Coca-Cola Consolidated, Inc. — Q2 2020 Form 10-Q
Reporting period: 13 weeks ended June 28, 2020, with first-half comparisons covering 26 weeks. Dollar amounts below are in millions unless otherwise noted. The company is the largest U.S. Coca-Cola bottler, operating across 14 states and the District of Columbia; about 85% of bottle/can volume is from Coca-Cola Company products.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1,227.2 | $1,273.7 | $2,400.2 | $2,376.6 |
| Gross profit | $429.3 | $435.8 | $834.6 | $825.1 |
| Income from operations | $83.1 | $67.2 | $115.9 | $87.4 |
| Net income attributable to Coca-Cola Consolidated | $39.6 | $15.4 | $54.2 | $8.5 |
| Basic EPS, Common and Class B shares | $4.23 | $1.64 | $5.79 | $0.91 |
| Operating cash flow | Not presented separately | Not presented separately | $229.0 | $88.6 |
- Q2 net sales declined 3.6%, while first-half sales increased 1.0%. Q2 bottle/can sales grew 0.9%, but other sales fell 29.2%, mainly as fountain syrup sales dropped 56.6% amid restaurant and other on-premise closures.
- Q2 gross margin was 35.0%, up 80 basis points year over year; management attributed the change to product mix, favorable commodity prices and manufacturing costs. Operating margin was approximately 6.8%, versus 5.3%.
- Q2 operating income rose 23.7%; reported net income attributable to the company rose $24.2 million. First-half operating income increased $28.6 million and attributable net income increased $45.7 million.
- Reported results include substantial noncash fair-value adjustments to acquisition-related contingent consideration: expense of $14.5 million in Q2 2020 and $15.3 million in the first half, versus $29.2 million and $43.3 million in the respective 2019 periods. Management’s adjusted non-GAAP measures showed Q2 operating income of $81.7 million, up 5.4%, and first-half adjusted operating income of $118.5 million, up 20.5%.
Liquidity, cash flow and debt
- First-half operating cash flow was $229.0 million, up from $88.6 million. The company cited stronger operating performance, working-capital changes, lower inventory, payment timing and payroll-tax deferrals under the CARES Act.
- Cash was $77.6 million at June 28, 2020, versus $9.6 million at year-end 2019. Capital expenditures were $72.9 million; cash dividends paid were $4.7 million.
- Long-term debt was $970.2 million, down from $1,029.9 million at year-end. No revolver borrowings were outstanding; $500 million of capacity was available under the facility. The company reported compliance with debt covenants and stated it expected adequate capital and liquidity for at least the next 12 months.
- Net working capital was $265.9 million. Current assets were $900.1 million and current liabilities $634.2 million.
- Dividends were $0.25 per share in Q2 and $0.50 per share for the first half, unchanged from 2019.
Material changes, outlook and risks
- COVID-19 caused major channel shifts: Q2 physical bottle/can volume increased 0.6%, with sparkling volume up 3.7% and still beverage volume down 6.6%. Monthly bottle/can sales volume growth was down 6.1% in April, up 1.9% in May and up 4.7% in June. Management cautioned that June’s demand might not persist.
- Management said the company did not then expect a material short-term impact on liquidity or access to capital. It provided no specific earnings or revenue guidance in this filing.
- On-premise weakness and movement toward lower-margin take-home packages could pressure profitability. The company also reported tightening aluminum-can supply, responding by sourcing cans internationally and limiting package offerings.
- The company recorded an additional $3.5 million Q2 receivables reserve for COVID-related collection risk, primarily involving on-premise customers. The first-half allowance for credit losses included a $5.0 million COVID-related adjustment.
- Contingent consideration related to territory sub-bottling fees totaled $441.1 million at quarter-end; annual payments were expected to range from $28 million to $52 million. Fair-value movements depend on cash-flow forecasts and discount rates and can materially affect noncash earnings.
- Other commitments include a $14.7 million guarantee of a manufacturing cooperative’s debt, $37.6 million in standby letters of credit, and $178.1 million of future marketing-contract payments. Management did not expect ordinary-course legal matters to have a material adverse effect.
- Related-party lease developments included a 15-year extension of a production-facility lease, effective June 30, with an additional $60.1 million lease liability. The filing also describes the company’s substantial dependence on Coca-Cola Company brands, supplies and commercial arrangements.
Important facts for investors to verify
- Whether the recovery in June volume continued and whether on-premise and fountain sales recovered after reopening.
- How channel and package mix, can availability and commodity costs affected gross margin and profitability after Q2.
- Whether first-half operating cash flow was sustainable, given working-capital timing and deferred payroll taxes.
- Debt repayment and refinancing plans, including the term loan maturing in June 2021 and ongoing contingent-consideration payments.
- Changes in customer credit quality, receivables reserves and exposure to large customers; Walmart and Kroger represented approximately 24% of first-half net sales combined.
- Non-GAAP adjustments and the assumptions underlying the Level 3 contingent-consideration valuation.