Coca-Cola Consolidated, Inc. — Q1 2021 Form 10-Q
Business context and period. The filing covers the three months ended April 2, 2021, compared with the three months ended March 29, 2020. Coca-Cola Consolidated distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia. Approximately 83% of bottle/can sales volume is made up of Coca-Cola Company products. The 2021 quarter had one additional selling day, estimated to contribute approximately 1 percentage point to physical case volume growth.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,269.9 million | $1,173.0 million | +8.3% |
| Gross profit / margin | $448.7 million / 35.3% | $405.3 million / 34.6% | +10.7%; +70 bps |
| SD&A expenses | $354.5 million | $372.5 million | -4.8%; 27.9% of sales vs. 31.8% |
| Operating income / margin | $94.2 million / 7.4% | $32.8 million / 2.8% | +$61.4 million |
| Net income attributable to company | $53.4 million | $14.7 million | +$38.7 million |
| Diluted EPS | $5.67 | $1.55 | +$4.12 |
| Operating cash flow | $81.9 million | $32.3 million | +$49.6 million |
| Capital expenditures | $37.2 million | $33.1 million | +$4.1 million |
Net sales growth reflected higher bottle/can prices and product mix (+$55.6 million), higher volume (+$50.6 million), and lower fountain syrup sales (-$9.4 million). Bottle/can volume rose 4.8%: sparkling +4.5% and still beverages +5.5%. Bottle/can sales increased 10.6%; other sales declined 5.8%.
Gross margin improved mainly on sparkling price realization and favorable mix, including increased multi-serve PET sales. SD&A declined primarily due to lower payroll and fleet costs, following operating model changes and expense controls. Interest expense fell 8.5% to $8.7 million, primarily due to lower average debt. The effective tax rate was 27.3%, up from 25.6%; the prior-year period included a tax credit that did not recur.
Financial position and liquidity
- At April 2, 2021, cash was $51.8 million, current assets $926.8 million, current liabilities $683.9 million, and net working capital $242.9 million. Long-term debt was $909.3 million, down from $940.5 million at year-end 2020. Total liabilities were $2.72 billion and equity was $565.3 million.
- The company had no revolving-credit borrowings and $500 million of capacity available under its $500 million revolving facility, maturing June 2023. The $186.3 million term-loan balance matured June 7, 2021; management intended to refinance amounts due within 12 months and cited the revolving facility as available capacity. Nonpublic debt covenants were met.
- Cash from operations less cash capital expenditures was approximately $44.7 million. Financing activities used $45.2 million, including $31.3 million of term-loan repayments and $2.3 million of dividends. Cash decreased $3.0 million during the quarter.
- Management stated it expected adequate capital to meet requirements for at least the next 12 months. The board paid $0.25 per share for each common share class; future dividends remain subject to board determination.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected aluminum, PET and high-fructose corn syrup costs to rise through the rest of 2021 and planned customer price increases later in the year to help offset cost pressure. It also expected operating expenses to increase as channels reopened and the company served its full customer portfolio.
- 2021 capital spending was estimated at $170–$200 million. Expected pension contributions were $8–$12 million. Annual payments under sub-bottling contingent-consideration arrangements were estimated at $30–$54 million.
- Operating income and net income improved sharply, but Q1 2021 included a $11.0 million noncash fair-value expense on acquisition-related contingent consideration, recorded in other expense. The related liability was $435.7 million. The fair-value estimate depends on forecasts and discount-rate assumptions and can create material noncash earnings volatility. Management’s adjusted non-GAAP net income was $61.3 million and adjusted diluted/basic EPS was not reported; adjusted basic EPS was $6.54. Adjusted operating income was $93.7 million. These measures exclude specified items and are not GAAP results.
- COVID-19 continued to affect on-premise sales, including fountain syrup demand, although management reported improving on-premise channels as restrictions eased. Management did not expect a material effect on 2021 liquidity or capital access. Supply-chain optimization included opening an automated Whitestown, Indiana distribution center after quarter-end and integrating Memphis-area manufacturing operations.
- Market risks include commodity prices and variable-rate debt. A 10% increase in raw-material commodity prices was estimated to raise costs by approximately $61.3 million over 12 months, assuming unchanged volume; a 1 percentage-point increase in interest rates was estimated to add approximately $0.9 million of interest expense. Price increases may not fully offset higher costs if consumers reduce purchases.
- The company guaranteed $14.7 million of South Atlantic Canners debt and had $155.7 million of future payments under long-term marketing arrangements. Management said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material change to previously disclosed risk factors.
Material comparisons and context
Growth reflected higher pricing, product mix, and volume alongside lower operating expenses. Q1 2020 included $0.9 million of net income attributable to the former noncontrolling interest in Piedmont; the company acquired the remaining 22.7% interest in December 2020, so there was no noncontrolling-interest allocation in Q1 2021. The company reported reducing long-term debt by more than $170 million since the end of Q1 2020. Moody’s upgraded the company to Baa1 with a stable outlook on April 30, 2021, after quarter-end.
Important facts for investors to verify
- Whether planned price increases offset rising commodity costs without materially weakening volume or customer demand.
- The refinancing or repayment outcome for the term loan that matured June 7, 2021, and the company’s subsequent debt and liquidity levels.
- The assumptions underlying the $435.7 million contingent-consideration liability and the timing and amount of future sub-bottling payments.
- Execution, costs and expected benefits of the Whitestown facility and Memphis/West Memphis supply-chain changes, alongside the $170–$200 million capital-spending plan.
- How reopening on-premise channels, continuing pandemic effects, commodity exposure and customer concentration affect future sales and margins.