Coca-Cola Consolidated, Inc. — Q3 2023 Form 10-Q
Reporting period: Fiscal quarter ended September 29, 2023; comparisons are with the quarter ended September 30, 2022. Nine-month figures are for the periods ended on those dates. Unless noted, financial amounts below are in millions.
Business context
The company manufactures, distributes and markets nonalcoholic beverages across 14 states and the District of Columbia. It is the largest U.S. Coca-Cola bottler; approximately 85% of bottle/can sales volume to retail customers is made up of Coca-Cola Company products. The business is seasonal, with higher sales typically in the second and third quarters.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First 9 months 2023 | First 9 months 2022 |
|---|---|---|---|---|
| Net sales | $1,712.4 (+5.1%) | $1,628.6 | $5,022.9 (+8.5%) | $4,628.2 |
| Gross profit | $661.6 (+6.5%) | $621.1 | $1,957.2 (+16.5%) | $1,679.3 |
| Gross margin | 38.6% | 38.1% | 39.0% | 36.3% |
| Operating income | $216.3 (+13.9%) | $189.9 | $656.0 (+40.1%) | $468.2 |
| Operating margin | 12.6% | 11.7% | 13.1% | 10.1% |
| Net income | $92.1 (-22.5%) | $118.8 | $332.5 (+6.7%) | $311.7 |
| Diluted EPS, Common Stock | $9.80 | $12.63 | $35.38 | $33.13 |
| Operating cash flow | Not provided separately | Not provided separately | $644.5 | $394.3 |
Q3 adjusted net income, a company-defined non-GAAP measure, was $164.3 million versus $138.8 million; adjusted basic EPS was $17.53 versus $14.81. For the first nine months, adjusted net income was $489.2 million versus $330.0 million and adjusted basic EPS was $52.19 versus $35.20. These adjusted measures exclude specified items and are not substitutes for GAAP results.
Q3 sales growth was driven principally by approximately $95 million of higher average bottle/can pricing, partly offset by about $25 million from lower case volume. Standard physical case volume fell 1.4% in Q3 and 2.8% year to date; Q3 sparkling volume was up 0.2%, while still volume fell 5.4%. For the first nine months, sparkling volume declined 1.3% and still volume declined 6.9%.
Cash, debt and liquidity
- Cash and cash equivalents were $616.2 million at September 29, 2023, up $418.6 million from December 31, 2022. Current assets were $1,676.5 million and current liabilities $907.8 million; net working capital was $768.6 million.
- Nine-month operating cash flow was $644.5 million. Investing cash outflow was $160.9 million, including $152.3 million of capital expenditures; financing cash outflow was $65.1 million. Operating cash flow less reported capital expenditures was approximately $492.3 million.
- Long-term debt was $599.1 million, with no revolving-credit-facility borrowings. The facility provides up to $500 million. The company reported compliance with debt covenants and stable Baa1/BBB+ long-term ratings.
- Cash dividends paid in the first nine months were $42.2 million, including a $3.00-per-share special dividend. Reported dividends per share for the period were $4.50; Q3 dividends were $0.50 per share.
Material changes and unusual items
- Q3 GAAP net income fell despite higher sales and operating income, primarily reflecting a $77.3 million non-cash pension settlement charge. The nine-month pension settlement expense was $117.1 million. The primary pension plan liabilities were fully settled during Q3; a related $57.2 million Q3 benefit was recorded in other comprehensive income, so the settlement substantially affected reported net income and comprehensive income differently.
- Other expense included non-cash fair-value remeasurement of acquisition-related contingent consideration. The liability rose to $605.7 million from $541.5 million at year-end, including an $86.0 million nine-month fair-value increase, primarily reflecting higher projected future cash flows. Q3 fair-value increase was $18.9 million.
- Q3 net sales growth moderated as the company partially cycled prior-year price increases. Management expected sales growth to slow further in Q4 as it fully cycles 2022 price increases. On-premise and Club/Value channel sales were strong; growth in take-home packages at larger retail stores declined.
- Gross margin improved as higher selling prices outweighed cost pressures. Q3 cost of sales increased 4.3%, with higher manufacturing costs partly offset by lower volume. Q3 SD&A increased 3.3%, while SD&A as a share of sales declined to 26.0% from 26.5%.
- Year-to-date other expense also reflected commodity derivative fair-value changes. Derivatives are used as economic hedges, not for trading; their mark-to-market results can add period-to-period earnings volatility.
Outlook, risks and contingencies
- Management expected 2023 capital expenditures of $250–$300 million, including approximately $100–$150 million in Q4, to support supply-chain optimization and growth. It stated it had adequate capital sources for at least the next 12 months.
- Management estimated annual acquisition-related contingent-consideration payments of approximately $45–$65 million over each of the next five years. Payments depend on distribution-territory performance; the liability’s fair value is sensitive to forecast cash flows and discount rates.
- A 10-basis-point change in the risk-free rate used in the liability’s discount-rate calculation was estimated to change its fair value by about $6 million. A 10% increase in raw-material commodity prices was estimated to raise costs by approximately $70 million over the next 12 months, assuming unchanged volume.
- Key disclosed risks include inflation and input availability/costs, labor retention and costs, consumer preferences and weather, competition and pricing, reliance on Coca-Cola Company brands and marketing support, major-customer relationships, technology and cybersecurity, and access to capital. Walmart and Kroger together represented approximately 25% of nine-month net sales.
- The company disclosed a $9.5 million guarantee of a manufacturing cooperative’s debt, $37.6 million of standby letters of credit and $137.3 million of future marketing-contract payments. Management did not expect the guarantee or ordinary-course legal proceedings to result in a material loss; it reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Q4 sales and volume trends reflect the expected full comparison against 2022 price increases, including the differing performance of sparkling and still beverages and retail channels.
- How much reported earnings are affected by the non-cash pension settlement and contingent-consideration remeasurement, and how management’s non-GAAP adjustments reconcile to GAAP results.
- Whether operating cash flow remains strong after considering working-capital timing, planned capital spending and the special dividend.
- The assumptions behind the $605.7 million contingent-consideration liability, its projected annual payments and sensitivity to discount rates and territory cash flows.
- The continuing effects of manufacturing, commodity, labor and distribution costs on margins, as well as reliance on Coca-Cola Company products and support and concentration in major customers.