Coca-Cola Consolidated, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter ended September 30, 2022; comparisons are with the third quarter ended October 1, 2021. Financial statements are unaudited. Unless otherwise noted, dollar amounts are in millions.
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 United States; approximately 86% of bottle-and-can volume sold to retail customers consists of Coca-Cola Company products. Its business is seasonal, with typically higher sales in the second and third quarters.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Net sales | $1,628.6 | $1,457.4 | $4,628.2 | $4,160.4 |
| Gross profit | $621.1 | $517.7 | $1,679.3 | $1,461.4 |
| Income from operations | $189.9 | $137.0 | $468.2 | $352.1 |
| Net income | $118.8 | $68.9 | $311.7 | $170.5 |
| Diluted EPS, Common Stock | $12.63 | $7.32 | $33.13 | $18.11 |
| Operating cash flow | Not presented separately for the quarter | $394.3 | $439.9 |
Q3 gross margin was 38.1% versus 35.5%; operating margin was 11.7% versus 9.4%. For the first nine months, gross margin was 36.3% versus 35.1%, and operating margin was 10.1% versus 8.5%. Margins are calculated from reported figures.
At September 30, 2022, cash was $163.2, long-term debt was $598.8, total current assets were $1,230.3 and current liabilities were $876.7; net working capital was $353.6. The company had no revolving-credit-facility borrowings. Its $500 million revolving facility matures in 2026.
Changes and management commentary
- Q3 net sales rose 11.7%, while physical case volume increased 0.6%. Management attributed most sales growth to price increases and product mix; approximately 90% of that increase came from higher average bottle/can prices. Sparkling volume grew 0.8% and still beverage volume 0.1%.
- Q3 gross profit increased 20%. Management cited pricing, volume and a pullback in some commodity prices. Cost of sales still rose 7.2%, reflecting higher input costs, including aluminum, PET resin and transportation.
- Q3 selling, delivery and administrative expenses rose 13.3%, driven principally by labor costs, fleet costs and other expenses; the expense ratio increased to 26.5% from 26.1%. Nine-month SD&A rose 9.2%, while its share of sales declined to 26.2% from 26.7%.
- Nine-month operating cash flow decreased $45.6 year over year, which management attributed to working-capital timing. Investing cash outflow was $210.3, including $183.9 of capital expenditures and $30.1 for additional BODYARMOR distribution rights. Cash increased $20.9 over the period.
- The company used cash to repay $125.0 of senior notes in September ahead of their February 2023 maturity. Debt declined from $723.4 at year-end 2021 to $598.8 at quarter-end.
Outlook, risks and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management said available capital sources should be sufficient to fund its plan and meet working-capital needs for at least the next 12 months. Priorities include pricing and commercial execution, supply-chain optimization, cash generation and debt reduction.
- Management said it did not expect COVID-19 to materially affect 2022 liquidity or capital access. The company highlighted inflation, supply availability, labor constraints, consumer response to pricing, weather, competition, customer concentration and dependence on Coca-Cola Company brands and support as risks.
- A $536.9 acquisition-related contingent consideration liability, tied to long-term sub-bottling payments, is measured using Level 3 forecasts and discount-rate assumptions. Its fair-value increase was $21.1 for the first nine months and was noncash; estimated annual payments under the arrangements are $35–$75. Q3 net income was also affected by a $22.6 fair-value increase in the liability.
- Commodity-price exposure is material: the company estimated a 10% rise in raw-material commodity prices could increase costs by approximately $71.2 over the next 12 months, assuming unchanged volume. It uses commodity derivatives as economic hedges, not for speculation.
- The company began terminating its primary pension plan and expects to offer certain participants lump-sum payouts in 2023 before purchasing annuities. It also bought the Snyder Production Center for $60.0 from an entity related to company leadership, ending the prior lease.
- Standard & Poor’s upgraded the company’s rating to BBB+ with a stable outlook on October 26, 2022, after quarter-end. Management reported compliance with debt covenants. It said ordinary-course legal matters were not expected to have a material adverse effect and disclosed no material change in previously reported risk factors.
Investor verification priorities
- Assess whether pricing can continue to offset input-cost inflation without materially weakening case volumes or consumer demand.
- Track cash conversion and working capital, given lower nine-month operating cash flow and the timing-related movements in receivables, rebates and payables.
- Review assumptions behind the $536.9 contingent consideration liability, its potential $35–$75 annual cash payments and sensitivity to discount rates and projected cash flows.
- Monitor commodity costs and hedging coverage alongside capital spending and the company’s stated debt-reduction priorities.
- Evaluate exposure to Coca-Cola Company products and support, as well as customer concentration: Walmart and Kroger represented approximately 25% of nine-month net sales combined.