Coca-Cola Consolidated, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 29, 2019, a 52-week year; comparable fiscal 2018 ended December 30, 2018. The filing is an annual report, not a standalone Q4 filing. All figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions where appropriate.
Business context
Coca-Cola Consolidated is the largest Coca-Cola bottler in the United States, distributing, marketing and manufacturing nonalcoholic beverages across 14 states and the District of Columbia. Coca-Cola Company products represented approximately 85% of bottle/can sales volume to retail customers. The company served approximately 66 million consumers and operated 12 manufacturing plants and 71 distribution centers at year-end.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $4,826.5 million | $4,625.4 million |
| Gross profit / gross margin | $1,670.5 million / 34.6% | $1,555.7 million / 33.6% |
| Operating income / operating margin | $180.8 million / 3.7% | $57.9 million / 1.3% |
| Net income (loss) attributable to Coca-Cola Consolidated | $11.4 million | ($19.9 million) |
| Basic earnings (loss) per share | $1.21 | ($2.13) |
| Net cash provided by operating activities | $290.4 million | $168.9 million |
| Capital expenditures | $171.4 million | $138.2 million |
| Cash and cash equivalents at year-end | $9.6 million | $13.5 million |
| Long-term debt at year-end | $1,029.9 million | $1,104.4 million |
| Working capital | $208.1 million | $195.7 million |
Operating cash flow less capital expenditures was approximately $119.0 million in 2019; this is a simple calculation, not a company-reported free-cash-flow measure. The company had $455 million available under its $500 million revolving credit facility at year-end and reported compliance with debt covenants. It paid $1.00 per share in dividends on each common-stock class.
Management reported non-GAAP adjusted net income of $92.0 million and adjusted basic EPS of $9.82 for 2019, compared with $45.1 million and $4.82 in 2018. These non-GAAP figures exclude specified items and should not be treated as substitutes for GAAP results.
Material changes versus prior period
- Net sales rose 4.3%. Bottle/can sales increased 5.9%; sparkling beverage sales rose 4.6% and still beverage sales rose 8.1%. Bottle/can volume increased 1.6% overall, including 4.9% growth in still beverages.
- Management attributed sales growth principally to higher average bottle/can prices and a shift toward higher-revenue still products, as well as increased sales volume. Sales to other Coca-Cola bottlers declined 11.8%.
- Gross profit increased $114.8 million. Selling, delivery and administrative expenses decreased $8.1 million, and their share of sales declined to 30.9% from 32.4%.
- Operating income improved by $122.9 million, and the company returned to positive GAAP net income attributable to the company. Results nevertheless included a substantial noncash fair-value expense described below.
- Operating cash flow increased $121.5 million, which management attributed to improved results and working-capital focus. Capital expenditures increased to $171.4 million.
- Debt declined about $74.5 million. In April 2019, the company issued $100 million of 3.93% senior notes due 2026, using the proceeds to refinance notes due in 2019.
Fourth-quarter results
For the quarter ended December 29, 2019, net sales were $1,178.9 million, gross profit $413.2 million and operating income $39.5 million. Net loss attributable to Coca-Cola Consolidated was $10.2 million, or a basic loss of $1.09 per share. In the comparable 2018 quarter, sales were $1,136.6 million, operating income $12.8 million and attributable net loss $27.0 million, or $2.88 per share.
Outlook, management commentary and notable items
- Management’s priorities are commercial execution, revenue management, supply-chain optimization and cash-flow generation, with continued emphasis on debt repayment and prudent capital spending.
- For 2020, the company expected capital expenditures of $180–$210 million, income-tax payments of $18–$28 million, pension contributions of $7–$12 million and acquisition-related contingent-consideration payments of approximately $27–$51 million. These are selected estimates, not formal earnings guidance.
- The company opened an automated distribution center in Erlanger, Kentucky, and was integrating its Memphis, Tennessee production center with West Memphis, Arkansas operations to expand capacity and reduce production costs.
- Other expense included a $92.8 million noncash increase in the fair value of acquisition-related contingent consideration, compared with $28.8 million in 2018. The liability reached $446.7 million at year-end; its valuation depends on long-term cash-flow projections and discount-rate assumptions.
- Other notable 2019 items included $10.6 million of supply-chain and asset-optimization impairment/accelerated-depreciation charges, a $7.3 million expense from a higher capitalization threshold for certain assets, and $6.9 million of System Transformation expenses. Commodity hedge mark-to-market adjustments were favorable by $10.1 million before tax.
- Management stated it had sufficient capital sources for at least the next 12 months. Standard & Poor’s reaffirmed its BBB rating and changed its outlook from negative to stable in January 2020; Moody’s outlook was stable.
- The company adopted lease accounting in 2019, recording operating-lease right-of-use assets and liabilities. It also recorded a $19.7 million cumulative adjustment increasing opening retained earnings for stranded tax effects.
Risks, contingencies and governance
- Dependence on Coca-Cola Company brands, concentrate and agreements is significant. The agreements impose operating, investment and volume requirements, and certain prices for products sold to other bottlers are set by Coca-Cola North America.
- Walmart and Kroger together represented 31% of bottle/can volume and 21% of net sales in 2019. The filing warns that losing either could materially harm results.
- Commodity, packaging and fuel costs; supplier concentration; competition; changing consumer preferences; weather; regulation; cybersecurity; and labor costs could pressure sales, margins or operations. A hypothetical 10% increase in relevant commodity prices was estimated to increase costs by about $58.2 million over the next 12 months, assuming no volume change.
- The Harrison family controlled approximately 86% of total voting power. Coca-Cola Company owned approximately 27% of total shares but represented about 5% of voting power.
- The company guaranteed $14.7 million of South Atlantic Canners debt and had $35.6 million of standby letters of credit. It also had substantial contractual commitments, including a $449.2 million estimated purchase obligation for finished product from the cooperative through June 2024.
- Management did not believe ordinary-course litigation would have a material adverse effect or that material losses in excess of recorded amounts were reasonably possible. The filing identifies no material environmental remediation commitments.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The valuation of contingent consideration was identified as a critical audit matter; the auditor’s discussion does not constitute a separate opinion on that estimate.
Important facts for investors to verify
- How much of the improvement in GAAP operating income and adjusted earnings reflects sustainable operating performance versus excluded or unusual items, especially the contingent-consideration remeasurement.
- The assumptions behind the $446.7 million contingent-consideration liability and the expected annual cash payments of $27–$51 million.
- Whether pricing, product mix and still-beverage growth can continue to offset concentrate, packaging, commodity and distribution costs.
- The company’s ability to fund planned capital expenditures, repay debt and manage near-term maturities while holding only $9.6 million of cash at year-end.
- Customer and supplier concentration, Coca-Cola agreement requirements, and the terms and potential exposure associated with cooperative purchase commitments and guarantees.
- Progress, cost and expected savings from the supply-chain optimization projects, including the Memphis–West Memphis integration.