Coca-Cola Consolidated, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The company changed its year-end to December 31; 2020 included four extra days versus 2019, estimated to add $59 million of sales and $7 million of operating income. The filing also reports unaudited fourth-quarter results.
Business context
The company manufactures, markets and distributes nonalcoholic beverages across 14 states and the District of Columbia. About 84% of retail bottle/can volume was Coca-Cola Company products. COVID-19 shifted demand from higher-margin on-premise and immediate-consumption channels toward take-home retail products. In December, the company acquired Coca-Cola Company’s remaining 22.7% interest in Piedmont for $100 million, making it wholly owned.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $5,007.4 million (+3.7%) | $4,826.5 million |
| Gross profit / gross margin | $1,768.9 million / 35.3% | $1,670.5 million / 34.6% |
| Operating income / operating margin | $313.4 million / 6.3% | $180.8 million / 3.7% |
| Net income attributable to Coca-Cola Consolidated | $172.5 million | $11.4 million |
| Diluted EPS, Common Stock | $18.30 | $1.21 |
| Operating cash flow | $494.5 million | $290.4 million |
| Capital expenditures | $202.0 million | $171.4 million |
| Cash and cash equivalents at year-end | $54.8 million | $9.6 million |
| Long-term debt at year-end | $940.5 million | $1,029.9 million |
Bottle/can sales rose 6.3%; sparkling and still beverage volumes increased 4.5% and 4.7%, respectively. Post-mix and other sales fell 19.8%, largely reflecting reduced fountain sales. SD&A fell 2.3% to $1,455.5 million, or 29.1% of sales versus 30.9%, as pandemic-related savings outweighed higher costs elsewhere. Net interest expense declined to $36.7 million.
Fourth-quarter net sales were $1,278.6 million versus $1,178.9 million in 2019; operating income was $93.6 million versus $39.5 million, and net income attributable to the company was $66.4 million versus a $10.2 million loss. Quarter figures are unaudited.
Liquidity, debt and cash flow
Working capital was $204.2 million, down from $208.1 million. The company had no revolver borrowings and $500 million of availability under its $500 million revolving facility, maturing in 2023; capacity may be increased to $750 million subject to conditions. A $217.5 million term-loan balance matures in June 2021; management said it intended to refinance the amount due and had revolver capacity to do so. Debt covenants were met. Operating cash flow benefited from strong results, working-capital timing and deferred payroll taxes under the CARES Act. The company paid $9.4 million in dividends.
Changes, outlook and risks
- Year-over-year improvement: Operating income increased $132.6 million. Management attributed the gains to price realization, manufacturing efficiencies, cost savings and favorable input costs; lower marketing, travel, healthcare and labor costs also helped. Adjusted non-GAAP operating income was $307.6 million, excluding specified items and the extra days.
- 2021 outlook: Management anticipated top-line growth opportunities and another solid year of financial performance, but expected operating income below 2020 as operating costs rose with channel reopening and input-cost inflation. Planned 2021 capital expenditures were $170–$200 million. This is qualitative outlook, not a detailed earnings forecast.
- Material noncash item: A $31.2 million fair-value increase in acquisition-related contingent consideration was recorded as expense in 2020, versus $92.8 million in 2019. The liability was $434.7 million at year-end; its valuation depends on long-term forecasts and discount-rate assumptions. The auditor identified it as a critical audit matter.
- Key risks: COVID-related channel and demand uncertainty; aluminum-can availability and commodity/fuel inflation; reliance on Coca-Cola Company brands and agreements; concentration in Walmart and Kroger, together representing 24% of sales; and significant debt and refinancing requirements. Walmart and Kroger together accounted for 32% of bottle/can volume.
- Other commitments and governance: The company guaranteed $14.7 million of SAC debt and reported $164.9 million of future marketing-contract payments. Harrison family interests controlled about 86% of voting power. Related-party leases and the Coca-Cola system agreements are also relevant. Management and the auditor reported effective internal control; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- How much of 2020’s sales and operating-income growth reflects durable volume, pricing and productivity versus the extra four days and temporary pandemic cost savings.
- Whether 2021 channel recovery, cost inflation and aluminum-can supply affect margins, product availability and management’s below-2020 operating-income outlook.
- The assumptions and cash-payment profile behind the $434.7 million contingent consideration liability, including expected annual payments of $28–$52 million.
- The refinancing plan for the $217.5 million term loan due in 2021 and the company’s capacity to reduce debt while funding planned capital expenditures.
- Customer concentration and exposure to Coca-Cola Company agreements, including pricing, marketing support and distribution-right requirements.