19,720) —  —  (19,720)
Total AOCI(L) $ (95,814) $ 259  $ (63) $ (95,618)

Following is a summary of AOCI(L) for the first nine months of 2020 and the first nine months of 2019:

(in thousands) December 29, 2019 Pre-tax Activity Tax Effect September 27, 2020
Net pension activity:
Actuarial loss $ (93,174) $ 3,568  $ (879) $ (90,485)
Prior service costs (7) 14  (3) 4 
Net postretirement benefits activity:
Actuarial loss (1,191) 263  (65) (993)
Prior service costs (624) —  —  (624)
Interest rate swap (270) (942) 232  (980)
Foreign currency translation adjustment (16) 18  (5) (3)
Reclassification of stranded tax effects (19,720) —  —  (19,720)
Total AOCI(L) $ (115,002) $ 2,921  $ (720) $ (112,801)

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(in thousands) December 30, 2018 Pre-tax Activity Tax Effect September 29, 2019
Net pension activity:
Actuarial loss $ (72,690) $ 2,702  $ (665) $ (70,653)
Prior service costs (24) 17  (4) (11)
Net postretirement benefits activity:
Actuarial loss (4,902) 587  (144) (4,459)
Prior service costs 351  (970) 239  (380)
Interest rate swap —  (496) 122  (374)
Foreign currency translation adjustment —  (26) 5  (21)
Reclassification of stranded tax effects —  —  (19,720) (19,720)
Total AOCI(L) $ (77,265) $ 1,814  $ (20,167) $ (95,618)

Following is a summary of the impact of AOCI(L) on the condensed consolidated statements of operations:

Third Quarter 2020
(in thousands) Net Pension Activity Net Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales $ 363  $ 55  $ —  $ —  $ 418 
Selling, delivery and administrative expenses 831  33  402  15  1,281 
Subtotal pre-tax 1,194  88  402  15  1,699 
Income tax expense 294  22  99  4  419 
Total after tax effect $ 900  $ 66  $ 303  $ 11  $ 1,280 

Third Quarter 2019
(in thousands) Net Pension Activity Net Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales $ 265  $ (67) $ —  $ —  $ 198 
Selling, delivery and administrative expenses 641  (61) (496) (23) 61 
Subtotal pre-tax 906  (128) (496) (23) 259 
Income tax expense 223  (32) (122) (6) 63 
Total after tax effect $ 683  $ (96) $ (374) $ (17) $ 196 

First Nine Months 2020
(in thousands) Net Pension Activity Net Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales $ 1,057  $ 160  $ —  $ —  $ 1,217 
Selling, delivery and administrative expenses 2,525  103  (942) 18  1,704 
Subtotal pre-tax 3,582  263  (942) 18  2,921 
Income tax expense 882  65  (232) 5  720 
Total after tax effect $ 2,700  $ 198  $ (710) $ 13  $ 2,201 

First Nine Months 2019
(in thousands) Net Pension Activity Net Postretirement Benefits Activity Interest Rate Swap Foreign Currency Translation Adjustment Total
Cost of sales $ 794  $ (200) $ —  $ —  $ 594 
Selling, delivery and administrative expenses 1,925  (183) (496) (26) 1,220 
Subtotal pre-tax 2,719  (383) (496) (26) 1,814 
Income tax expense 669  (95) (122) (5) 447 
Total after tax effect $ 2,050  $ (288) $ (374) $ (21) $ 1,367 

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22.    Supplemental Disclosures of Cash Flow Information

Changes in current assets and current liabilities affecting cash flows were as follows:

First Nine Months
(in thousands) 2020 2019
Accounts receivable, trade $ (19,850) $ (11,638)
Allowance for doubtful accounts 11,268  4,169 
Accounts receivable from The Coca‑Cola Company 7,895  (15,509)
Accounts receivable, other (1,475) (9,621)
Inventories 18,153  (21,719)
Prepaid expenses and other current assets (368) (8,478)
Accounts payable, trade 40,937  44,506 
Accounts payable to The Coca‑Cola Company 26,957  23,155 
Other accrued liabilities (2,254) (58,493)
Accrued compensation (13,035) (1,946)
Accrued interest payable 1,747  1,311 
Change in current assets less current liabilities $ 69,975  $ (54,263)

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations of Coca‑Cola Consolidated, Inc., a Delaware corporation (together with its majority-owned subsidiaries, the “Company,” “we,” “us” or “our”), should be read in conjunction with the condensed consolidated financial statements of the Company and the accompanying notes to the condensed consolidated financial statements. All comparisons are to the corresponding period in the prior year unless specified otherwise.

The Company’s fiscal year generally ends on the Sunday closest to December 31 of each year. The condensed consolidated financial statements presented are:

•The financial position as of September 27, 2020 and December 29, 2019.
•The results of operations and comprehensive income for the 13-week periods ended September 27, 2020 (the “third quarter” of fiscal 2020 (“2020”)) and September 29, 2019 (the “third quarter” of fiscal 2019 (“2019”)), and the 39-week periods ended September 27, 2020 (the “first nine months” of 2020) and September 29, 2019 (the “first nine months” of 2019).
•The changes in cash flows and equity for the first nine months of 2020 and the first nine months of 2019.

The condensed consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries, including Piedmont Coca‑Cola Bottling Partnership (“Piedmont”), the Company’s only subsidiary with a significant noncontrolling interest. This noncontrolling interest consists of The Coca‑Cola Company’s interest in Piedmont, which was 22.7% for all periods presented.

Our Business and the Nonalcoholic Beverage Industry

We distribute, market and manufacture nonalcoholic beverages in territories spanning 14 states and the District of Columbia. The Company was incorporated in 1980 and, together with its predecessors, has been in the nonalcoholic beverage manufacturing and distribution business since 1902. We are the largest Coca‑Cola bottler in the United States. Approximately 84% of our total bottle/can sales volume to retail customers consists of products of The Coca‑Cola Company, which include some of the most recognized and popular beverage brands in the world. We also distribute products for several other beverage companies, including BA Sports Nutrition, LLC (“BodyArmor”), Keurig Dr Pepper Inc. (“Dr Pepper”) and Monster Energy Company. Our purpose is to honor God in all we do, serve others, pursue excellence and grow profitably. Our stock is traded on the NASDAQ Global Select Market under the symbol “COKE.”

We offer a range of nonalcoholic beverage products and flavors, including both sparkling and still beverages, designed to meet the demands of our consumers. Sparkling beverages are carbonated beverages and the Company’s principal sparkling beverage is Coca‑Cola. Still beverages include energy products and noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks.

Our sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Other sales include sales to other Coca‑Cola bottlers, “post-mix” products, transportation revenue and equipment maintenance revenue. Post-mix products are dispensed through equipment that mixes fountain syrups with carbonated or still water, enabling fountain retailers to sell finished products to consumers in cups or glasses.

Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. The Company’s products are sold and distributed 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” accounts, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, and selling through other channels such as vending machine outlets.

The nonalcoholic beverage industry is highly competitive for both sparkling and still beverages. Our competitors include bottlers and distributors of nationally and regionally advertised and marketed products, as well as bottlers and distributors of private label beverages. Our principal competitors include local bottlers of PepsiCo, Inc. products and, in some regions, local bottlers of Dr Pepper products.

The principal methods of competition in the nonalcoholic beverage industry are new brand and product introductions, point-of-sale merchandising, new vending and dispensing equipment, packaging changes, pricing, sales promotions, product quality, retail
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space management, customer service, frequency of distribution and advertising. We believe we are competitive in our territories with respect to these methods of competition.

Business seasonality results primarily from higher unit sales of the Company’s products in the second and third quarters of the fiscal year. We believe that we and other manufacturers from whom we purchase finished products have adequate production capacity to meet sales demand for sparkling and still beverages during these peak periods. Sales volume can also be impacted by weather conditions. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.

Executive Summary

Physical case volume increased 3.9% in the third quarter of 2020, as sales of multi-serve packages in larger retail stores remained strong and single-serve sales began to gradually improve in small stores and accounts where our products are consumed on-premise. Sparkling category volume increased 3.6% in the third quarter of 2020, while Still beverages grew 4.5%. Still beverage sales are more tied to smaller outlets than our Sparkling category, and sales of Still products improved as certain government-imposed restrictions were eased or lifted during the third quarter. While volume growth was strong for the third quarter of 2020, sales volume softened in the last two months of the quarter.

Revenue increased 4.5% in the third quarter of 2020. Revenue from our bottle/can Sparkling beverages increased 7.0% in the third quarter of 2020, driven primarily by volume growth and price realization within this category. Sales of multi-serve PET packages were especially strong in the quarter as we adjusted our commercial plans to emphasize PET packages and limit product assortment in cans as demand for aluminum cans has exceeded supply this year. Revenue from our Still beverages increased 6.0% in the third quarter of 2020 as a result of higher sales volume in small stores and on-premise outlets. Revenue from fountain syrup, which is primarily sold through restaurants, convenience stores, amusement parks, and other on-premise outlets, declined $19.5 million, or 35.2%, during the third quarter of 2020. While the decline in fountain syrup revenue was significant, we are experiencing gradual improvement within this revenue stream as compared to the second quarter of 2020, as traffic continues to increase at our on-premise outlets.

For the first nine months of 2020, revenue increased $81.1 million, or 2.2%. While sales within our Sparkling and Still categories grew 5.8% and 3.2% for the first nine months of 2020, respectively, fountain syrup sales decreased 33.8%.

Gross profit increased $40.2 million, or 9.3%, in the third quarter of 2020, while gross margin increased 160 basis points to 35.6%. On an adjusted basis, as defined in the “Adjusted Non-GAAP Results” section below, gross profit increased $39.0 million, or 9.0%, in the third quarter of 2020. The improvement in gross profit and gross margin was primarily due to price realization within our Sparkling category, favorable input costs, and lower manufacturing costs. Gross profit in the first nine months of 2020 increased $49.7 million, or 4.0%, while gross margin increased 60 basis points to 35.1%. On an adjusted basis, gross profit increased $47.9 million compared to the first nine months of 2019.

Selling, delivery and administrative (“SD&A”) expenses in the third quarter of 2020 decreased $9.8 million, or 2.6%. SD&A expenses as a percentage of net sales decreased 210 basis points in the third quarter of 2020. Adjusted SD&A expenses in the third quarter of 2020 decreased $7.4 million, or 2.0%. The decrease in SD&A expenses related to lower labor and benefits costs as a result of adjustments we made to our operating model earlier in the year in response to COVID-19-related impacts on our business. Additionally, we generated favorable results in a number of expense categories due to the diligent management of our variable operating expenses. SD&A expenses in the first nine months of 2020 decreased $28.8 million, or 2.6%. SD&A expenses as a percentage of net sales decreased 140 basis points in the first nine months of 2020 as compared to the first nine months of 2019.

Income from operations in the third quarter of 2020 was $103.8 million, compared to $53.8 million in the third quarter of 2019, an increase of 92.9%. Adjusted income from operations in the third quarter of 2020 was $105.2 million, an increase of 79.1%. For the first nine months of 2020, income from operations increased $78.6 million to $219.8 million. Adjusted income from operations in the first nine months of 2020 was $223.6 million, an increase of $66.6 million, or 42.4%, compared to the first nine months of 2019.

Net income in the third quarter of 2020 was $51.9 million, compared to $13.0 million in the third quarter of 2019, an improvement of $38.9 million. Net income in the third quarter of 2020 was adversely impacted by fair value adjustments to our acquisition related contingent consideration liability, driven by changes in future cash flow projections. Fair value adjustments to this liability are non-cash in nature and a routine part of our quarterly financial closing process. Net income increased $84.6 million for the first nine months of 2020 to $106.1 million, as compared to the first nine months of 2019.

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Cash flows provided by operations for the first nine months of 2020 were $376.4 million, compared to $204.6 million for the first nine months of 2019. The significant increase in operating cash flows for the first nine months of 2020 was primarily a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory, the timing of accounts payable and the deferral of payroll taxes permitted under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).

COVID-19 Impact on Consumer, Customer, Teammate and Community Safety

The Company continues to diligently monitor the impact of the COVID-19 pandemic on all aspects of its business, including the impact on its consumers, customers, teammates, suppliers and distribution network. Our business has been recognized by the United States Department of Homeland Security and state and local governments in the communities in which we operate as “essential,” as all of our teammates support beverage manufacturing and distribution.

The Company has taken the following actions to protect its consumers, customers, teammates and communities, while it continues to manufacture and distribute products:

•We continue to execute our Infectious Disease Response Plan and Incident Management Crisis Response Protocols as the macro environment moves through the Response, Reopen and Recovery phases of the COVID-19 pandemic.
•We have established a cross-functional Health & Wellness Task Force to manage and monitor all risk mitigation and safety activities related to COVID-19. In addition, a subset of leaders from the Health & Wellness Task Force conducts case management activities that follow prescribed company and other accepted standards (e.g., Centers for Disease Control and Prevention (“CDC”) and local health authorities).
•We have established a process for the reporting of COVID-19 symptoms, exposures and positive test results of teammates and of incidents in customer accounts that our teammates have serviced. This reporting process enables the Company to follow appropriate quarantine protocols and to communicate to its workforce in a timely and appropriate manner.
•We have increased our communications with teammates through podcasts, meetings, videos and emails about safety protocols, Personal Protective Equipment (“PPE”), such as disposable gloves and masks, and CDC requirements and recommendations.
•We have increased sanitation protocols to sanitize equipment and common areas multiple times per day in order to mitigate risk and exposure situations.
•We have promoted hygiene practices recommended by the CDC, including social distancing requiring six or more feet between teammates where possible, and staggered work start and stop times and lunch breaks.
•We have utilized daily health and wellness monitoring, PPE and other measures to promote workplace safety and remain in compliance with local or state regulatory requirements.
•We have restricted access to our facilities for non-essential visitors, vendors and contractors. For essential visitors, vendors and contractors, we require health and wellness certifications to be completed and the use of PPE as the Company determines appropriate.
•We have restricted business travel to “essential travel” to curtail exposure risk for all teammates.
•We have provided sanitation solution and supplies for our front-line teammates who interact with our products, customers and communities.
•We have implemented work-from-home routines for teammates whose work duties permit it and are utilizing virtual technology to replace many of our in-person meetings.
•We have developed a comprehensive Return to Office Program of Guidelines to manage a phased, measured approach and to prepare our higher density locations with safety modifications, signage and process changes to promote a safe work environment.
•We have offered our teammates 40 hours of supplemental sick time for non-exempt teammates to encourage our teammates to stay home if they or their family members are experiencing COVID-19 symptoms.
•We have modified our healthcare plans for COVID-19-related events to cover the costs of COVID-19 treatment to remove a barrier for our teammates to receive care if they are experiencing symptoms.
•We have worked with state and local elected officials in order to quickly implement newly enacted state and local government regulatory safety requirements and guidelines.

Expected COVID-19 Impact on the Company

We do not currently expect the COVID-19 pandemic to materially impact our liquidity position or access to capital in the short term. As of September 27, 2020, we had $164.8 million of cash and cash equivalents. In addition, our revolving credit facility matures in 2023 and has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s
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option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. We had no outstanding borrowings under the revolving credit facility as of September 27, 2020.

Our supply chain is dependent on aluminum as a key raw material in the production of aluminum cans, which are used to package many of our products. During the COVID-19 pandemic, beverage consumption has shifted from “on-premise” accounts, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities, to homes and consumers have favored the portability and storability of aluminum cans as they spend more time at home. Additionally, the alcoholic and nonalcoholic beverage industries continue to introduce many new canned product offerings, further increasing the demand for aluminum cans. These factors have impacted the supply of aluminum cans. We have made changes to our typical sourcing model and product offerings to address constraints in the supply of aluminum cans, including sourcing aluminum cans from international locations and limiting our canned product package offerings. We will continue to monitor and react as needed to the limited supply of aluminum cans in the marketplace.

We do not expect any material impairments or adjustments to the fair values of our assets as a result of the COVID-19 pandemic. Through the normal course of business, we have assessed the collectability of our receivables, including COVID-19-related collectability risk, and have recorded any expected losses. Further, there have been no triggering events identified in the first nine months of 2020 that would indicate an impairment of our long-lived assets, goodwill or other intangible assets. We will continue to monitor the valuation of our assets and the collectability of our receivables and record any adjustments as necessary.

We have assessed COVID-19-related circumstances around work routines, including remote work arrangements, and the impact on our internal controls over financial reporting. We do not anticipate any material impact to our control procedures that would materially affect our internal controls over financial reporting.

Areas of Emphasis

Key priorities for the Company include commercial execution, revenue management, supply chain optimization and cash flow generation.

Commercial Execution: Our success is dependent on our ability to execute our commercial strategy within our customers’ stores. Our ability to obtain shelf space within stores and remain in-stock across our portfolio of brands and packages in a profitable manner will have a significant impact on our results. We are focused on execution at every step in our supply chain, including raw material and finished products procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur. We are investing in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and drive value in our business for the long term.

Revenue Management: Our revenue management strategy focuses on pricing our brands and packages optimally within product categories and channels, creating effective working relationships with our customers and making disciplined fact-based decisions. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs, the roles certain brands play in our product portfolio and other market conditions.

Supply Chain Optimization: In October 2017, we completed a multi-year series of transactions through which we acquired and exchanged distribution territories and manufacturing facilities (the “System Transformation”). We are focused on optimizing our supply chain as we continue to integrate the acquired territories and facilities into our operations. We are in the process of integrating our Memphis, Tennessee manufacturing plant with our West Memphis, Arkansas operations, which is expected to greatly expand our West Memphis production capabilities and to reduce our overall production costs. Additionally, we are planning to open a new, automated distribution center in Whitestown, Indiana by the spring of 2021, which will allow us to consolidate our Anderson, Bloomington, Lafayette, Shelbyville and Speedway, Indiana warehousing and distribution operations into this one new facility. The increased capacity and automation in Whitestown will allow us to optimize our supply chain and to better serve our customers and consumers in Indiana and the surrounding areas. We will continue to look for opportunities to invest in our supply chain to optimize our costs.

Cash Flow Generation: We have several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures, as we continue to prioritize debt repayment and to focus on strengthening our balance sheet.

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Results of Operations

Third Quarter Results

The Company’s results of operations for the third quarter of 2020 and the third quarter of 2019 are highlighted in the table below and discussed in the following paragraphs.

Third Quarter
(in thousands) 2020 2019 Change
Net sales $ 1,328,484  $ 1,271,029  $ 57,455 
Cost of sales 856,046  838,805  17,241 
Gross profit 472,438  432,224  40,214 
Selling, delivery and administrative expenses 368,594  378,378  (9,784)
Income from operations 103,844  53,846  49,998 
Interest expense, net 9,033  10,965  (1,932)
Other expense, net 21,394  20,711  683 
Income before income taxes 73,417  22,170  51,247 
Income tax expense 18,363  6,624  11,739 
Net income 55,054  15,546  39,508 
Less: Net income attributable to noncontrolling interest 3,170  2,540  630 
Net income attributable to Coca‑Cola Consolidated, Inc. $ 51,884  $ 13,006  $ 38,878 
Other comprehensive income, net of tax 1,280  196  1,084 
Comprehensive income attributable to Coca‑Cola Consolidated, Inc.
$ 53,164  $ 13,202  $ 39,962 

Net Sales

Net sales increased $57.5 million, or 4.5%, to $1.33 billion in the third quarter of 2020, as compared to $1.27 billion in the third quarter of 2019. The increase in net sales was primarily attributable to the following (in millions):

Third Quarter 2020
Attributable to:
$ 53.9  Increase in net sales related to increased sales volume
34.4  Increase in net sales primarily related to an increase in average bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences
(30.8) Decrease in net sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19
$ 57.5  Total increase in net sales

Net sales by product category were as follows:

Third Quarter
(in thousands) 2020 2019 % Change
Bottle/can sales:
Sparkling beverages $ 703,549  $ 657,522  7.0  %
Still beverages 464,921  438,603  6.0  %
Total bottle/can sales 1,168,470  1,096,125  6.6  %
Other sales:
Sales to other Coca‑Cola bottlers 84,852  83,250  1.9  %
Post-mix and other 75,162  91,654  (18.0) %
Total other sales 160,014  174,904  (8.5) %
Total net sales $ 1,328,484  $ 1,271,029  4.5  %

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Product category sales volume of physical cases as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

Bottle/Can Sales Volume
Third Quarter Bottle/Can Sales
Product Category 2020 2019 Volume % Change
Sparkling beverages 67.5  % 67.7  % 3.6  %
Still beverages 32.5  % 32.3  % 4.5  %
Total bottle/can sales volume 100.0  % 100.0  % 3.9  %

As the Company introduces new products, it reassesses the category assigned to its products at the SKU level, therefore categorization could differ from previously presented results to conform with current period categorization. Any differences are not material.

Cost of Sales

Inputs representing a substantial portion of the Company’s cost of sales include: (i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles and sweetener, (iii) concentrate costs and (iv) manufacturing costs, including labor, overhead and warehouse costs. In addition, cost of sales includes shipping, handling and fuel costs related to the movement of finished products from manufacturing facilities to distribution centers, amortization expense of distribution rights, distribution fees of certain products and marketing credits from brand companies. Raw material costs represent approximately 20% of total cost of sales on an annual basis.

Cost of sales increased $17.2 million, or 2.1%, to $856.0 million in the third quarter of 2020, as compared to $838.8 million in the third quarter of 2019. The increase in cost of sales was primarily attributable to the following (in millions):

Third Quarter 2020
Attributable to:
$ (24.3) Decrease in cost of sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19
22.5  Increase in cost of sales related to increased sales volume
12.8  Increase in cost of sales primarily related to the change in product mix to meet consumer preferences
6.2  Other
$ 17.2  Total increase in cost of sales

The Company relies extensively on advertising and sales promotions in the marketing of its products. The Coca‑Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the Company’s territories. Certain of the marketing expenditures by The Coca‑Cola Company and other beverage companies are made pursuant to annual arrangements. The Company also benefits from national advertising programs conducted by The Coca‑Cola Company and other beverage companies. Total marketing funding support from The Coca‑Cola Company and other beverage companies, which includes both direct payments to the Company and payments to customers for marketing programs, was $33.8 million in the third quarter of 2020, as compared to $34.8 million in the third quarter of 2019.

Shipping and handling costs related to the movement of finished products from manufacturing facilities to distribution centers are included in cost of sales. The Company’s cost of sales may not be comparable to other peer companies, as some peer companies include all costs related to distribution networks 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.

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.

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SD&A expenses decreased by $9.8 million, or 2.6%, to $368.6 million in the third quarter of 2020, as compared to $378.4 million in the third quarter of 2019. SD&A expenses as a percentage of net sales decreased to 27.7% in the third quarter of 2020 from 29.8% in the third quarter of 2019. The decrease in SD&A expenses was primarily attributable to the following (in millions):

Third Quarter 2020
Attributable to:
$ (7.9) Decrease in payroll and employee benefit costs, primarily as a result of the elimination of certain field-based positions and reduced overtime hours
(1.9) Other
$ (9.8) Total decrease in SD&A expenses

Shipping and handling costs included in SD&A expenses were $155.8 million in the third quarter of 2020 and $161.0 million in the third quarter of 2019.

Interest Expense, Net

Interest expense, net decreased $1.9 million, or 17.6%, to $9.0 million in the third quarter of 2020, as compared to $11.0 million in the third quarter of 2019. The decrease was primarily a result of lower average interest rates and lower average debt balances.

Other Expense, Net

A summary of other expense, net is as follows:

Third Quarter
(in thousands) 2020 2019
Increase in the fair value of the acquisition related contingent consideration liability $ 19,808  $ 18,749 
Non-service cost component of net periodic benefit cost 1,586  1,962 
Total other expense, net $ 21,394  $ 20,711 

Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to sub-bottling fees to fair value. The fair value is determined by discounting future expected sub-bottling payments required under the Company’s comprehensive beverage agreement, which extend through the life of the applicable distribution assets, using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates and future cash flow projections of the distribution territories subject to sub-bottling fees. The life of these distribution assets is generally 40 years. The Company is required to pay the current portion of the sub-bottling fee on a quarterly basis.

The increase in the fair value of the acquisition related contingent consideration liability during the third quarter of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees. The increase in the fair value of the acquisition related contingent consideration liability during the third quarter of 2019 was primarily driven by a decrease in the discount rate used to calculate the fair value.

Income Tax Expense

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 25.0% for the third quarter of 2020 and 29.9% for the third quarter of 2019. The decrease in the effective income tax rate was primarily driven by improved financial results. The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 26.1% for the third quarter of 2020 and 33.7% for the third quarter of 2019.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $3.2 million in the third quarter of 2020 and $2.5 million in the third quarter of 2019, each related to the portion of Piedmont owned by The Coca‑Cola Company.

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $1.3 million in the third quarter of 2020 and $0.2 million in the third quarter of 2019.

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First Nine Months Results

Our results of operations for the first nine months of 2020 and the first nine months of 2019 are highlighted in the table below and discussed in the following paragraphs.

First Nine Months
(in thousands)
2020 2019 Change
Net sales $ 3,728,720  $ 3,647,600  $ 81,120 
Cost of sales 2,421,686  2,390,289  31,397 
Gross profit 1,307,034  1,257,311  49,723 
Selling, delivery and administrative expenses 1,087,251  1,116,097  (28,846)
Income from operations 219,783  141,214  78,569 
Interest expense, net 27,778  35,846  (8,068)
Other expense, net 39,826  67,743  (27,917)
Income before income taxes 152,179  37,625  114,554 
Income tax expense 38,911  10,801  28,110 
Net income 113,268  26,824  86,444 
Less: Net income attributable to noncontrolling interest 7,153  5,279  1,874 
Net income attributable to Coca‑Cola Consolidated, Inc. $ 106,115  $ 21,545  $ 84,570 
Other comprehensive income, net of tax 2,201  1,367  834 
Comprehensive income attributable to Coca‑Cola Consolidated, Inc.
$ 108,316  $ 22,912  $ 85,404 

Net Sales

Net sales increased $81.1 million, or 2.2%, to $3.73 billion in the first nine months of 2020, as compared to $3.65 billion in the first nine months of 2019. The increase in net sales was primarily attributable to the following (in millions):

First Nine Months 2020
Attributable to:
$ 104.7  Increase in net sales related to increased sales volume
(55.2) Decrease in net sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19
38.5  Increase in net sales primarily related to an increase in average bottle/can sales price per unit to retail customers and the shift in product mix to higher revenue still products in order to meet consumer preferences
(6.9) Other
$ 81.1  Total increase in net sales

Net sales by product category were as follows:

First Nine Months
(in thousands) 2020 2019 % Change
Bottle/can sales:
Sparkling beverages $ 2,040,139  $ 1,928,297  5.8  %
Still beverages 1,239,335  1,200,971  3.2  %
Total bottle/can sales 3,279,474  3,129,268  4.8  %
Other sales:
Sales to other Coca‑Cola bottlers 249,994  254,200  (1.7) %
Post-mix and other 199,252  264,132  (24.6) %
Total other sales 449,246  518,332  (13.3) %
Total net sales $ 3,728,720  $ 3,647,600  2.2  %

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Product category sales volume of physical cases as a percentage of total bottle/can sales volume and the percentage change by product category were as follows:

Bottle/Can Sales Volume
First Nine Months Bottle/Can Sales
Product Category 2020 2019 Volume % Change
Sparkling beverages 69.9  % 69.7  % 3.7  %
Still beverages 30.1  % 30.3  % 2.7  %
Total bottle/can sales volume 100.0  % 100.0  % 3.4  %

As the Company introduces new products, it reassesses the category assigned to its products at the SKU level, therefore categorization could differ from previously presented results to conform with current period categorization. Any differences are not material.

The following table summarizes the percentage of the Company’s total bottle/can sales volume to its largest customers, as well as the percentage of the Company’s total net sales that such volume represents:

First Nine Months
2020 2019
Approximate percent of the Company’s total bottle/can sales volume:
Wal-Mart Stores, Inc. 19  % 19  %
The Kroger Company 13  % 12  %
Total approximate percent of the Company’s total bottle/can sales volume 32  % 31  %
Approximate percent of the Company’s total net sales:
Wal-Mart Stores, Inc. 14  % 14  %
The Kroger Company 10  % 8  %
Total approximate percent of the Company’s total net sales 24  % 22  %

Cost of Sales

Cost of sales increased $31.4 million, or 1.3%, to $2.42 billion in the first nine months of 2020, as compared to $2.39 billion in the first nine months of 2019. The increase in cost of sales was primarily attributable to the following (in millions):

First Nine Months 2020
Attributable to:
$ 50.4  Increase in cost of sales related to increased sales volume
(42.1) Decrease in cost of sales related to the decrease in fountain syrup sales mainly sold in on-premise outlets, which have been impacted by COVID-19
17.7  Increase in cost of sales primarily related to the change in product mix to meet consumer preferences
5.4  Other
$ 31.4  Total increase in cost of sales

Total marketing funding support from The Coca‑Cola Company and other beverage companies was $90.4 million in the first nine months of 2020, as compared to $100.8 million in the first nine months of 2019.

Selling, Delivery and Administrative Expenses

SD&A expenses decreased by $28.8 million, or 2.6%, to $1.09 billion in the first nine months of 2020, as compared to $1.12 billion in the first nine months of 2019. SD&A expenses as a percentage of net sales decreased to 29.2% in the first nine
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months of 2020 from 30.6% in the first nine months of 2019. The decrease in SD&A expenses was primarily attributable to the following (in millions):

First Nine Months 2020
Attributable to:
$ (16.7) Decrease in payroll, employee benefit costs and incentive compensation, primarily as a result of the elimination of certain field-based positions and reduced overtime hours
(13.8) Decrease in a number of expense categories due to reductions in discretionary spending, including travel and entertainment
1.7  Other
$ (28.8) Total decrease in SD&A expenses

Shipping and handling costs included in SD&A expenses were $465.0 million in the first nine months of 2020 and $465.7 million in the first nine months of 2019.

Interest Expense, Net

Interest expense, net decreased $8.1 million, or 22.5%, to $27.8 million in the first nine months of 2020, as compared to $35.8 million in the first nine months of 2019. The decrease was primarily a result of lower average interest rates and lower average debt balances.

Other Expense, Net

A summary of other expense, net is as follows:

First Nine Months
(in thousands) 2020 2019
Increase in the fair value of the acquisition related contingent consideration liability $ 35,068  $ 62,017 
Non-service cost component of net periodic benefit cost 4,758  5,882 
Other —  (156)
Total other expense, net $ 39,826  $ 67,743 

The increase in the fair value of the acquisition related contingent consideration liability during the first nine months of 2020 was primarily driven by changes in future cash flow projections of the distribution territories subject to sub-bottling fees, partially offset by an increase in the discount rate used to calculate the fair value. The increase in the fair value of the acquisition related contingent consideration liability during the first nine months of 2019 was primarily driven by a decrease in the discount rate used to calculate the fair value and changes in future cash flow projections of the distribution territories subject to sub-bottling fees.

Income Tax Expense

The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes, was 25.6% for the first nine months of 2020 and 28.7% for the first nine months of 2019. The decrease in the effective income tax rate was primarily driven by improved financial results. The Company’s effective income tax rate, calculated by dividing income tax expense by income before income taxes minus net income attributable to noncontrolling interest, was 26.8% for the first nine months of 2020 and 33.4% for the first nine months of 2019.

Noncontrolling Interest

The Company recorded net income attributable to noncontrolling interest of $7.2 million in the first nine months of 2020 and $5.3 million in the first nine months of 2019, each related to the portion of Piedmont owned by The Coca‑Cola Company.

Other Comprehensive Income, Net of Tax

Other comprehensive income, net of tax was $2.2 million in the first nine months of 2020 and $1.4 million in the first nine months of 2019.

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Segment Operating Results

The Company evaluates segment reporting in accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operating Decision Maker (the “CODM”). The Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM.

The Company believes three operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.”

The Company’s segment results are as follows:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Net sales:
Nonalcoholic Beverages $ 1,295,271  $ 1,236,261  $ 3,633,376  $ 3,547,373 
All Other 84,776  92,501  246,406  275,358 
Eliminations(1)
(51,563) (57,733) (151,062) (175,131)
Consolidated net sales $ 1,328,484  $ 1,271,029  $ 3,728,720  $ 3,647,600 
Income from operations:
Nonalcoholic Beverages $ 108,035  $ 48,248  $ 227,559  $ 120,613 
All Other (4,191) 5,598  (7,776) 20,601 
Consolidated income from operations $ 103,844  $ 53,846  $ 219,783  $ 141,214 

(1)The entire net sales elimination represents net sales from the All Other segment to the Nonalcoholic Beverages segment. Sales between these segments are recognized at either fair market value or cost depending on the nature of the transaction.

Adjusted Non-GAAP Results

The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). However, management believes certain non-GAAP financial measures provide users with additional meaningful financial information that should be considered when assessing the Company’s ongoing performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company’s performance.

Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. The Company’s non-GAAP financial information does not represent a comprehensive basis of accounting. The following tables reconcile reported results (GAAP) to adjusted results (non-GAAP):

Third Quarter 2020
(in thousands, except per share data)
Gross
profit 		SD&A
expenses 		Income from
operations 		Income before
income taxes 		Net
income 		Basic net income
per share
Reported results (GAAP) $ 472,438  $ 368,594  $ 103,844  $ 73,417  $ 51,884  $ 5.53 
Fair value adjustment of acquisition related contingent consideration(1)
—  —  —  19,808  14,895  1.59 
Fair value adjustments for commodity derivative instruments(2)
(1,194) 575  (1,769) (1,769) (1,330) (0.14)
Supply chain and asset optimization(3)
3,122  —  3,122  3,122  2,348  0.25 
Other tax adjustments(4)
—  —  —  —  (421) (0.04)
Total reconciling items 1,928  575  1,353  21,161  15,492  1.66 
Adjusted results (non-GAAP) $ 474,366  $ 369,169  $ 105,197  $ 94,578  $ 67,376  $ 7.19 

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Third Quarter 2019
(in thousands, except per share data)
Gross
profit 		SD&A
expenses 		Income from
operations 		Income before
income taxes 		Net
income 		Basic net income
per share
Reported results (GAAP) $ 432,224  $ 378,378  $ 53,846  $ 22,170  $ 13,006  $ 1.39 
Fair value adjustment of acquisition related contingent consideration(1)
—  —  —  18,749  14,099  1.51 
Fair value adjustments for commodity derivative instruments(2)
(487) (74) (413) (413) (311) (0.04)
Supply chain and asset optimization(3)
3,581  —  3,581  3,581  2,693  0.29 
Capitalization threshold change for certain assets(5)
—  (1,732) 1,732  1,732  1,302  0.14 
Other tax adjustments(4)
—  —  —  —  1,482  0.15 
Total reconciling items 3,094  (1,806) 4,900  23,649  19,265  2.05 
Adjusted results (non-GAAP) $ 435,318  $ 376,572  $ 58,746  $ 45,819  $ 32,271  $ 3.44 

First Nine Months 2020
(in thousands, except per share data)
Gross
profit 		SD&A
expenses 		Income from
operations 		Income before
income taxes 		Net
income 		Basic net income
per share
Reported results (GAAP) $ 1,307,034  $ 1,087,251  $ 219,783  $ 152,179  $ 106,115  $ 11.32 
Fair value adjustment of acquisition related contingent consideration(1)
—  —  —  35,068  26,371  2.81 
Fair value adjustments for commodity derivative instruments(2)
(924) (949) 25  25  19  — 
Supply chain and asset optimization(3)
4,441  601  3,840  3,840  2,888  0.31 
Other tax adjustments(4)
—  —  —  —  (1,103) (0.11)
Total reconciling items 3,517  (348) 3,865  38,933  28,175  3.01 
Adjusted results (non-GAAP) $ 1,310,551  $ 1,086,903  $ 223,648  $ 191,112  $ 134,290  $ 14.33 

First Nine Months 2019
(in thousands, except per share data)
Gross
profit 		SD&A
expenses 		Income from
operations 		Income before
income taxes 		Net
income 		Basic net income
per share
Reported results (GAAP) $ 1,257,311  $ 1,116,097  $ 141,214  $ 37,625  $ 21,545  $ 2.30 
Fair value adjustment of acquisition related contingent consideration(1)
—  —  —  62,017  46,637  4.98 
Fair value adjustments for commodity derivative instruments(2)
482  2,575  (2,093) (2,093) (1,574) (0.17)
Supply chain and asset optimization(3)
4,875  —  4,875  4,875  3,666  0.39 
Capitalization threshold change for certain assets(5)
—  (6,111) 6,111  6,111  4,595  0.49 
System Transformation expenses(6)
—  (6,915) 6,915  6,915  5,200  0.56 
Other tax adjustments(4)
—  —  —  —  (2,178) (0.24)
Total reconciling items 5,357  (10,451) 15,808  77,825  51,146  6.01 
Adjusted results (non-GAAP) $ 1,262,668  $ 1,105,646  $ 157,022  $ 115,450  $ 72,691  $ 8.31 

Following is an explanation of non-GAAP adjustments:

(1)This non-cash, fair value adjustment of acquisition related contingent consideration fluctuates based on factors such as long-term interest rates and future cash flow projections of the distribution territories subject to sub-bottling fees.

(2)The Company enters into commodity derivative instruments from time to time to hedge some or all of its projected purchases of aluminum, PET resin, diesel fuel and unleaded gasoline in order to mitigate commodity risk. The Company accounts for its commodity derivative instruments on a mark-to-market basis.

(3)Adjustment reflects expenses within the Nonalcoholic Beverages segment related to the impairment and accelerated depreciation of property, plant and equipment as the Company continues to optimize efficiency opportunities across its business.

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(4)Adjustment reflects the impact from reconciling items to reported results on the annualized adjusted effective income tax rate.

(5)Adjustment reflects additional expense for the prospective change of increasing the capitalization thresholds in 2019 on certain low-cost, short-lived assets.

(6)Adjustment reflects expenses incurred during the applicable period of 2019 related to the System Transformation, which primarily includes information technology system conversions.

Financial Condition

Total assets were $3.31 billion as of September 27, 2020, which was an increase of $186.0 million from December 29, 2019. Net working capital, defined as current assets less current liabilities, was $292.9 million as of September 27, 2020, which was an increase of $84.8 million from December 29, 2019.

Significant changes in net working capital as of September 27, 2020 as compared to December 29, 2019 were as follows:

•An increase in cash and cash equivalents of $155.2 million primarily as a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act.
•A decrease in inventory of $18.2 million, primarily as a result of higher than expected sales volume and a shift in product offerings during the COVID-19 pandemic.
•An increase in accounts payable, trade of $47.2 million and an increase in accounts payable to The Coca‑Cola Company of $27.0 million, both primarily as a result of the timing of cash payments.
•A decrease in other accrued compensation of $13.0 million, primarily as a result of the timing of bonus and incentive payments during the first quarter of each fiscal year.

Liquidity and Capital Resources

The Company’s sources of capital include cash flows from operations, available credit facilities and the issuance of debt and equity securities. As of September 27, 2020, the Company had $164.8 million of cash and cash equivalents. The Company has obtained its long-term debt from public markets, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to refinance its maturing debt, finance its business plan, meet its working capital requirements and maintain an appropriate level of capital spending for at least the next 12 months from the issuance of the condensed consolidated financial statements. At this time, the Company does not expect the COVID-19 pandemic to have a material impact on its liquidity or sources of capital.

The Company’s long-term debt as of September 27, 2020 and December 29, 2019 was as follows:

(in thousands) Maturity Date September 27, 2020 December 29, 2019
Term loan facility(1)
6/7/2021 $ 240,000  $ 262,500 
Senior notes 2/27/2023 125,000  125,000 
Revolving credit facility 6/8/2023 —  45,000 
Senior notes and unamortized discount on senior notes(2)
11/25/2025 349,955  349,948 
Senior notes 10/10/2026 100,000  100,000 
Senior notes 3/21/2030 150,000  150,000 
Debt issuance costs (2,088) (2,528)
Long-term debt $ 962,867  $ 1,029,920 

(1)The Company intends to refinance principal payments due in the next 12 months under the term loan facility, and has the capacity to do so under its revolving credit facility, which is classified as long-term debt. As such, any amounts due in the next 12 months were classified as noncurrent.
(2)The senior notes due in 2025 were issued at 99.975% of par.

The Company’s term loan facility matures on June 7, 2021. The original aggregate principal amount borrowed by the Company under the facility was $300 million and repayment of principal amounts outstanding began in 2018. The Company may request additional term loans under the term loan facility, provided the Company’s aggregate borrowings under the facility do not exceed $500 million.

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In 2019, the Company entered into a $100 million fixed rate swap maturing June 7, 2021, to hedge a portion of the interest rate risk on the Company’s term loan facility. This interest rate swap is designated as a cash flow hedging instrument and changes in its fair value are not expected to be material to the condensed consolidated balance sheets. Changes in the fair value of this interest rate swap were classified as accumulated other comprehensive loss on the condensed consolidated balance sheets and included in the condensed consolidated statements of comprehensive income.

As discussed below under “Cash Flows From Financing Activities,” in 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife Investment Advisors, LLC (“MetLife”) and certain of its affiliates. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to $200 million.

The Company’s revolving credit facility matures on June 8, 2023 and has an aggregate maximum borrowing capacity of $500 million, which may be increased at the Company’s option to $750 million, subject to obtaining commitments from the lenders and satisfying other conditions specified in the credit agreement. The Company currently believes all banks participating in the revolving credit facility have the ability to and will meet any funding requests from the Company. As of September 27, 2020, the Company had no outstanding borrowings under the revolving credit facility, and, therefore, had $500 million borrowing capacity available.

The indenture under which the Company’s public debt was 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 September 27, 2020. These covenants do not currently, and the Company does not anticipate they will, restrict its liquidity or capital resources.

All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s debt.

The Company’s Board of Directors has declared, and the Company has paid, dividends on the Common Stock and Class B Common Stock each quarter since 1994. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future.

The Company’s credit ratings are reviewed periodically by certain nationally recognized rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material adverse impact on the Company’s operating results or financial position. During the first quarter of 2020, Standard & Poor’s reaffirmed the Company’s BBB rating and revised the Company’s rating outlook to stable from negative. Moody’s rating outlook for the Company is stable. As of September 27, 2020, the Company’s credit ratings were as follows:

Long-Term Debt
Standard & Poor’s BBB
Moody’s Baa2

The Company is subject to interest rate risk on its variable rate debt, including its revolving credit facility and term loan facility. Assuming no changes in the Company’s capital structure, if market interest rates average 1% more over the next 12 months than the interest rates as of September 27, 2020, interest expense for the next 12 months would increase by approximately $1.4 million.

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The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability. There were no transfers of assets or liabilities from Level 1 or Level 2 in any period presented. Fair value adjustments were non-cash, and, therefore, did not impact the Company’s liquidity or capital resources. Following is a summary of the Level 3 activity:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Beginning balance - Level 3 liability $ 441,113  $ 412,450  $ 446,684  $ 382,898 
Payments of acquisition related contingent consideration (11,468) (5,948) (31,999) (18,784)
Reclassification to current payables (800) (60) (1,100) (940)
Increase in fair value 19,808  18,749  35,068  62,017 
Ending balance - Level 3 liability $ 448,653  $ 425,191  $ 448,653  $ 425,191 

Cash Sources and Uses

A summary of cash-based activity is as follows:

First Nine Months
(in thousands) 2020 2019
Cash Sources:
Net cash provided by operating activities(1)
$ 376,401  $ 204,583 
Borrowings under revolving credit facility 235,000  331,339 
Proceeds from issuance of senior notes —  100,000 
Proceeds from the sale of property, plant and equipment 2,397  1,028 
Total cash sources $ 613,798  $ 636,950 
Cash Uses:
Payments on revolving credit facility $ 280,000  $ 376,339 
Payments on term loan facility and senior notes 22,500  132,500 
Additions to property, plant and equipment 110,717  96,747 
Payments of acquisition related contingent consideration 31,999  18,784 
Cash dividends paid 7,030  7,026 
Payments on financing lease obligations 4,428  6,441 
Other distribution agreements —  4,654 
Other 1,915  2,018 
Total cash uses $ 458,589  $ 644,509 
Net increase (decrease) in cash during period $ 155,209  $ (7,559)

(1)Net cash provided by operating activities in the first nine months of 2020 included net income tax payments of $36.9 million and pension plan contributions of $16.3 million. Net cash provided by operating activities in the first nine months of 2019 included net income tax payments of $5.5 million and pension plan contributions of $4.9 million.

Cash Flows From Operating Activities

During the first nine months of 2020, cash provided by operating activities was $376.4 million, which was an increase of $171.8 million as compared to the first nine months of 2019. The increase was primarily a result of our strong operating performance and working capital improvement, primarily related to a reduction in inventory, the timing of accounts payable and the deferral of payroll taxes permitted under the CARES Act.

The Company has taken advantage of certain provisions of the CARES Act, which allow an employer to defer the deposit and payment of the employer’s portion of social security taxes that would otherwise be 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.

Cash Flows From Investing Activities

During the first nine months of 2020, cash used in investing activities was $110.1 million, which was an increase of $8.0 million as compared to the first nine months of 2019. The increase was primarily a result of additions to property, plant and equipment,
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which were $110.7 million during the first nine months of 2020 and $96.7 million during the first nine months of 2019. There were $25.5 million and $8.9 million of additions to property, plant and equipment accrued in accounts payable, trade as of September 27, 2020 and September 29, 2019, respectively.

The Company anticipates additions to property, plant and equipment for the full year 2020 will be $180 million to $200 million, with remaining anticipated expenditures in the fourth quarter of 2020 of $70 million to $90 million.

Cash Flows From Financing Activities

During the first nine months of 2020, cash used in financing activities was $111.1 million, which was an increase of $1.0 million as compared to the first nine months of 2019. The Company repaid $67.5 million of debt during the first nine months of 2020.

The Company had cash payments for acquisition related contingent consideration of $32.0 million during the first nine months of 2020 and $18.8 million during the first nine months of 2019. The Company anticipates the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to sub-bottling fees will be in the range of $28 million to $53 million.

In 2019, the Company sold $100 million aggregate principal amount of senior unsecured notes due in 2026 to MetLife and certain of its affiliates pursuant to a note purchase and private shelf agreement, dated January 23, 2019, between the Company, MetLife and the other parties thereto. These notes bear interest at 3.93%, payable quarterly in arrears, and will mature on October 10, 2026, unless earlier redeemed by the Company. The Company used the proceeds to refinance the senior notes due on April 15, 2019. The Company may request that MetLife consider the purchase of additional senior unsecured notes of the Company under the agreement in an aggregate principal amount of up to $200 million.

Critical Accounting Policies

See Note 1, Note 3 and Note 10 to the condensed consolidated financial statements for information on the Company’s critical accounting policies.

Off-Balance Sheet Arrangements

The Company is a shareholder of South Atlantic Canners, Inc. (“SAC”), a manufacturing cooperative in Bishopville, South Carolina. All of SAC’s shareholders are Coca‑Cola bottlers and each has equal voting rights. As of September 27, 2020, the Company had guaranteed $14.7 million of SAC’s debt. In the event SAC fails to fulfill its commitments under the related debt, the Company would be responsible for payment to the lenders up to the level of the guarantee. The Company does not anticipate SAC will fail to fulfill its commitments related to the debt. The Company further believes SAC has sufficient assets, including production equipment, facilities and working capital, and the ability to adjust selling prices of its products to adequately mitigate the risk of material loss from the Company’s guarantee. See Note 20 to the condensed consolidated financial statements for additional information.

Hedging Activities

The Company uses commodity derivative instruments to manage its exposure to fluctuation in certain commodity prices. Fees paid by the Company for commodity derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity derivative instruments on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or SD&A expenses.

The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its commodity derivative instruments that provide for net settlement of derivative transactions. The net impact of the commodity derivative instruments on the condensed consolidated statements of operations was as follows:

Third Quarter First Nine Months
(in thousands) 2020 2019 2020 2019
Increase (decrease) in cost of sales $ (814) $ 2,984  $ 1,778  $ 8,779 
Increase (decrease) in SD&A expenses 296  582  3,291  (1,403)
Net impact $ (518) $ 3,566  $ 5,069  $ 7,376 

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Cautionary Information Regarding Forward-Looking Statements

Certain statements contained in this report, or in other public filings, press releases, or other written or oral communications made by the Company or its representatives, which are not historical facts, are forward-looking statements subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things, Company plans, activities or events which the Company expects will or may occur in the future and may include express or implied projections of revenue or expenditures; statements of plans and objectives for future operations, growth or initiatives; statements of future economic performance, including, but not limited to, the state of the economy, capital investment and financing plans, net sales, cost of sales, SD&A expenses, gross profit, income tax rates, net income per diluted share, dividends, pension plan contributions and estimated acquisition related contingent consideration payments; statements regarding the outcome or impact of certain recent accounting pronouncements and pending or threatened litigation; or statements regarding the impact of the COVID-19 pandemic on the Company’s business, financial condition, results of operations or cash flows.

These forward-looking statements may be identified by the use of the words “will,” “may,” “believe,” “plan,” “estimate,” “expect,” “anticipate,” “probably,” “should,” “project,” “intend,” “continue,” “could,” and other similar terms and expressions. Various factors, risks and uncertainties may cause the Company’s actual results to differ materially from those expressed or implied in any forward-looking statements. Factors, risks and uncertainties that may result in actual results differing from such forward-looking information include, but are not limited to, those listed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for 2019 and in “Item 1A. Risk Factors” of this report and elsewhere herein, including, without limitation, the factors described under “Critical Accounting Policies” in Note 1 to the condensed consolidated financial statements, or in other filings or statements made by the Company. All of the forward-looking statements in this report and other documents or statements are qualified by these and other factors, risks and uncertainties.

Caution should be taken not to place undue reliance on the forward-looking statements included in this report. The Company assumes no obligation to update any forward-looking statements, even if experience or future changes make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law. In evaluating forward-looking statements, these risks and uncertainties should be considered, together with the other risks described from time to time in the Company’s other reports and documents filed with the Securities and Exchange Commission.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

The Company is subject to interest rate risk on its variable rate debt, including its revolving credit facility and term loan facility. Assuming no changes in the Company’s capital structure, if market interest rates average 1% more over the next 12 months than the interest rates as of September 27, 2020, interest expense for the next 12 months would increase by approximately $1.4 million. This amount was determined by calculating the effect of the hypothetical interest rate on the unhedged portion of the Company’s variable rate debt. This calculated, hypothetical increase in interest expense for the following 12 months may be different from the actual increase in interest expense from a 1% increase in interest rates due to varying interest rate reset dates on the Company’s variable rate debt.

The Company’s acquisition related contingent consideration, which is adjusted to fair value each reporting period, is also impacted by changes in interest rates. The risk-free interest rate used to estimate the Company’s WACC is a component of the discount rate used to calculate the present value of future cash flows due under the Company’s comprehensive beverage agreement. As a result, any changes in the underlying risk-free interest rate will impact the fair value of the acquisition related contingent consideration and could materially impact the amount of non-cash expense or income recorded each reporting period.

The Company is exposed to certain market risks and commodity price risk that arise in the ordinary course of business. The Company may enter into derivative financial instrument transactions to manage or reduce market risk. The Company does not enter into derivative financial instrument transactions for trading or speculative purposes.

The Company is also subject to commodity price risk arising from price movements for certain commodities included as part of its raw materials. The Company manages this commodity price risk in some cases by entering into contracts with adjustable prices to hedge commodity purchases. The Company periodically uses commodity derivative instruments in the management of this risk. The Company estimates a 10% increase in the market prices of commodities included as part of its raw materials over the current market prices would cumulatively increase costs during the next 12 months by approximately $56.3 million assuming no change in volume.

Fees paid by the Company for agreements to hedge commodity purchases are amortized over the corresponding period of the agreement. The Company accounts for its commodity derivative instruments on a mark-to-market basis with any expense or
43

income being reflected as an adjustment to cost of sales or SD&A expenses, consistent with the expense classification of the underlying hedged item.

The annual rate of inflation in the United States, as measured by year-over-year changes in the Consumer Price Index (the “CPI”), was 2.3% in 2019 and 2.4% in 2018. Inflation in the prices of those commodities important to the Company’s business is reflected in changes in the CPI, but commodity prices are volatile and in recent years have moved at a faster rate of change than the CPI.

The principal effect of inflation in both commodity and consumer prices on the Company’s operating results is to increase costs, both of goods sold and SD&A expenses. Although the Company can offset these cost increases by increasing selling prices for its products, consumers may not have the buying power to cover these increased costs and may reduce their volume of purchases of those products. In that event, selling price increases may not be sufficient to offset completely the Company’s cost increases.

Item 4.    Controls and Procedures.

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 27, 2020.

There has been no change in the Company’s internal control over financial reporting during the quarter ended September 27, 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION

Item 1.    Legal Proceedings.

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.

Item 1A. Risk Factors.

Except as set forth below, there have been no material changes in the Company’s risk factors from those disclosed in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for 2019.

The COVID-19 pandemic and other pandemic outbreaks in the future could materially adversely affect our business, financial condition, results of operations or cash flows.

The COVID-19 pandemic has significantly impacted our business and results of operations, as government-imposed restrictions on social and commercial activity to promote social distancing have caused significant changes to consumer purchasing behavior. Governmental and societal impositions of restrictions on public gatherings have had, and we expect will continue to have, adverse effects on our business, including, but not limited to, the following:

•Due to the closing or restricted operations of many public locations, we have experienced a decrease in sales volume in “on-premise” accounts, where products are typically consumed immediately, such as restaurants, schools, amusement parks and recreational facilities. This negative trend is likely to continue for the remainder of 2020, and, if the COVID‑19 pandemic continues or intensifies, its negative impact on our net sales may persist or become more severe. We have experienced increased sales volume in our larger retail customer outlets as consumers stock up on certain of our products with the expectation of spending more time at home during the pandemic; however, such increased sales volume may not continue in the long term and may not offset the pressure we are experiencing in our on-premise customer outlets.

•Consumer demand has shifted from higher margin products sold for immediate consumption through smaller retail stores and on-premise locations to lower margin, take home products sold in grocery stores, mass merchandise stores and club stores. We expect this shift in consumer purchasing behavior to continue while shelter-in-place and social distancing behaviors are mandated or encouraged, and possibly for a period of time thereafter.

•Deteriorating economic conditions in our territories, such as increasing unemployment, decreasing disposable income, declining consumer confidence, or economic slowdowns or recessions, could cause an overall decrease in demand for our products or a shift in the types of products sold.

•Disruptions in our concentrate suppliers’ production and distribution operations could increase concentrate costs and create delays in delivery of concentrate, which could adversely impact our ability to manufacture and distribute certain products. Further, disruptions in supply chains have placed, and may continue to place, constraints on our ability to procure beverage containers, such as plastic bottles and aluminum cans. These supply chain disruptions have increased, and in the future could increase further, our packaging costs and alter the product offerings to our customers.

•We may be required to write off obsolete inventory, accounts receivable and balances of advanced funding provided to customers that permanently close or suffer financial hardships as a result of the COVID-19 pandemic.

•The current uncertain credit market conditions and the actual or perceived effects on our financial condition and results of operations, along with the current unfavorable economic environment in the United States, may increase the likelihood that one or more of the nationally recognized rating agencies will downgrade our credit ratings, which could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material adverse impact on the Company’s operating results or financial position.

•Governmental authorities in the United States may increase or impose new income taxes or indirect taxes, or revise interpretations of existing tax rules and regulations, as a means to finance the cost of stimulus packages and other
45

measures enacted or taken, or that may be enacted or taken in the future, to protect populations and economies from the impact of the COVID-19 pandemic. Alternatively, concerns about the difficulty or desirability of financing additional fiscal stimulus at the federal level could prevent such stimulus from being authorized in a timely manner or at all. Such actions could have an adverse effect on our results of operations or cash flows.

•We rely on third-party service providers and business partners, such as cloud data storage and other information technology service providers, suppliers, distributors, contractors, joint venture partners and other external business partners, for certain functions or for services in support of key portions of our operations. These third-party service providers and business partners are subject to risks and uncertainties related to the COVID-19 pandemic, which may interfere with their ability to fulfill their respective commitments and responsibilities to us in a timely manner and in accordance with our agreed-upon terms.

•As a result of the COVID-19 pandemic, including related governmental guidance or directives, we have encouraged, and in some cases required, most office-based employees, including most employees based at our corporate headquarters in Charlotte, North Carolina, to work remotely. We may experience reductions in productivity and disruptions to our business routines while our remote-work policy remains in place.

•Actions we have taken or may take, or decisions we have made or may make, because of the COVID-19 pandemic may result in legal claims or litigation against us.

•The resumption of normal business operations after the disruptions caused by the COVID-19 pandemic may be delayed or constrained by its lingering effects on our consumers, customers, suppliers and/or third-party service providers.

Any of the negative impacts of the COVID-19 pandemic, including those described above, alone or in combination with others, may have a material adverse effect on our business, financial condition, results of operations or cash flows. Any of these negative impacts, alone or in combination with others, could exacerbate many of the risk factors discussed in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for 2019. The full extent to which the COVID-19 pandemic will negatively affect our business, financial condition, results of operations or cash flows will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Future pandemics may also pose risks similar to or more severe than the risks associated with the COVID-19 pandemic, which are impossible to predict at this time.

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Item 6.    Exhibits.

Exhibit
No.
Description Incorporated by Reference or
Filed/Furnished Herewith
3.1 Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 2, 2017 (File No. 0-9286).
3.2 Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 2, 2019 (File No. 0-9286).
3.3 Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on January 2, 2019 (File No. 0-9286).
4.1 Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 13, 2020 (File No. 0-9286).
4.2 Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 13, 2020 (File No. 0-9286).
10.1
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 7, 2020 (File No. 0-9286).
10.2* Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2020 (File No. 0-9286).
10.3 Filed herewith.
31.1 Filed herewith.
31.2 Filed herewith.
32 Furnished herewith.
101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. Filed herewith.
101.SCH Inline XBRL Taxonomy Extension Schema Document. Filed herewith.
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. Filed herewith.
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. Filed herewith.
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. Filed herewith.
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. Filed herewith.
104 Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. Filed herewith.

*Indicates a management contract or compensatory plan or arrangement.
47

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COCA-COLA CONSOLIDATED, INC.
(REGISTRANT)
Date: November 3, 2020
By:
/s/ F. Scott Anthony
F. Scott Anthony
Executive Vice President and Chief Financial Officer
(Principal Financial Officer of the Registrant)
Date: November 3, 2020
By:
/s/ Matthew J. Blickley
Matthew J. Blickley
Senior Vice President, Financial Planning and
Chief Accounting Officer
(Principal Accounting Officer of the Registrant)

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