Coca-Cola Consolidated, Inc. — Q1 2022 Form 10-Q
Business context and period. The company distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia; it is the largest U.S. Coca-Cola bottler. This report covers the three months ended April 1, 2022, compared with the three months ended April 2, 2021. Figures below are in millions unless noted.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $1,404.4 | $1,269.9 | +10.6% |
| Gross profit / margin | $507.6 / 36.1% | $448.7 / 35.3% | +$58.9 / +0.8 pts |
| Operating income | $131.0 | $94.2 | +39.1% |
| Net income | $93.4 | $53.4 | +$40.0 |
| Diluted EPS, Common Stock | $9.94 | $5.67 | +$4.27 |
| Net cash from operations | $130.9 | $81.9 | +$49.0 |
Net sales growth was primarily driven by pricing and product mix: the company attributed $140.0 million of the increase to those factors, with about 80% from higher average bottle/can prices and 20% from mix. Physical bottle/can case volume declined 0.6%; sparkling volume fell 1.5%, while still beverage volume rose 1.6%. SD&A increased 6.2% to $376.6 million, but declined as a share of sales to 26.8% from 27.9%. Interest expense fell to $7.7 million from $8.7 million.
Reported results included favorable, noncash fair-value movements and commodity-derivative gains. The contingent-consideration fair-value adjustment was a $5.5 million gain in Q1 2022 versus an $11.0 million expense in Q1 2021. Commodity derivative instruments produced a $13.7 million gain in Q1 2022 versus $0.8 million in Q1 2021, reflected in operating expenses. On the company’s adjusted non-GAAP basis, operating income was $117.3 million versus $93.7 million, and net income was $79.0 million versus $61.3 million. These adjusted measures exclude specified items and are not GAAP results.
Financial position and liquidity
- Cash and cash equivalents were $127.1 million at April 1, 2022, down from $142.3 million at year-end. Net working capital was $157.1 million, down $84.7 million from December 31, 2021.
- Total debt was $723.6 million, versus $723.4 million at year-end. Of this, $125.0 million was classified as current because senior notes mature in February 2023. The company had no borrowings outstanding on its $500 million revolving credit facility and was in compliance with debt covenants.
- Operating cash flow was $130.9 million; investing cash use was $132.5 million, including $104.4 million of property and equipment additions and $30.1 million for BODYARMOR distribution rights. Financing cash use was $13.6 million. Cash declined $15.2 million during the quarter.
- Dividends were $0.25 per share for each common-stock class. Total equity was $803.6 million.
Material developments, outlook and risks
- The company purchased its Charlotte Snyder Production Center for $60.0 million from a related-party partnership, terminating the associated financing lease. It also acquired additional BODYARMOR distribution rights in its Mid-Atlantic territory for $30.1 million; still-beverage growth was partly attributed to BODYARMOR distribution there.
- Management expects 2022 property, plant and equipment additions of $200–$220 million. It expects annual acquisition-related sub-bottling payments of approximately $38–$64 million and pension-plan contributions of $20–$30 million in 2022.
- Management said it believes available capital sources are sufficient for debt repayment, its business plan and working-capital needs for at least the next 12 months. It did not provide full-year revenue or earnings guidance. It did not expect COVID-19 to materially affect 2022 liquidity or access to capital.
- Management cited inflation in aluminum, PET resin, transportation and other inputs, as well as higher payroll costs amid a tight labor market. A 10% rise in raw-material commodity prices was estimated to increase costs over the next 12 months by about $75.4 million, assuming no volume change. Pricing may not fully offset cost inflation if consumers reduce purchases.
- Other identified risks include supply shortages or disruption, competition and pricing pressure, weather, customer concentration, reliance on Coca-Cola brands and marketing support, and interest-rate changes affecting the fair value of contingent consideration. The company reported a $527.9 million contingent-consideration liability; its valuation depends on forecasts and discount-rate assumptions and can cause material noncash earnings fluctuations.
- The company disclosed ordinary-course legal matters, but management did not believe their resolution would materially adversely affect financial condition, results or cash flows. It guaranteed $9.5 million of a manufacturing cooperative’s debt. Management reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether pricing gains can persist while volume is declining and commodity and labor costs remain elevated.
- How much of reported earnings growth reflects recurring operations versus commodity-derivative and contingent-consideration fair-value movements; compare GAAP and adjusted results.
- Funding and execution of the $200–$220 million capital-spending plan, including expected operating cash generation and the 2023 note maturity.
- The assumptions behind the $527.9 million contingent-consideration liability and the estimated $38–$64 million annual payment range.
- Exposure to major customers: Walmart and Kroger together represented approximately 24% of Q1 net sales.