Coca-Cola Consolidated, Inc. (COKE) FY 2023 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7.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 the Company is intended to help the reader understand our financial condition and results of operations and is provided as an addition to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements. The consolidated financial statements include the accounts and the consolidated operations of the Company and its majority-owned subsidiaries. All comparisons are to the prior year unless specified otherwise.
The periods presented are the fiscal years ended December 31, 2023 (“2023”) and December 31, 2022 (“2022”). Information concerning the fiscal year ended December 31, 2021 (“2021”) and a comparison of 2022 and 2021 may be found under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10‑K for 2022, filed with the SEC on February 22, 2023.
The Company manages its business on the basis of three operating segments. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.”
Executive Summary
Net sales increased 7% to $6.65 billion in 2023, with standard physical case volume down 1.9% when compared to the prior year. The increase in net sales was driven primarily by price increases across our product portfolio during the second half of 2022 and the beginning of 2023. Volume continued to outperform the price elasticities we have historically experienced with higher pricing. Sparkling and Still net sales increased 10.5% and 6.4%, respectively, compared to 2022. While Sparkling volume decreased 0.3% in 2023, we experienced strong consumer demand for our multi-serve can packages as well as our Immediate Consumption products. Brands within the Sparkling category benefited from solid performance in our on-premise sales channels, as more consumers returned to pre-COVID work and leisure routines. Additionally, Sparkling sales at our Club store channels were strong as consumers sought value-oriented packages during 2023. Still volume decreased 6.1% in 2023, as the overall Sports Drinks category slowed considerably. Other Still categories such as Energy and Enhanced Water continued to perform well, with Monster Energy and glacéau smartwater both achieving solid growth in 2023.
Gross profit in 2023 increased $320.8 million, or 14%, while gross margin increased 240 basis points to 39.1%. The improvement in gross profit resulted primarily from higher prices for our products and a moderation of prices for certain commodities. Compared to 2022, gross margin also benefited from the increased mix of Sparkling beverages, which generally carry higher gross margins than Still packages.
Selling, delivery and administrative (“SD&A”) expenses in 2023 increased $127.4 million, or 8%. SD&A expenses as a percentage of net sales in 2023 increased 10 basis points to 26.5% as compared to 2022. The increase in SD&A expenses related primarily to an increase in labor costs and certain investments in our teammates, including incentive compensation expense, to reward their performance and contributions in achieving strong operating results.
Income from operations in 2023 increased $193.4 million to $834.5 million. Income tax expense in 2023 was $149.1 million, compared to $144.9 million in 2022. The effective income tax rate for 2023 was 26.7%, compared to 25.2% for 2022. The increase in the effective income tax rate was primarily the result of lower income before taxes and an increase in certain nondeductible amounts as compared to 2022.
Net income decreased $21.8 million in 2023 to $408.4 million as compared to 2022. Net income in 2023 was adversely impacted by fair value adjustments to our acquisition related contingent consideration liability, driven by changes in the discount rate and future cash flow projections used to calculate the fair value of the liability. Additionally, net income in 2023 included a non-cash charge of $112.8 million related to the full settlement of our primary pension plan benefit liabilities.
Cash flows provided by operations in 2023 were $810.7 million, compared to $554.5 million in 2022. Cash flows from operations reflected our strong operating performance during 2023. During 2023, we invested $282.3 million in capital expenditures as we continued to optimize our supply chain and invest for future growth.
23
Areas of Emphasis
Key priorities for the Company include executing our commercial strategy, executing our revenue management strategy, optimizing our supply chain, generating cash flow, determining the optimal route to market and creating a digitally enabled selling platform.
Commercial Execution: Our success is dependent on our ability to execute our commercial strategy within our customers’ stores. Our ability to obtain shelf space within stores and remain in-stock across our portfolio of brands and packages in a profitable manner will have a significant impact on our results. We are focused on execution at every step in our supply chain, including raw material and finished product procurement, manufacturing conversion, transportation, warehousing and distribution, to ensure in-store execution can occur. We continue to invest in tools and technology to enable our teammates to operate more effectively and efficiently with our customers and to drive long-term value in our business.
Revenue Management: Our revenue management strategy focuses on pricing our brands and packages optimally within product categories and channels, creating effective working relationships with our customers and making disciplined fact-based decisions. Pricing decisions are made considering a variety of factors, including brand strength, competitive environment, input costs, the roles certain brands play in our product portfolio and other market conditions.
Supply Chain Optimization: We are continually focused on optimizing our supply chain, which includes identifying nearby warehousing and distribution operations that can be consolidated into new facilities to increase capacity, expand production capabilities, reduce overall production costs and add automation to allow the Company to better serve its customers and consumers. The Company undertook significant capital expenditures to optimize our supply chain and to invest for future growth during 2023, and expects to continue to make significant investments during 2024.
Cash Flow Generation: We have several initiatives in place to optimize cash flow, improve profitability and prudently manage capital expenditures. We believe strengthening our balance sheet gives us the flexibility to make optimal capital allocation decisions for long-term value creation.
Optimal Route to Market: We are focused on implementing optimal methods of distribution of our products within our territory. Our typical direct store delivery method uses Company-owned vehicles and warehouses, but we are increasingly using alternative methods of distribution. For example, in instances of post-mix delivery for use in fountain machines, we have shifted our delivery method to alternative distributors in order to enhance customer service and profitability. In instances of bottle/can delivery, we are shifting certain products for certain customers and channels of business to alternative routes to market. These alternative routes to market include third-party distributors, the manufacturer of the product or the customer’s supply chain infrastructure. These bottle/can arrangements generally come with favorable commercial terms for the Company. In 2023, more than half of our post-mix gallons and less than 10% of our bottle/can volume was delivered through alternative routes to market.
Digitally Enabled Selling Platform: Through our investment in CONA, we, along with other Coca-Cola bottlers, are building a digitally enabled selling platform called MyCoke 360 that we believe will enable us to better serve our customers. This platform will enable a more seamless order and payment platform for certain customers and we expect this platform will enable us to enhance customer service and create more selling opportunities for our teammates. This platform is targeted to certain on-premise and small store customers.
24
Results of Operations
The Company’s results of operations for 2023 and 2022 are highlighted in the table below and discussed in the following paragraphs.
| Fiscal Year | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | Change | ||||||||
| Net sales | $ | 6,653,858 | $ | 6,200,957 | $ | 452,901 | |||||
| Cost of sales | 4,055,147 | 3,923,003 | 132,144 | ||||||||
| Gross profit | 2,598,711 | 2,277,954 | 320,757 | ||||||||
| Selling, delivery and administrative expenses | 1,764,260 | 1,636,907 | 127,353 | ||||||||
| Income from operations | 834,451 | 641,047 | 193,404 | ||||||||
| Interest (income) expense, net | (918) | 24,792 | (25,710) | ||||||||
| Mark-to-market on acquisition related contingent consideration | 159,354 | 32,301 | 127,053 | ||||||||
| Pension plan settlement expense | 112,796 | — | 112,796 | ||||||||
| Other expense, net | 5,738 | 8,867 | (3,129) | ||||||||
| Income before taxes | 557,481 | 575,087 | (17,606) | ||||||||
| Income tax expense | 149,106 | 144,929 | 4,177 | ||||||||
| Net income | 408,375 | 430,158 | (21,783) | ||||||||
| Other comprehensive income, net of tax | 80,561 | 15,626 | 64,935 | ||||||||
| Comprehensive income | $ | 488,936 | $ | 445,784 | $ | 43,152 |
Net Sales
Net sales increased $452.9 million, or 7.3%, to $6.65 billion in 2023, as compared to $6.20 billion in 2022. The largest driver of the increase in net sales was higher average bottle/can sales price per unit charged to retail customers, which increased net sales by approximately $515 million. The increase in net sales was partially offset by lower case sales volume as compared to 2022, which decreased net sales by approximately $110 million.
Net sales by product category were as follows:
| Fiscal Year | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | % Change | ||||||||
| Bottle/can sales: | |||||||||||
| Sparkling beverages | $ | 3,892,133 | $ | 3,521,273 | 10.5 | % | |||||
| Still beverages | 2,149,639 | 2,020,100 | 6.4 | % | |||||||
| Total bottle/can sales | 6,041,772 | 5,541,373 | 9.0 | % | |||||||
| Other sales: | |||||||||||
| Sales to other Coca‑Cola bottlers | 353,819 | 349,837 | 1.1 | % | |||||||
| Post-mix sales and other | 258,267 | 309,747 | (16.6) | % | |||||||
| Total other sales | 612,086 | 659,584 | (7.2) | % | |||||||
| Total net sales | $ | 6,653,858 | $ | 6,200,957 | 7.3 | % |
The decline in post-mix sales and other in 2023 as compared to 2022 was related to a shift in how we deliver post-mix products to our customers. The Company has shifted to a broader use of alternative distributors, rather than Company-owned vehicles and warehouses, to deliver post-mix products to customers in our territory. We receive a fee from a vendor on these post-mix gallons delivered to locally managed customers in our territory, which is recorded as a reduction to cost of sales. This transition has occurred over the past several years but accelerated in 2023 and is expected to be more prevalent in 2024. More than half of the post-mix gallons sold to local customers in our franchise territory in 2023 were delivered using these alternative distribution methods.
25
Product category sales volume of standard physical cases (as defined below) and the percentage change by product category were as follows:
| Fiscal Year | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | % Change | ||||
| Bottle/can sales volume: | |||||||
| Sparkling beverages | 263,872 | 264,735 | (0.3) | % | |||
| Still beverages | 91,495 | 97,456 | (6.1) | % | |||
| Total bottle/can sales volume | 355,367 | 362,191 | (1.9) | % |
A standard physical case is a volume metric used to standardize differing package configurations in order to measure delivered cases on an equivalent basis. As the Company evaluates its volume metrics, it reassesses the way in which physical case volume is measured, which may lead to differences from previously presented results in order to conform with current period standard volume measurement techniques, as used by management. Additionally, 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 in order to conform with current period categorization. Any differences are not material.
The bottle/can sales volume above represents volume that is delivered directly to our customer outlets using Company-owned vehicles and warehouses. In order to serve our customers in the most efficient way, as well as in response to customer demands, the Company has, in certain circumstances, shifted the delivery of our products to third-party distributors, the manufacturer of the product or the customer’s supply chain infrastructure, rather than through Company-owned vehicles and warehouses.
As a result of not physically delivering the product, the sales volume delivered using these alternative methods of distribution is not reflected in our volume metrics. However, because we have the exclusive distribution rights for non-alcoholic beverages within our franchise territory, we receive fees for the delivery of qualified product in our territory. These fees are reported in net sales. Changes in the delivery of our products to our customers has impacted, and will continue to impact, our reported volume and net sales. This transition has occurred over the past several years but accelerated in 2023 and is expected to be more prevalent in 2024. Less than 10% of the bottle/can volume sold in our franchise territory in 2023 was delivered using these alternative routes to market.
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:
| Fiscal Year | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Approximate percent of the Company’s total bottle/can sales volume: | ||||||
| Wal-Mart Stores, Inc. | 21 | % | 20 | % | ||
| The Kroger Company | 14 | % | 12 | % | ||
| Total approximate percent of the Company’s total bottle/can sales volume | 35 | % | 32 | % | ||
| Approximate percent of the Company’s total net sales: | ||||||
| Wal-Mart Stores, Inc. | 17 | % | 16 | % | ||
| The Kroger Company | 11 | % | 10 | % | ||
| Total approximate percent of the Company’s total net sales | 28 | % | 26 | % |
Cost of Sales
Inputs representing a substantial portion of the Company’s cost of sales include: (i) purchases of finished products, (ii) raw material costs, including aluminum cans, plastic bottles, carbon dioxide and sweetener, (iii) concentrate costs and (iv) manufacturing costs, including labor, overhead and warehouse costs. In addition, cost of sales includes shipping, handling and fuel costs related to the movement of finished products from manufacturing plants to distribution centers, amortization expense of distribution rights, distribution fees of certain products and marketing credits and post-mix funding from brand companies. Raw material costs represent approximately 20% of total cost of sales on an annual basis.
Cost of sales increased $132.1 million, or 3.4%, to $4.06 billion in 2023, as compared to $3.92 billion in 2022. The increase in cost of sales was driven by higher input costs, including concentrate and manufacturing costs, which increased cost of sales by approximately $180 million. The increase in cost of sales was partially offset by lower case sales volume as compared to 2022, which decreased cost of sales by approximately $40 million.
26
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, including national advertising programs, to develop their brand identities and to promote sales in the Company’s territories. Certain of these marketing and advertising expenditures are made pursuant to annual arrangements. 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 $164.5 million in 2023, as compared to $147.3 million in 2022.
Selling, Delivery and Administrative Expenses
SD&A expenses include the following: sales management labor costs, distribution costs resulting from transporting finished products from distribution centers to customer locations, distribution center overhead including depreciation expense, distribution center warehousing costs, delivery vehicles and cold drink equipment, point-of-sale expenses, advertising expenses, cold drink equipment repair costs, amortization of intangible assets and administrative support labor and operating costs.
SD&A expenses increased $127.4 million, or 7.8%, to $1.76 billion in 2023, as compared to $1.64 billion in 2022. SD&A expenses as a percentage of net sales increased to 26.5% in 2023 from 26.4% in 2022. Of the increase in SD&A expenses, approximately $72 million was related to an increase in labor costs and certain investments in our teammates, including incentive compensation expense, to reward their performance and contributions in achieving strong operating results. In addition, approximately $30 million of the increase in SD&A expenses was attributable to higher transportation costs, including fleet repairs, as well as changes in our fuel commodity hedge positions as compared to 2022. Approximately $12 million of the increase in SD&A expenses was driven by an increase in commitments to various charities and donor-advised funds in light of the Company’s financial performance.
Shipping and handling costs included in SD&A expenses were approximately $780 million in 2023 and approximately $757 million in 2022.
Interest (Income) Expense, Net
Interest (income) expense, net in 2023 totaled $0.9 million of interest income, net, as compared to $24.8 million of interest expense, net in 2022. The change in interest (income) expense, net was primarily a result of an increase in interest income due to higher cash and cash equivalent balances and increased yields as compared to 2022. The increase in yields was due to the rising rate environment and related to cash deposits and investments in money market funds and U.S. Treasury securities, which contributed to additional interest income as compared to the prior year.
Mark-to-Market on Acquisition Related Contingent Consideration
Mark-to-market on acquisition related contingent consideration increased $127.1 million to $159.4 million in 2023, as compared to $32.3 million in 2022.
Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to acquisition related sub-bottling payments to fair value. The fair value is determined by discounting future expected acquisition related sub-bottling payments required under the CBA, which extend through the life of the related distribution assets acquired in each distribution territory, using the Company’s estimated weighted average cost of capital (“WACC”), which is impacted by many factors, including long-term interest rates and future cash flow projections. The life of these distribution assets is generally 40 years. The Company is required to pay the current portion of the acquisition related sub-bottling payments on a quarterly basis.
The change in the fair value of the acquisition related contingent consideration liability in 2023 as compared to 2022 was primarily driven by changes in the discount rate and projections of future cash flows used to calculate the fair value of the liability.
Pension Plan Settlement Expense
During 2023, the Company recognized a non-cash charge of $112.8 million related to the full settlement of the primary Company-sponsored pension plan (the “Primary Plan”) benefit liabilities, including final premium adjustments, which was recorded as pension plan settlement expense in the consolidated statement of operations for that year. The charge related primarily to a reclassification of actuarial losses from accumulated other comprehensive loss. As of December 31, 2023, there were no gross actuarial losses included in accumulated other comprehensive loss associated with the Primary Plan. As of December 31, 2022, there were approximately $117 million of gross actuarial losses included in accumulated other comprehensive loss associated with the Primary Plan. See Note 17 to the consolidated financial statements for additional information related to the Company’s pension plans.
27
Other Expense, Net
Other expense, net decreased $3.1 million to $5.7 million in 2023, as compared to $8.9 million in 2022. The decrease in other expense, net was primarily driven by changes in the actuarial assumptions related to our pension and postretirement plan liabilities.
Income Tax Expense
The Company’s effective income tax rate was 26.7% for 2023 and 25.2% for 2022. The Company’s income tax expense increased $4.2 million, or 2.9%, to $149.1 million in 2023, as compared to $144.9 million in 2022. The increase in the effective income tax rate was primarily attributable to lower income before taxes and an increase in certain nondeductible amounts during 2023 as compared to 2022.
Other Comprehensive Income, Net of Tax
Other comprehensive income, net of tax was $80.6 million in 2023 and $15.6 million in 2022. As noted in the discussion of pension plan settlement expense above, the Company recognized a non-cash charge of $112.8 million during 2023 related to the full settlement of the Primary Plan benefit liabilities. A corresponding benefit was recognized within other comprehensive income, net of tax due to the reclassification of certain previously recognized actuarial losses from accumulated other comprehensive loss. See Note 17 to the consolidated financial statements for additional information related to the Company’s pension plans.
Segment Operating Results
The Company evaluates segment reporting in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 280, Segment Reporting, each reporting period, including evaluating the reporting package reviewed by the Chief Operating Decision Maker (the “CODM”). The Company has concluded the Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer, as a group, represent the CODM. Asset information is not provided to the CODM.
The Company believes three operating segments exist. Nonalcoholic Beverages represents the vast majority of the Company’s consolidated net sales and income from operations. The additional two operating segments do not meet the quantitative thresholds for separate reporting, either individually or in the aggregate, and, therefore, have been combined into “All Other.”
The Company’s segment results are as follows:
| Fiscal Year | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | |||||
| Net sales: | |||||||
| Nonalcoholic Beverages | $ | 6,562,622 | $ | 6,081,357 | |||
| All Other | 370,748 | 399,359 | |||||
| Eliminations(1) | (279,512) | (279,759) | |||||
| Consolidated net sales | $ | 6,653,858 | $ | 6,200,957 | |||
| Income from operations: | |||||||
| Nonalcoholic Beverages | $ | 841,491 | $ | 639,136 | |||
| All Other | (7,040) | 1,911 | |||||
| Consolidated income from operations | $ | 834,451 | $ | 641,047 |
(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 Results (Non-GAAP)
The Company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”). However, management believes that certain non-GAAP financial measures provide users of the financial statements with additional, meaningful financial information that should be considered, in addition to the measures reported in accordance with GAAP, 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.
28
The following tables reconcile reported results (GAAP) to adjusted results (non-GAAP):
| Fiscal Year 2023 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | Gross profit | SD&A expenses | Income from operations | Income before taxes | Net income | Basic net income per share | |||||||||||||||||
| Reported results (GAAP) | $ | 2,598,711 | $ | 1,764,260 | $ | 834,451 | $ | 557,481 | $ | 408,375 | $ | 43.56 | |||||||||||
| Fair value adjustment of acquisition related contingent consideration(1) | — | — | — | 159,354 | 119,834 | 12.78 | |||||||||||||||||
| Fair value adjustments for commodity derivative instruments(2) | (1,220) | (2,281) | 1,061 | 1,061 | 798 | 0.09 | |||||||||||||||||
| Supply chain optimization(3) | 1,296 | — | 1,296 | 1,296 | 975 | 0.10 | |||||||||||||||||
| Pension plan settlement expense(4) | — | — | — | 112,796 | 84,823 | 9.05 | |||||||||||||||||
| Total reconciling items | 76 | (2,281) | 2,357 | 274,507 | 206,430 | 22.02 | |||||||||||||||||
| Adjusted results (non-GAAP) | $ | 2,598,787 | $ | 1,761,979 | $ | 836,808 | $ | 831,988 | $ | 614,805 | $ | 65.58 |
| Column 1 | Column 2 | Column 3 | Column 4 | Column 5 | Column 6 | Column 7 | Column 8 | Column 9 | Column 10 |
|---|---|---|---|---|---|---|---|---|---|
| Adjusted percentage change versus 2022 | 13.9 | % | 7.6 | % | 29.8 | % |
| Fiscal Year 2022 | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | Gross profit | SD&A expenses | Income from operations | Income before taxes | Net income | Basic net income per share | |||||||||||||||||
| Reported results (GAAP) | $ | 2,277,954 | $ | 1,636,907 | $ | 641,047 | $ | 575,087 | $ | 430,158 | $ | 45.88 | |||||||||||
| Fair value adjustment of acquisition related contingent consideration(1) | — | — | — | 32,301 | 24,306 | 2.59 | |||||||||||||||||
| Fair value adjustments for commodity derivative instruments(2) | 3,333 | 427 | 2,906 | 2,906 | 2,187 | 0.23 | |||||||||||||||||
| Supply chain optimization(3) | 533 | (73) | 606 | 606 | 456 | 0.05 | |||||||||||||||||
| Total reconciling items | 3,866 | 354 | 3,512 | 35,813 | 26,949 | 2.87 | |||||||||||||||||
| Adjusted results (non-GAAP) | $ | 2,281,820 | $ | 1,637,261 | $ | 644,559 | $ | 610,900 | $ | 457,107 | $ | 48.75 |
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 acquisition related sub-bottling payments.
(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 price risk. The Company accounts for its commodity derivative instruments on a mark-to-market basis.
(3)This adjustment reflects expenses within the Nonalcoholic Beverages segment as the Company continues to optimize efficiency opportunities across its business.
(4)This non-cash settlement expense relates to the termination of the Primary Plan during 2023.
Financial Condition
Total assets increased $579.4 million to $4.29 billion on December 31, 2023, as compared to $3.71 billion on December 31, 2022. Net working capital, defined as current assets less current liabilities, was $613.8 million on December 31, 2023, which was an increase of $273.1 million from December 31, 2022.
Significant changes in net working capital as of December 31, 2023 as compared to December 31, 2022 were as follows:
•An increase in cash and cash equivalents of $437.6 million, primarily as a result of cash flows relating to our strong operating performance.
•An increase in accounts receivable, trade of $23.9 million, driven primarily by increased net sales and the timing of cash receipts.
•A decrease in inventories of $25.6 million, primarily due to lower inventory levels for certain manufacturing materials compared to December 31, 2022.
•An increase in accounts payable, trade of $31.8 million, primarily due to the timing of cash payments.
•A decrease in accounts payable to The Coca‑Cola Company of $23.3 million, primarily as a result of the timing of cash payments.
•An increase in other accrued liabilities of $37.0 million, primarily due to an increase in the current portion of the acquisition related contingent consideration liability.
29
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 December 31, 2023, the Company had $635.3 million in cash and cash equivalents. The Company’s cash equivalents balance at December 31, 2023 consisted predominantly of investments in money market funds and U.S. Treasury securities with maturities of 90 days or less. The Company has obtained its long-term debt from public markets, private placements and bank facilities. Management believes the Company has sufficient sources of capital available to finance its business plan, to meet its working capital requirements and to maintain an appropriate level of capital spending for at least the next 12 months from the issuance of the consolidated financial statements.
The Company’s long-term debt as of December 31, 2023 and December 31, 2022 was as follows:
| (in thousands) | Maturity Date | December 31, 2023 | December 31, 2022 | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Senior bonds and unamortized discount on senior bonds(1) | 11/25/2025 | $ | 349,983 | $ | 349,974 | ||||
| Revolving credit facility(2)(3) | 7/9/2026 | — | — | ||||||
| Senior notes | 10/10/2026 | 100,000 | 100,000 | ||||||
| Senior notes | 3/21/2030 | 150,000 | 150,000 | ||||||
| Debt issuance costs | (824) | (1,157) | |||||||
| Total long-term debt | $ | 599,159 | $ | 598,817 |
(1)The senior bonds due in 2025 were issued at 99.975% of par.
(2)The Company’s revolving credit facility has an aggregate maximum borrowing capacity of $500 million. 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)During 2023, the Company amended its revolving credit facility to complete the transition of the interest rate index from the London InterBank Offered Rate (LIBOR) to the Secured Overnight Financing Rate (SOFR), as contemplated in the revolving credit facility.
The indenture under which the Company’s senior bonds were issued does not include financial covenants, but does limit the incurrence of certain liens and encumbrances as well as indebtedness by the Company’s subsidiaries in excess of certain amounts. The agreements under which the Company’s nonpublic debt was issued include two financial covenants: a consolidated cash flow/fixed charges ratio and a consolidated funded indebtedness/cash flow ratio, each as defined in the respective agreement. The Company was in compliance with these covenants as of December 31, 2023. These covenants have not restricted, and are not expected to restrict, the Company’s liquidity or capital resources.
All outstanding long-term debt has been issued by the Company and none has been issued by any of its subsidiaries. There are no guarantees of the Company’s long-term debt.
The Company’s credit ratings are reviewed periodically by certain nationally recognized rating agencies. Changes in the Company’s operating results or financial position could result in changes in the Company’s credit ratings. Lower credit ratings could result in higher borrowing costs for the Company or reduced access to capital markets, which could have a material adverse impact on the Company’s operating results or financial position. As of December 31, 2023, the Company’s credit ratings and outlook for its long-term debt were as follows:
| Credit Rating | Rating Outlook | |||
|---|---|---|---|---|
| Moody’s | Baa1 | Stable | ||
| Standard & Poor’s | BBB+ | Stable |
The Company’s Board of Directors has declared, and the Company has paid, dividends on the Common Stock and the Class B Common Stock and each class of common stock has participated equally in all dividends each quarter for more than 25 years. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future.
On December 5, 2023, the Company announced that its Board of Directors had declared (i) a regular quarterly cash dividend of $0.50 per share on the Common Stock and the Class B Common Stock of the Company and (ii) a special cash dividend of $16.00 per share on the Common Stock and the Class B Common Stock of the Company, each payable on February 9, 2024 to stockholders of record of
30
the Common Stock and the Class B Common Stock as of the close of business on January 26, 2024. The total dividends paid on February 9, 2024 were approximately $155 million.
We review supplier terms and conditions on an ongoing basis, and have negotiated payment term extensions in recent years in connection with our efforts to improve cash flow and working capital. Separate from those term extension actions, the Company has an agreement with a third-party financial institution to facilitate a supply chain finance (“SCF”) program, which allows qualifying suppliers to sell their receivables from the Company to the financial institution in order to negotiate shorter payment terms on outstanding receivable arrangements. The Company’s obligations to its suppliers, including amounts due and scheduled payment terms, are not impacted by a supplier’s participation in the SCF program. See Note 12 to the consolidated financial statements for additional information related to the Company’s SCF program.
The Company’s only Level 3 asset or liability is the acquisition related contingent consideration liability. There were no transfers from Level 1 or Level 2 in any period presented. Fair value adjustments were non-cash and, therefore, did not impact the Company’s liquidity or capital resources. Following is a summary of the Level 3 activity:
| Fiscal Year | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | |||||
| Beginning balance - Level 3 liability | $ | 541,491 | $ | 542,105 | |||
| Payments of acquisition related contingent consideration | (28,208) | (36,515) | |||||
| Reclassification to current payables | (3,300) | 3,600 | |||||
| Increase in fair value | 159,354 | 32,301 | |||||
| Ending balance - Level 3 liability | $ | 669,337 | $ | 541,491 |
Cash Sources and Uses
A summary of cash-based activity is as follows:
| Fiscal Year | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | |||||
| Cash Sources: | |||||||
| Net cash provided by operating activities(1) | $ | 810,690 | $ | 554,506 | |||
| Proceeds from the sale of property, plant and equipment | 695 | 7,369 | |||||
| Total cash sources | $ | 811,385 | $ | 561,875 | |||
| Cash Uses: | |||||||
| Additions to property, plant and equipment | $ | 282,304 | $ | 298,611 | |||
| Cash dividends paid | 46,868 | 9,374 | |||||
| Payments of acquisition related contingent consideration | 28,208 | 36,515 | |||||
| Investment in equity method investees | 13,741 | 3,094 | |||||
| Payments on financing lease obligations | 2,303 | 2,988 | |||||
| Debt issuance fees | 340 | 310 | |||||
| Acquisition of distribution rights | — | 30,649 | |||||
| Payments on term loan facility and senior notes | — | 125,000 | |||||
| Total cash uses | $ | 373,764 | $ | 506,541 | |||
| Net increase in cash | $ | 437,621 | $ | 55,334 |
(1)Net cash provided by operating activities in 2023 included net income tax payments of $200.8 million and pension plan contributions of $16.3 million. Net cash provided by operating activities in 2022 included net income tax payments of $141.0 million, pension plan contributions of $26.0 million and payment of deferred payroll taxes under the Coronavirus Aid, Relief and Economic Security Act of $18.7 million.
Cash Flows From Operating Activities
During 2023, cash provided by operating activities was $810.7 million, which was an increase of $256.2 million as compared to 2022. The cash flows from operations were primarily the result of our strong operating performance. As a result of the Company’s strong cash flows from operations, the Company was able to invest in property, plant and equipment and to pay a special cash dividend, as further discussed in the following sections.
31
Cash Flows From Investing Activities
During 2023, cash used in investing activities was $295.4 million, which was a decrease of $29.6 million as compared to 2022. The decrease was partially a result of fewer additions to property, plant and equipment, which were $282.3 million during 2023 and $298.6 million during 2022. CCBCC Operations, LLC, a wholly owned subsidiary of the Company, purchased the Snyder Production Center and an adjacent sales facility in Charlotte, North Carolina during 2022 for a purchase price of $60.0 million, which was included in additions to property, plant and equipment for that period. There were $59.0 million and $44.8 million of additions to property, plant and equipment accrued in accounts payable, trade as of December 31, 2023 and December 31, 2022, respectively.
The decrease in cash used in investing activities as compared to 2022 was also driven by the acquisition of $30.1 million of additional BODYARMOR distribution rights during 2022. The decrease in cash used in investing activities as compared to 2022 was partially offset by an increase of approximately $11 million in our investment in equity method investees.
The additions to property, plant and equipment reflect the Company’s focus on optimizing its supply chain and investing for future growth. The Company anticipates additions to property, plant and equipment in 2024 to be in the range of approximately $300 million to $350 million.
Cash Flows From Financing Activities
During 2023, cash used in financing activities was $77.7 million, which was a decrease of $96.5 million as compared to 2022. The decrease was primarily a result of the repayment of $125.0 million of debt during 2022. This was partially offset by dividend payments of $46.9 million during 2023 (which included a special cash dividend of $3.00 per share), as compared to $9.4 million during 2022.
The Company had cash payments for acquisition related contingent consideration of $28.2 million during 2023 and $36.5 million during 2022. For the next five years, the Company anticipates that the amount it could pay annually under the acquisition related contingent consideration arrangements for the distribution territories subject to acquisition related sub-bottling payments will be in the range of approximately $50 million to $70 million.
Material Contractual Obligations
The Company had a number of contractual obligations and commercial obligations as of December 31, 2023 that are material to an assessment of the Company’s short- and long-term cash requirements.
The Company has outstanding long-term debt of $600.0 million, none of which is contractually due in 2024. The remaining interest payments on the Company’s debt obligations are $73.4 million determined in reference to the contractual terms of such debt, of which $23.2 million is due in 2024. All of the Company’s long-term debt instruments have fixed interest rates, and, thus, are not impacted by fluctuations in interest rates, with the exception of the Company’s revolving credit facility, which did not have any outstanding borrowings as of December 31, 2023.
The Company’s acquisition related contingent consideration liability relates to acquisition related sub-bottling payments required in certain distribution territories under the CBA and totaled $669.3 million as of December 31, 2023. The future expected acquisition related sub-bottling payments extend through the life of the related distribution assets acquired in each distribution territory, which is generally 40 years. The Company’s short-term portion of the acquisition related contingent consideration liability was $64.5 million as of December 31, 2023 and was included within other accrued liabilities in the consolidated balance sheets.
The Company is obligated to purchase 17.5 million cases of finished product from SAC on an annual basis through June 2024. Based on information available as of December 31, 2023, the Company estimates this purchase obligation to be $71.1 million, all of which is expected to occur in 2024.
The Company has $146.9 million in total minimum operating lease obligations including interest, of which $29.9 million are due in 2024. The Company has $8.2 million in total minimum financing lease obligations including interest, of which $2.8 million are due in 2024.
As of December 31, 2023, the Company estimated obligations for its executive benefit plans to be $184.4 million, of which $30.9 million is expected to be paid in 2024.
The Company provides postretirement benefits for employees meeting specified qualifying criteria. The Company recognizes the cost of postretirement benefits, which consist principally of medical benefits, during employees’ periods of active service. The Company
32
does not prefund these benefits and has the right to modify or terminate certain of these benefits in the future. As of December 31, 2023, the Company had obligations related to its postretirement benefits plan of $63.8 million, of which $3.2 million is expected to be paid in 2024.
The Company is a shareholder of Southeastern Container (“Southeastern”), a plastic bottle manufacturing cooperative from which the Company is obligated to purchase at least 80% of its requirements of plastic bottles for certain designated territories. This obligation has no minimum purchase requirements; however, purchases from Southeastern were $146.9 million during 2023 and are expected to remain material in future foreseeable periods. See Note 20 to the consolidated financial statements for additional information related to Southeastern.
The Company participates in long-term marketing contractual arrangements with certain prestige properties, athletic venues and other locations. As of December 31, 2023, the future payments related to these contractual arrangements, which expire at various dates through 2033, amounted to $130.5 million, of which $30.0 million is expected to be paid in 2024.
On December 5, 2023, the Board of Directors of the Company declared a regular quarterly cash dividend of $0.50 per share, as well as a special cash dividend of $16.00 per share, on the Common Stock and the Class B Common Stock of the Company. Both dividends are payable on February 9, 2024 to stockholders of record of the Common Stock and the Class B Common Stock as of the close of business on January 26, 2024. As of December 31, 2023, dividends declared but not yet paid were $154.7 million.
Hedging Activities
The Company uses commodity derivative instruments to manage its exposure to fluctuations in certain commodity prices. Fees paid by the Company for commodity derivative instruments are amortized over the corresponding period of the instrument. The Company accounts for its commodity derivative instruments on a mark-to-market basis with any expense or income being reflected as an adjustment to cost of sales or SD&A expenses, consistent with the expense classification of the underlying hedged item.
The Company uses several different financial institutions for commodity derivative instruments to minimize the concentration of credit risk. The Company has master agreements with the counterparties to its commodity derivative instruments that provide for net settlement of derivative transactions. The net impact of the commodity derivative instruments on the consolidated statements of operations was as follows:
| Fiscal Year | |||||||
|---|---|---|---|---|---|---|---|
| (in thousands) | 2023 | 2022 | |||||
| Increase in cost of sales | $ | 1,656 | $ | 3,335 | |||
| Increase (decrease) in SD&A expenses | 5,928 | (16,390) | |||||
| Net impact | $ | 7,584 | $ | (13,055) |
Discussion of Critical Accounting Estimates
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of its results of operations and financial position in the preparation of its consolidated financial statements in conformity with GAAP. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes the following discussion addresses the Company’s most critical accounting estimates, which are those the Company believes to be the most important to the portrayal of its financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Any changes in critical accounting estimates are discussed with the Audit Committee of the Company’s Board of Directors during the quarter in which a change is contemplated and prior to making such change.
Revenue Recognition
The Company’s sales are divided into two main categories: (i) bottle/can sales and (ii) other sales. Bottle/can sales include products packaged primarily in plastic bottles and aluminum cans. Bottle/can net pricing is based on the invoice price charged to customers reduced by any promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the sales volume generated for each package and the channels in which those packages are sold. Other sales include sales to other Coca‑Cola bottlers, post-mix sales, transportation revenue and equipment maintenance revenue.
The Company’s contracts are derived from customer orders, including customer sales incentives, generated through an order processing and replenishment model. Generally, the Company’s service contracts and contracts related to the delivery of specifically
33
identifiable products have a single performance obligation. Revenues do not include sales or other taxes collected from customers. The Company has defined its performance obligations for its contracts as either at a point in time or over time. Bottle/can sales, sales to other Coca‑Cola bottlers and post-mix sales are recognized when control transfers to a customer, which is generally upon delivery and is considered a single point in time (“point in time”).
Other sales, which include revenue for service fees related to the repair of cold drink equipment and delivery fees for freight hauling and brokerage services, are recognized over time (“over time”). Revenues related to cold drink equipment repair are recognized as the respective services are completed using a cost-to-cost input method. Repair services are generally completed in less than one day but can extend up to one month. Revenues related to freight hauling and brokerage services are recognized as the delivery occurs using a miles driven output method. Generally, delivery occurs and freight charges are recognized in the same day. Over time sales orders open at the end of a financial period are not material to the consolidated financial statements.
The Company sells its products and extends credit, generally without requiring collateral, based on an ongoing evaluation of the customer’s business prospects and financial condition. The Company evaluates the collectability of its trade accounts receivable based on a number of factors, including the Company’s historic collections pattern and changes to a specific customer’s ability to meet its financial obligations. The Company typically collects payment from customers within 30 days from the date of sale.
The Company has established an allowance for doubtful accounts to adjust the recorded receivable to the estimated amount the Company believes will ultimately be collected. The Company’s allowance for doubtful accounts in the consolidated balance sheets includes a reserve for customer returns and an allowance for credit losses. The Company experiences customer returns primarily as a result of damaged or out-of-date product. At any given time, the Company estimates less than 1% of bottle/can sales and post-mix sales could be at risk for return by customers. Returned product is recognized as a reduction to net sales.
The Company estimates an allowance for credit losses, based on historic days’ sales outstanding trends, aged customer balances, previously written-off balances and expected recoveries up to balances previously written off, in order to present the net amount expected to be collected. Accounts receivable balances are written off when determined uncollectible and are recognized as a reduction to the allowance for credit losses.
Valuation of Long-Lived Assets, Goodwill and Other Intangibles
Management performs recoverability and impairment tests of long-lived assets, goodwill and other intangibles in accordance with GAAP, during which management makes numerous assumptions which involve a significant amount of judgment. When performing impairment tests, management estimates the fair values of the assets using its best assumptions, which management believes would be consistent with what a hypothetical marketplace participant would use. Estimates and assumptions used in these tests are evaluated and updated as appropriate. For certain assets, recoverability and/or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable. For other assets, impairment tests are required at least annually, or more frequently if events or circumstances indicate that an asset may be impaired.
The Company evaluates the recoverability of the carrying amount of its property, plant and equipment and other intangibles when events or circumstances indicate the carrying amount of an asset or asset group may not be recoverable. These evaluations are performed at a level where independent cash flows may be attributed to either an asset or an asset group. If the Company determines the carrying amount of an asset or asset group is not recoverable based upon the expected undiscounted future cash flows of the asset or asset group, an impairment loss is recorded equal to the excess of the carrying amounts over the estimated fair values of the long-lived assets. During 2023 and 2022, the Company performed periodic reviews of property, plant and equipment and other intangibles and determined no material impairment existed.
All business combinations are accounted for using the acquisition method. All of the Company’s goodwill resides within one reporting unit within the Nonalcoholic Beverages reportable segment and, therefore, the Company has determined it has one reporting unit for the purpose of assessing goodwill for potential impairment. The Company performs its annual goodwill impairment test as of the first day of the fourth quarter each year, and more frequently if facts and circumstances indicate such assets may be impaired, including significant declines in actual or future projected cash flows and significant deterioration of market conditions.
The Company uses its overall market capitalization as part of its estimate of fair value of the reporting unit and in assessing the reasonableness of the Company’s internal estimates of fair value. The Company’s goodwill impairment assessment includes a qualitative assessment to determine whether it is more likely than not that the fair value of the goodwill is below its carrying value, each year, and more often if there are significant changes in business conditions that could result in impairment. When a quantitative analysis is considered necessary for the annual impairment analysis of goodwill, the Company develops an estimated fair value for the reporting unit considering three different approaches: (i) market value, using the Company’s stock price plus outstanding debt; (ii) discounted cash flow analysis; and (iii) multiple of earnings before interest, taxes, depreciation and amortization based upon relevant industry data.
34
The estimated fair value of the reporting unit is then compared to its carrying amount, including goodwill. If the estimated fair value exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount, including goodwill, exceeds its estimated fair value, any excess of the carrying value of goodwill of the reporting unit over its fair value is recorded as an impairment. The Company performed its annual impairment test of goodwill as of the first day of the fourth quarter during both 2023 and 2022 and determined there was no impairment of the carrying values of these assets. The Company has determined there has not been an interim impairment trigger since the first day of the fourth quarter of 2023 annual test date.
Acquisition Related Contingent Consideration Liability
The acquisition related contingent consideration liability consists of the estimated amounts due to The Coca‑Cola Company under the CBA with The Coca‑Cola Company and CCR over the useful life of the related distribution rights. Pursuant to the CBA, the Company is required to make quarterly acquisition related sub-bottling payments to CCR on a continuing basis in exchange for the grant of exclusive rights to distribute, promote, market and sell the authorized brands of The Coca‑Cola Company and related products in certain distribution territories the Company acquired from CCR. This acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs.
Each reporting period, the Company adjusts its acquisition related contingent consideration liability related to the distribution territories subject to acquisition related sub-bottling payments to fair value by discounting future expected acquisition related sub-bottling payments required under the CBA using the Company’s estimated WACC. These future expected acquisition related sub-bottling payments extend through the life of the related distribution assets acquired in each distribution territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the acquisition related sub-bottling payments that will be made in the future under the CBA, and current acquisition related sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration liability and could materially impact the amount of non-cash expense (or income) recorded each reporting period. The Company estimates a 10-basis point change in the underlying risk-free interest rate used to estimate the Company’s WACC would result in a change of approximately $6 million to the Company’s acquisition related contingent consideration liability.
Income Tax Estimates
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to operating losses and tax credit carryforwards, as well as the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
A valuation allowance will be provided against deferred tax assets if the Company determines it is more likely than not such assets will not ultimately be realized.
The Company does not recognize a tax benefit unless it concludes that it is more likely than not that the benefit will be sustained on audit by the taxing authority based solely on the technical merits of the associated tax position. If the recognition threshold is met, the Company recognizes a tax benefit measured at the largest amount of the tax benefit that, in the Company’s judgment, is greater than 50% likely to be realized. The Company records interest and penalties related to uncertain tax positions in income tax expense.
Pension and Postretirement Benefit Obligations
The Company has historically sponsored two pension plans. The Primary Plan was frozen as of June 30, 2006 and no benefits accrued to participants after that date. During 2023, the Primary Plan was fully settled, and the Company recognized a non-cash charge of $112.8 million related to the full settlement of the Primary Plan benefit liabilities, which was recorded as pension plan settlement expense in the consolidated statement of operations for that year. There were no remaining benefit liabilities or associated estimates related to the Primary Plan as of December 31, 2023. See Note 17 for additional discussion of the termination of the Primary Plan.
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 Bargaining Plan are based on actuarially determined amounts and are limited to the amounts currently deductible for income tax purposes. The Company also sponsors a postretirement healthcare plan for employees meeting specified qualifying criteria.
35
Several statistical and other factors, which attempt to anticipate future events, are used in calculating the expense and liability related to the Bargaining Plan. These factors include assumptions about the discount rate, expected return on plan assets, employee turnover and age at retirement, as determined by the Company, within certain guidelines. In addition, the Company uses subjective factors such as mortality rates to estimate the projected benefit obligation. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may result in a significant impact to the amount of net periodic pension cost recorded by the Company in future periods. See Note 17 to the consolidated financial statements for additional information.
The discount rate used in determining the actuarial present value of the projected benefit obligation for the Bargaining Plan was 5.16% in 2023 and 5.34% in 2022. The discount rate assumption is generally the estimate which can have the most significant impact on net periodic pension cost and the projected benefit obligation. The Company determines an appropriate discount rate annually for the Bargaining Plan based on the Aon AA Above Median yield curve as of the measurement date and reviews the discount rate assumption at the end of each year. See Note 17 to the consolidated financial statements for additional information.
Pension costs for the Bargaining Plan were $3.7 million in 2023 and $6.8 million in 2022.
A 0.25% increase or decrease in the discount rate assumption would have impacted the projected benefit obligation and the net periodic pension cost for the Bargaining Plan as follows:
| (in thousands) | 0.25% Increase | 0.25% Decrease | |||||
|---|---|---|---|---|---|---|---|
| Increase (decrease) in: | |||||||
| Projected benefit obligation at December 31, 2023 | $ | (1,996) | $ | 2,136 | |||
| Net periodic pension cost in 2023 | (194) | 206 |
The weighted average expected long-term rate of return of plan assets used in computing net periodic pension cost for the Bargaining Plan was 7.00% in 2023 and 5.50% in 2022. These rates reflect an estimate of long-term future returns for the pension plan assets, and the estimate is primarily a function of the asset classes (equities versus fixed income) in which the Bargaining Plan assets are invested. This analysis includes expected long-term inflation and the risk premiums associated with equity and fixed income investments. See Note 17 to the consolidated financial statements for the details by asset type for the Bargaining Plan. The actual return on pension plan assets for the Bargaining Plan was a gain of 13.5% in 2023 and a loss of 24.6% in 2022.
The Company sponsors a postretirement healthcare plan for employees meeting specified qualifying criteria. Several statistical and other factors, which attempt to anticipate future events, are used in calculating the net periodic postretirement benefit cost and the postretirement benefit obligation for this plan. These factors include assumptions about the discount rate and the expected growth rate for the cost of healthcare benefits. In addition, the Company uses subjective factors such as withdrawal and mortality rates to estimate the projected liability under this plan. The actuarial assumptions used by the Company may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. The Company does not prefund its postretirement benefits and has the right to modify or terminate certain of these benefits in the future.
The discount rate assumption, the annual healthcare cost trend and the ultimate trend rate for healthcare costs are key estimates which can have a significant impact on the net periodic postretirement benefit cost and the postretirement benefit obligation in future periods. The Company annually determines the healthcare cost trend based on recent actual medical trend experience and projected experience for subsequent years.
The discount rate assumptions used to determine the postretirement benefit obligation are based on the annual yield on long-term corporate bonds as of the plan’s measurement date. The discount rate used in determining the postretirement benefit obligation was 5.02% in 2023 and 5.19% in 2022. The discount rate was derived using the Aon AA Above Median yield curve. Projected benefit payouts for the plan were matched to the Aon AA Above Median yield curve and an equivalent flat rate was derived.
A 0.25% increase or decrease in the discount rate assumption would have impacted the postretirement benefit obligation and the net periodic postretirement benefit cost for the Company’s postretirement healthcare plan as follows:
| (in thousands) | 0.25% Increase | 0.25% Decrease | |||||
|---|---|---|---|---|---|---|---|
| Increase (decrease) in: | |||||||
| Postretirement benefit obligation at December 31, 2023 | $ | (1,616) | $ | 1,692 | |||
| Net periodic postretirement benefit cost in 2023 | 25 | (26) |
36
Cautionary Note Regarding Forward-Looking Statements
Certain statements made in this report, or in other public filings, press releases, or other written or oral communications made by the Company, 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 involve risks and uncertainties which we expect will or may occur in the future and may impact our business, financial condition and results of operations. The words “anticipate,” “believe,” “expect,” “intend,” “project,” “may,” “will,” “should,” “could” and similar expressions are intended to identify those forward-looking statements. These forward-looking statements reflect the Company’s best judgment based on current information, and, although we base these statements on circumstances that we believe to be reasonable when made, there can be no assurance that future events will not affect the accuracy of such forward-looking information. As such, the forward-looking statements are not guarantees of future performance, and actual results may vary materially from the projected results and expectations discussed in this report. Factors that might cause the Company’s actual results to differ materially from those anticipated in forward-looking statements include, but are not limited to: increased costs (including due to inflation), disruption of supply or unavailability or shortages of raw materials, fuel and other supplies; the reliance on purchased finished products from external sources; changes in public and consumer perception and preferences, including concerns related to product safety and sustainability, artificial ingredients, brand reputation and obesity; changes in government regulations related to nonalcoholic beverages, including regulations related to obesity, public health, artificial ingredients and product safety and sustainability; decreases from historic levels of marketing funding support provided to us by The Coca‑Cola Company and other beverage companies; material changes in the performance requirements for marketing funding support or our inability to meet such requirements; decreases from historic levels of advertising, marketing and product innovation spending by The Coca‑Cola Company and other beverage companies, or advertising campaigns that are negatively perceived by the public; any failure of the several Coca‑Cola system governance entities of which we are a participant to function efficiently or on our best behalf and any failure or delay of ours to receive anticipated benefits from these governance entities; provisions in our beverage distribution and manufacturing agreements with The Coca‑Cola Company that could delay or prevent a change in control of us or a sale of our Coca‑Cola distribution or manufacturing businesses; the concentration of our capital stock ownership; our inability to meet requirements under our beverage distribution and manufacturing agreements; changes in the inputs used to calculate our acquisition related contingent consideration liability; technology failures or cyberattacks on our information technology systems or our effective response to technology failures or cyberattacks on our customers’, suppliers’ or other third parties’ information technology systems; unfavorable changes in the general economy; the concentration risks among our customers and suppliers; lower than expected net pricing of our products resulting from continued and increased customer and competitor consolidations and marketplace competition; the effect of changes in our level of debt, borrowing costs and credit ratings on our access to capital and credit markets, operating flexibility and ability to obtain additional financing to fund future needs; the failure to attract, train and retain qualified employees while controlling labor costs, and other labor issues; the failure to maintain productive relationships with our employees covered by collective bargaining agreements, including failing to renegotiate collective bargaining agreements; changes in accounting standards; our use of estimates and assumptions; changes in tax laws, disagreements with tax authorities or additional tax liabilities; changes in legal contingencies; natural disasters, changing weather patterns and unfavorable weather; climate change or legislative or regulatory responses to such change; the impact of any pandemic or public health situation; and the risks discussed in “Item 1A. Risk Factors” of this report and elsewhere herein.
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, 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 reports and other filings with the SEC.