Coca-Cola Consolidated, Inc. annual report, FY2023

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Coca-Cola Consolidated, Inc. — FY2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023, compared with fiscal 2022. This is an annual filing; it does not provide standalone fourth-quarter results. Coca-Cola Consolidated distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia. It is the largest U.S. Coca-Cola bottler, and Coca-Cola Company products represented about 85% of its bottle/can sales volume.

Financial performance and position

  • Revenue: Net sales were $6.654 billion, up 7.3% from $6.201 billion. Higher average bottle/can pricing added about $515 million; lower case volume reduced sales by about $110 million. Standard physical case volume fell 1.9%.
  • Product trends: Sparkling sales rose 10.5%, while volume slipped 0.3%. Still sales rose 6.4%, but volume declined 6.1%, with weakness in sports drinks; Energy and enhanced water performed well. Other sales decreased 7.2%, partly reflecting the shift to alternative post-mix delivery.
  • Profitability: Gross profit rose 14.1% to $2.599 billion and gross margin increased 2.4 percentage points to 39.1%. SD&A rose 7.8% to $1.764 billion, or 26.5% of sales versus 26.4%. Operating income increased 30.2% to $834.5 million.
  • Net income: GAAP net income decreased 5.1% to $408.4 million from $430.2 million; basic earnings per share were $43.56 versus $45.88. Results included a $159.4 million noncash fair-value expense on acquisition-related contingent consideration and a $112.8 million noncash pension settlement charge. Adjusted net income, a non-GAAP measure, was $614.8 million versus $457.1 million; adjusted basic EPS was $65.58 versus $48.75.
  • Cash flow and investment: Operating cash flow increased to $810.7 million from $554.5 million. Capital expenditures were $282.3 million, compared with $298.6 million. Operating cash flow less capital expenditures was approximately $528.4 million; this is a simple calculation, not a company-defined non-GAAP measure.
  • Liquidity and debt: Cash and equivalents were $635.3 million; net working capital was $613.8 million. Long-term debt was $599.2 million, with no revolving-credit borrowings and $500 million of revolving capacity available. Debt maturities include $350 million in 2025, $100 million in 2026 and $150 million in 2030. The company reported compliance with debt covenants and stable Baa1/BBB+ ratings.
  • Balance sheet: Total assets were $4.289 billion, up from $3.710 billion. The acquisition-related contingent consideration liability was $669.3 million, up from $541.5 million.

Material changes versus FY2022

  • Revenue growth reflected price increases, while total bottle/can volume declined. Sparkling volume was nearly flat; Still volume fell more sharply.
  • Operating income improved substantially as pricing, moderation in certain commodity costs and a higher Sparkling mix supported gross margin. Higher labor, incentive compensation and transportation costs partly offset gains.
  • GAAP net income declined despite higher operating income. The contingent-consideration fair-value expense increased by $127.1 million year over year, and the pension settlement added $112.8 million of expense.
  • Operating cash flow increased by $256.2 million, and year-end cash rose by $437.6 million. The company paid $46.9 million of dividends during 2023; a much larger special dividend was declared before year-end for payment in February 2024.

Outlook, commentary and risks

  • Investment outlook: Management expects 2024 capital expenditures of approximately $300 million to $350 million and expects significant supply-chain investment to continue. It provided no specific revenue or earnings guidance in the filing.
  • Operations: Management priorities include commercial execution, revenue management, supply-chain optimization, cash generation, route-to-market changes and a digitally enabled selling platform. Alternative delivery methods are expected to become more prevalent in 2024; in 2023, they covered more than half of post-mix gallons and less than 10% of bottle/can volume. These shifts affect reported volume and sales mix.
  • Key exposures: Risks include commodity and fuel prices, inflation, labor costs and availability, supply interruptions, changing consumer preferences and regulation, intense competition, weather and climate impacts, and cyber or technology disruption. Walmart and Kroger represented about 28% of net sales and 35% of bottle/can volume combined. Suppliers of key packaging materials are concentrated.
  • Contract and valuation risk: Coca-Cola agreements impose operating, investment and volume requirements and can limit pricing flexibility and certain transactions. The $669.3 million contingent-consideration liability is based on long-term forecasts and discount-rate assumptions; management estimates a 10-basis-point change in the underlying risk-free rate changes its value by about $6 million. Expected annual payments under these arrangements are approximately $50 million to $70 million over the next five years.
  • Other commitments: The company guaranteed $9.5 million of SAC debt. Ordinary-course legal matters were not expected by management to have a material adverse effect, and no material loss above recorded amounts was considered reasonably possible. A special dividend of $16 per share, plus a regular $0.50 quarterly dividend, was declared for February 9, 2024; total payment was approximately $155 million.
  • Audit and controls: PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective. The contingent-consideration valuation was identified as a critical audit matter.

Important facts for investors to verify

  • Whether pricing can continue to offset input-cost inflation without further weakening volume, particularly in Still beverages.
  • How alternative routes to market affect reported volume, net sales, margins and customer service as adoption expands.
  • The assumptions and sensitivity behind the $669.3 million contingent-consideration liability and related noncash charges.
  • Execution, returns and cash-flow effects of planned 2024 capital spending of $300 million to $350 million.
  • Exposure to Walmart and Kroger, concentrated packaging suppliers, and the terms and renewal requirements of Coca-Cola distribution and manufacturing agreements.
  • The cash and leverage impact of the $155 million dividend payment and future annual sub-bottling payments.