Coca-Cola Consolidated, Inc. — Q2 2022 Form 10-Q
Reporting period: Second quarter ended July 1, 2022; first half ended July 1, 2022. Comparisons are with the corresponding 2021 periods. The company distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia and is the largest Coca-Cola bottler in the United States.
Financial highlights
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1,595.2m | $1,433.1m | $2,999.6m | $2,702.9m |
| Gross profit | $550.7m | $494.9m | $1,058.2m | $943.6m |
| Income from operations | $147.3m | $120.9m | $278.3m | $215.0m |
| Net income | $99.6m | $48.2m | $193.0m | $101.5m |
| Diluted EPS, Common Stock | $10.59 | $5.12 | $20.53 | $10.79 |
| Operating cash flow | Not presented by quarter | $243.5m | $271.4m |
Q2 sales rose 11.3%, while physical case volume increased 1.0%. Management attributed most of the sales increase to price increases and product mix: about 90% of that contribution came from higher average bottle/can prices, with the remainder from mix. Sparkling volume grew 1.8%; still beverage volume declined 0.6%. Q2 reported gross margin was 34.5%, flat year over year; adjusted gross margin was 35.4%, up 90 basis points. SD&A rose 7.8% to $403.4m but declined to 25.3% of sales from 26.1%. Operating margin was approximately 9.2%, versus 8.4% in Q2 2021.
First-half sales grew 11.0% and bottle/can volume 0.3%. First-half reported gross margin was approximately 35.3%, versus 34.9% in 2021; SD&A was 26.0% of sales, versus 27.0%. Operating cash flow declined $27.9m year over year. Capital expenditures were $145.2m versus $80.3m, leaving first-half operating cash flow less capital expenditures of approximately $98.4m, compared with $191.1m in 2021.
Financial position and cash
- At July 1, cash and equivalents were $188.8m; total debt was $723.6m, including $125.0m classified as current and due February 2023. Long-term debt was $598.6m. The $500m revolving facility had no borrowings.
- Net working capital was $235.8m, down $6.0m from year-end 2021. Management said available capital was sufficient for at least the next 12 months.
- First-half investing cash use was $171.6m, including $145.2m of property and equipment additions and $30.1m for additional BODYARMOR distribution rights. Financing cash use was $25.4m; cash increased $46.5m to $188.8m.
- Debt covenants were in compliance. Ratings were Moody’s Baa1, Stable, and S&P BBB, Positive. Dividends were $0.25 per share per quarter.
Material changes, outlook and risks
- Net income increased substantially, supported by higher sales and operating income and by much lower other expense. Q2 other expense fell to $6.2m from $47.0m; the prior-year period included a $46.0m fair-value increase in acquisition-related contingent consideration. The 2022 Q2 fair-value increase was $4.0m. These adjustments are non-cash and sensitive to discount rates and projected cash flows.
- Inflation and supply constraints raised costs, particularly aluminum, PET resin and transportation. The company cited tight labor-market compensation costs and supply-chain challenges. Management said pricing and Sparkling growth helped offset higher input and production costs.
- Management gave no specific financial guidance. It emphasized commercial execution, revenue management, supply-chain optimization and cash generation, and said it expects adequate liquidity and capital access over the next 12 months.
- The company estimated that a 10% increase in raw-material commodity prices could raise costs by approximately $75.6m over the next 12 months, assuming unchanged volumes. Commodity hedges are used for risk management, not speculation.
- Acquisition-related contingent consideration was $522.3m, a Level 3 fair-value liability; potential annual payments were estimated at $39m–$69m. Changes in discount rates and future payment estimates can materially affect reported non-cash expense or income.
- Other matters include a $9.5m guarantee of a manufacturing cooperative’s debt, $139.2m in future marketing-contract payments, and ordinary-course legal proceedings that management did not expect to materially affect results. Management reported no material change in previously disclosed risk factors.
- The company purchased the Snyder Production Center from a related-party entity for $60m in March 2022, ending the associated financing lease. It also acquired $30.1m of BODYARMOR distribution rights. The filing identifies concentrated ownership and material transactions with The Coca-Cola Company.
Important facts for investors to verify
- Whether price increases can continue to offset inflation without materially reducing volume or consumer demand.
- Progress on supply availability, labor costs and capital projects, and the resulting effect on margins and cash conversion.
- Plans to refinance or repay the $125m February 2023 note maturity, and ongoing covenant compliance and access to credit.
- Assumptions behind the $522.3m contingent-consideration valuation and the projected annual payment range.
- Customer concentration, dependence on Coca-Cola system relationships and related-party dealings, including the Snyder facility purchase.