Coca-Cola Consolidated, Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Largest U.S. Coca-Cola bottler, distributing, marketing and manufacturing nonalcoholic beverages across 14 states and the District of Columbia. The filing covers the quarter ended June 30, 2023, and the first half of 2023; comparisons are with the quarter and first half ended July 1, 2022.
Key financial results
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $1.739B | $1.595B | $3.310B | $3.000B |
| Gross profit / margin | $671.6M / 38.6% | $550.7M / 34.5% | $1.296B | $1.058B |
| Operating income | $233.7M | $147.3M | $439.7M | $278.3M |
| Net income | $122.3M | $99.6M | $240.4M | $193.0M |
| Diluted EPS, Common Stock | $13.02 | $10.59 | $25.59 | $20.53 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $383.3M | $243.5M |
Q2 operating margin was 13.4%, versus 9.2% a year earlier. First-half net cash used in investing was $98.7M, including $92.9M of capital expenditures; financing used $52.2M. Cash increased to $430.2M at June 30 from $197.6M at year-end. Long-term debt was $599.0M, with no revolver borrowings; the facility provides up to $500M. Net working capital was $656.0M. The company was in compliance with its debt covenants.
Material changes versus prior periods
- Q2 sales rose 9.0%; first-half sales rose 10.4%. Higher average bottle/can pricing added approximately $185M to Q2 sales and $360M to first-half sales, partly offset by lower case volumes.
- Standard physical case volume fell 4.0% in Q2 and 3.6% in the first half. Q2 sparkling volume declined 2.1% and still volume 8.9%.
- Gross profit increased 22% in both Q2 and the first half, driven primarily by pricing and moderation in some commodity costs. Q2 gross margin improved 410 basis points.
- Q2 GAAP operating income increased 59%, while net income increased 23%. First-half net income rose 25%; results included higher noncash pension settlement and contingent-consideration charges.
- First-half net cash from operations increased $139.8M year over year. Capital expenditures were lower than in the prior-year half, which included the purchase of the Snyder Production Center and adjacent facility.
Outlook, commentary, risks and unusual items
- Management expects pricing growth to slow in the second half as the company compares against 2022 price increases. It expects the rate of SD&A expense growth to slow as it compares against prior-year labor adjustments.
- 2023 capital expenditures are forecast at $250M–$300M, with approximately $160M–$210M expected in the second half. Management says available capital is sufficient for its business plan and needs for at least the next 12 months.
- The partial termination of the primary pension plan generated a $39.8M noncash Q2 expense. Full termination was expected in Q3, with an additional noncash charge of approximately $79M. The company subsequently contributed approximately $12M to fund the plan termination.
- Other expense included a $25.5M Q2 and $67.2M first-half increase in the fair value of acquisition-related contingent consideration, a Level 3 liability totaling $594.4M at June 30. The filing attributes the first-half revaluation principally to higher projected future cash flows and a lower discount rate. Annual payments under these arrangements are estimated at approximately $30M–$60M for the next five years.
- Commodity, labor, fuel and other inflationary costs, consumer response to pricing, weather, supply availability, competition, customer concentration, and changes in contingent-consideration assumptions are among the disclosed risks. A 10% increase in relevant raw-material commodity prices would, assuming unchanged volume, raise costs by an estimated $71M over the next 12 months.
- The company reported $37.5M of dividends paid in the first half, including a special $3.00-per-share cash dividend; future dividends remain at the board’s discretion. Coca-Cola Consolidated also disclosed substantial related-party transactions and concentrated voting control: CEO J. Frank Harrison III controlled approximately 71% of voting power.
- Management said ordinary-course legal matters are not expected to materially affect results and reported no material change in the risk factors from its 2022 Form 10-K. Disclosure controls were deemed effective at quarter-end.
Important facts for investors to verify
- Whether pricing can sustain sales and margins as volume declines and pricing growth slows.
- How the Q3 pension-plan settlement charge compares with the approximately $79M estimate and its cash versus noncash effects.
- Key assumptions and valuation sensitivity of the $594.4M contingent-consideration liability and the expected annual payments.
- Delivery of the $250M–$300M capital-spending plan and the sustainability of operating cash flow after working-capital timing effects.
- Exposure to commodity, labor, transportation and customer-concentration risks, alongside the company’s relationship and reliance on The Coca-Cola Company.