Coca-Cola Consolidated, Inc. — Q2 2021 Form 10-Q
Business context and period. The company distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia; it is the largest Coca-Cola bottler in the United States. This report covers the quarter ended July 2, 2021, and the six-month first half, compared with the corresponding 2020 periods. Results benefited from reopening-related channel recovery and stronger demand, particularly for still beverages.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $1,433.1m | $1,227.2m | $2,702.9m | $2,400.2m |
| Gross profit / margin | $494.9m / 34.5% | $429.3m / 35.0% | $943.6m / 34.9% | $834.6m / 34.8% |
| Operating income / margin | $120.9m / 8.4% | $83.1m / 6.8% | $215.0m / 8.0% | $115.9m / 4.8% |
| Net income attributable to Coca-Cola Consolidated | $48.2m | $39.6m | $101.5m | $54.2m |
| Basic EPS | $5.14 | $4.23 | $10.83 | $5.79 |
| Operating cash flow | — | $271.4m | $229.0m |
Q2 sales rose 16.8%; first-half sales increased 12.6%. Q2 physical case volume grew 5.9% (still beverages +20.9%, sparkling flat); first-half volume grew 5.3%. Q2 operating income increased 45.4%, while attributable net income rose 21.8%. First-half operating income increased $99.1m and attributable net income increased $47.3m.
Q2 gross profit grew 15.3%, but gross margin narrowed about 50 basis points, mainly because still beverages carry lower margins than sparkling products. Selling, delivery and administrative expenses rose 8.1% in Q2, but declined as a share of sales to 26.1% from 28.2%; first-half expenses increased 1.4% and fell to 27.0% of sales from 29.9%. Higher labor costs were the main expense pressure.
Cash, debt and liquidity
At July 2, cash was $54.2m, long-term debt was $778.2m (down from $940.5m at December 31, 2020), and current assets less current liabilities were $182.9m. The current ratio was approximately 1.24. First-half capital expenditures were $80.3m; operating cash flow of $271.4m exceeded capital expenditures. Cash declined $0.6m over the half after financing outflows, including repayment of the $217.5m term loan. The company paid $0.25 per share in Q2 dividends.
After quarter-end, on July 9, the company replaced its prior revolving facility with a five-year unsecured $500m revolver, with an option to increase commitments by up to $250m subject to conditions. It also entered a $70m three-year term loan, using about $55m to repay revolver borrowings and the balance for general corporate purposes. The company reported compliance with debt covenants at quarter-end and stated it expects adequate capital for at least the next 12 months.
Material changes, outlook and risks
- Sales and mix: Management attributed Q2 growth to product mix and pricing, higher volume, and recovering fountain and other on-premise sales. Still-beverage growth was led primarily by BodyArmor, AHA and Monster. Fountain syrup revenue increased $20.8m, or 92.4%, year over year.
- Costs and pricing: Aluminum, PET resin and high fructose corn syrup costs increased in the first half, and management expected elevated input costs to continue through year-end. It planned customer price increases in Q3 to help offset cost pressure. A 10% increase in raw-material commodity prices was estimated to add about $62.1m to costs over the next 12 months, assuming unchanged volume.
- Unusual noncash expense: Other expense included a $46.0m Q2 and $57.0m first-half fair-value increase in acquisition-related contingent consideration, versus $14.5m and $15.3m in the comparable 2020 periods. The liability reached $473.1m; management said the adjustment was noncash and driven mainly by higher projected future cash flows. Expected annual payments under the arrangements are $31m–$57m. The company’s adjusted non-GAAP Q2 net income was $82.6m and adjusted basic EPS was $8.80, excluding specified adjustments; these differ substantially from GAAP net income of $48.2m and basic EPS of $5.14.
- Investment and operations: Full-year 2021 capital expenditures were forecast at $180m–$200m. The company opened an automated Whitestown, Indiana distribution center and integrated its Memphis manufacturing plant with West Memphis operations, citing supply-chain efficiency and cost goals.
- COVID-19 and other exposures: Management did not expect COVID-19 to materially affect 2021 liquidity or capital access, while continuing to monitor the pandemic. Risks include commodity inflation, interest-rate exposure, competition, weather and seasonality, and reliance on Coca-Cola brands and related-party arrangements. A 1 percentage-point increase in market rates was estimated to add about $0.6m to next-12-month interest expense. The company guarantees $14.7m of South Atlantic Canners debt and has $149.7m of future marketing-contract commitments. Management did not expect ordinary-course litigation to have a material adverse effect; no material risk-factor changes from the 2020 10-K were reported.
Most important facts for investors to verify
- Whether planned Q3 price increases offset continued commodity inflation without materially reducing volume or weakening customer demand.
- How much reported earnings growth reflects underlying operations versus the volatile, noncash contingent-consideration remeasurement; review GAAP results alongside management’s adjusted measures.
- Whether supply-chain investments deliver the expected operating efficiencies and how the $180m–$200m capital-spending plan affects cash generation and debt.
- The size and sensitivity of future contingent-consideration payments, and the terms, borrowing costs and covenant provisions of the post-quarter credit facilities.
- Exposure to major customers and related parties: Walmart and Kroger together represented approximately 23% of first-half net sales, and Coca-Cola supplies key beverage formulas and products.