Coca-Cola Consolidated, Inc. — Q1 2019 Form 10-Q
Business context and period: The company manufactures, markets and distributes nonalcoholic beverages, primarily in 14 states and the District of Columbia. This unaudited report covers the 13 weeks ended March 31, 2019; comparisons are with the 13 weeks ended April 1, 2018, and the balance sheet compares March 31, 2019 with December 30, 2018. All figures below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net sales | $1,102.9 million | $1,064.8 million; up 3.6% |
| Gross profit / margin | $389.3 million / 35.3% | $357.6 million / approximately 33.6% |
| Income (loss) from operations | $20.2 million | $(19.0) million |
| Net loss attributable to Coca-Cola Consolidated | $(6.8) million; $(0.73) per share | $(14.2) million; $(1.52) per share |
| Operating cash flow | $5.6 million | $(80.7) million |
| Capital expenditures | $29.3 million | $42.0 million |
| Cash and cash equivalents | $8.5 million | $13.5 million at December 30, 2018 |
| Total debt | $1,138.5 million | $1,104.4 million at December 30, 2018 |
| Current assets / current liabilities | $808.4 million / $559.1 million | $797.4 million / $601.7 million at December 30, 2018 |
Gross margin rose about 170 basis points as reported; management cites a roughly 100-basis-point improvement excluding specified adjustments. Cash used in investing activities was $33.8 million, while financing activities provided $23.1 million. The company had $371 million available under its $500 million revolving credit facility at quarter-end. Debt figures exclude lease liabilities.
Material changes and drivers
- Revenue increased $38.2 million, chiefly from higher average bottle/can pricing and product mix, including growth in still beverages. Physical bottle/can volume was approximately flat overall: still-beverage volume grew 2.8% while sparkling volume declined 0.8%. BodyArmor distribution contributed to sales growth.
- Gross profit rose $31.7 million. Management attributed margin improvement to prior pricing actions, more stable commodity prices, and lower transportation and sourcing costs; input costs remained elevated.
- Selling, delivery and administrative expenses fell $7.5 million, or 2.0%, with a 190-basis-point reduction as a share of sales. Lower system-transformation costs and workforce optimization were key factors. Distribution and warehouse costs were $148.9 million, versus $147.0 million.
- Other expense was $15.9 million, compared with $4.5 million of other income a year earlier. The principal item was a $14.0 million noncash unfavorable fair-value adjustment to acquisition-related contingent consideration; the comparable 2018 period included a $5.2 million favorable adjustment.
- Management’s adjusted non-GAAP results showed operating income of $20.7 million versus an adjusted operating loss of $3.6 million in Q1 2018, and adjusted net income of $3.3 million versus an adjusted net loss of $8.8 million. These measures exclude specified items and are not GAAP results.
Outlook, risks and unusual items
- Management forecast fiscal 2019 capital spending of $150–$180 million, including $120–$150 million for the remainder of the year, and an annualized effective tax rate in the low 30% range.
- The company expected to complete its information-technology conversion in Q2 2019 and anticipated a further $2–$3 million of related expenses. Q1 system-transformation expenses were $4.7 million, down from $12.5 million in Q1 2018.
- Management identified free-cash-flow generation, debt repayment, cost optimization, revenue management, and distribution-network optimization as priorities. It stated that it had sufficient capital sources for at least the next 12 months. The company refinanced $110 million of notes due April 15, 2019 with $100 million of new notes issued April 10, 2019, bearing 3.93% interest and maturing in 2026.
- Acquisition-related contingent consideration was a $393.0 million liability at quarter-end; expected annual payments were estimated at $25–$48 million. Its fair value depends on forecasts and discount-rate assumptions and can materially affect reported noncash earnings.
- Management estimated that a 10% increase in relevant commodity prices could increase costs by approximately $58.3 million over the next 12 months, assuming unchanged volume. A 1-percentage-point increase in market rates was estimated to add about $4.1 million to next-12-month interest expense.
- Other exposures include a $23.9 million guarantee of South Atlantic Canners’ debt, $171.9 million of future marketing-contract payments, and reliance on key customers: Walmart and Kroger represented approximately 23% of net sales combined. Management reported no material change in risk factors and did not expect ordinary-course legal proceedings to have a material adverse effect.
- The company adopted lease accounting in Q1, recognizing operating lease right-of-use assets and liabilities; this changed balance-sheet presentation but did not affect reported earnings or cash flows. It also reclassified $19.7 million of stranded tax effects from accumulated other comprehensive loss to retained earnings. Comparative 2018 sales and SD&A were revised by $7.3 million for customer-payment presentation, with no impact on net loss or earnings per share.
Important facts for investors to verify
- Whether pricing, product mix and still-beverage growth can sustain sales and margin improvement while input costs remain elevated.
- Whether operating cash generation improves enough to fund planned capital spending and reduce leverage; Q1 operating cash flow was only $5.6 million.
- The refinancing and repayment plans for remaining term-loan principal, and the effect of variable rates and credit-rating outlooks on borrowing costs.
- How assumptions affecting the $393.0 million contingent-consideration liability change, and the timing and cash impact of expected payments.
- Actual costs and completion timing for the IT conversion, alongside progress on the stated full-year capital-spending outlook.
- Exposure to commodity prices, major-customer concentration, related-party arrangements, and the South Atlantic Canners guarantee.