Coca-Cola Consolidated, Inc. — Q3 2020 Form 10-Q
Reporting period: 13 weeks ended September 27, 2020; year-to-date figures cover the first 39 weeks. Comparisons are with the corresponding 2019 periods unless noted. Financial amounts below are in millions of dollars, except per-share data and percentages.
Business context
The company manufactures, markets and distributes nonalcoholic beverages across 14 states and the District of Columbia. It is the largest Coca-Cola bottler in the U.S.; approximately 84% of bottle/can sales volume is Coca-Cola Company products. Pandemic-related shifts toward at-home consumption supported retail bottle/can sales, while fountain and other on-premise business remained pressured.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $1,328.5 | $1,271.0 | $3,728.7 | $3,647.6 |
| Gross profit | $472.4 | $432.2 | $1,307.0 | $1,257.3 |
| Gross margin | 35.6% | 34.0% | 35.1% | 34.5% |
| Operating income | $103.8 | $53.8 | $219.8 | $141.2 |
| Net income attributable to COKE | $51.9 | $13.0 | $106.1 | $21.5 |
| Diluted EPS | $5.51 | $1.38 | $11.25 Common / $11.24 Class B | $2.29 Common / $2.28 Class B |
| Operating cash flow | Not reported quarterly | $376.4 | $204.6 |
Q3 sales rose 4.5%; first-nine-month sales rose 2.2%. Q3 bottle/can volume increased 3.9% (Sparkling +3.6%; Still +4.5%). For the first nine months, bottle/can volume rose 3.4%. Q3 post-mix and other sales fell 18.0%; fountain syrup revenue declined $19.5 million, or 35.2%. The company attributed stronger gross profit and margin principally to Sparkling pricing, favorable input costs and lower manufacturing costs. SD&A declined 2.6% in both the quarter and year-to-date period, reflecting lower labor and benefit costs and expense controls.
Operating margin was approximately 7.8% in Q3 versus 4.2% in 2019, and 5.9% for the first nine months versus 3.9%. Net income attributable to COKE increased substantially year over year, while lower interest expense and a lower effective tax rate also supported results.
Management’s adjusted, non-GAAP results included Q3 operating income of $105.2 million and basic EPS of $7.19, versus $58.7 million and $3.44 in 2019. For the first nine months, adjusted operating income was $223.6 million and basic EPS was $14.33, versus $157.0 million and $8.31. These measures exclude specified items and should be considered alongside GAAP results.
Balance sheet, liquidity and debt
- At September 27, 2020, cash was $164.8 million, compared with $9.6 million at December 29, 2019. Net working capital was $292.9 million, up $84.8 million from year-end.
- Long-term debt was $962.9 million, down from $1,029.9 million at year-end; the company reported no revolver borrowings and $500 million of available capacity under its $500 million revolving facility, maturing in 2023. It reported compliance with debt covenants.
- Operating and finance lease liabilities totaled $217.1 million. The company had $448.7 million of acquisition-related contingent consideration liabilities associated with future sub-bottling payments.
- Operating cash flow of $376.4 million exceeded capital expenditures of $110.7 million in the first nine months. Cash generation benefited from operating performance, working-capital movements and CARES Act payroll-tax deferrals.
- Dividends were $0.25 per share per quarter, or $0.75 per share for the first nine months, for both share classes.
Changes, outlook and risks
Q3 improvement reflected volume and pricing gains in bottle/can products, alongside cost and expense management. That strength was partly offset by weaker fountain/on-premise sales. For the first nine months, Sparkling and Still sales increased 5.8% and 3.2%, respectively, while post-mix and other sales declined 24.6%.
Management said it did not expect COVID-19 to materially affect short-term liquidity or capital access, and believed available capital sources were sufficient for at least the next 12 months. This was not a guarantee of future performance. The company forecast full-year 2020 capital expenditures of $180–$200 million, with $70–$90 million expected in Q4. It prioritized commercial execution, revenue management, supply-chain optimization, cash generation and debt repayment. No specific revenue or earnings guidance was provided.
- COVID-19: On-premise closures and restrictions, economic weakness, changing product/channel mix, potential receivable or inventory losses, and supplier disruption could continue to hurt results. The company described gradual improvement in fountain sales but noted Q3 volume softened in its final two months.
- Packaging supply: Aluminum-can supply constraints prompted international sourcing and narrower canned-product offerings; management said it would continue to monitor supply.
- Contingent consideration: The $35.1 million year-to-date fair-value expense was noncash and driven primarily by revised future cash-flow projections, partly offset by a higher discount rate. Estimated annual payments are $28–$53 million; fair-value movements can fluctuate materially.
- Cost and financing exposure: A 10% increase in raw-material commodity prices was estimated to raise costs by approximately $56.3 million over the next 12 months, assuming no volume change. A 1-percentage-point increase in market rates was estimated to add approximately $1.4 million to next-12-month interest expense.
- Other items: A $1.6 million impairment was recorded on a location held for sale as part of supply-chain optimization. The company guaranteed $14.7 million of a manufacturing cooperative’s debt and reported $168.1 million of future marketing-contract payments. Management did not expect ordinary-course litigation to have a material adverse effect.
Important facts for investors to verify
- Whether on-premise and fountain demand recovers, and whether retail gains persist as consumer behavior changes.
- Whether aluminum-can availability, packaging costs and product mix affect sales, margins and customer service.
- The sustainability of cash generation after working-capital benefits and deferred payroll taxes; also track the CARES Act tax repayment schedule.
- Debt repayment and refinancing plans, including the term loan maturing in 2021, and execution of the $180–$200 million capital-spending plan.
- Assumptions underlying the Level 3 contingent-consideration valuation and its expected annual cash payments.
- Credit-loss allowance: it increased to $25.1 million from $13.8 million at year-end, including COVID-19-related collectability risk.
- Governance and related-party exposure: Harrison family trusts controlled approximately 86% of total voting power; The Coca-Cola Company held approximately 27% of shares but about 5% of voting power. The business also relies substantially on Coca-Cola brands and related agreements.