Coca-Cola Consolidated, Inc. — Q1 2020 Form 10-Q
Business context and period: The company manufactures, markets and distributes nonalcoholic beverages across 14 states and the District of Columbia. Its business relies primarily on Coca-Cola brands. The report covers the 13 weeks ended March 29, 2020; comparisons are with the 13 weeks ended March 31, 2019, unless noted.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $1,173.0 million | $1,102.9 million | Up 6.4%; physical case volume rose 6.1% |
| Gross profit | $405.3 million | $389.3 million | Up 4.1%; gross margin was 34.6%, down 70 basis points |
| SD&A expenses | $372.5 million | $369.2 million | Up 0.9%; 31.8% of sales versus 33.5% |
| Operating income | $32.8 million | $20.2 million | Up 62.9% |
| Net income attributable to Coca-Cola Consolidated | $14.7 million | Loss of $6.8 million | Basic EPS: $1.56 versus loss per share of $0.73 |
| Operating cash flow | $32.3 million | $5.6 million | Improved by $26.7 million |
| Capital expenditures | $33.1 million | $29.3 million | Cash used in investing activities was $32.3 million |
| Cash and cash equivalents | $47.7 million | $9.6 million at Dec. 29, 2019 | Quarter-end balance |
| Long-term debt | $1,082.6 million | $1,029.9 million at Dec. 29, 2019 | Includes $105 million drawn on revolving facility |
Changes and drivers
- Revenue growth was driven chiefly by higher volume, new products and price realization. Still-beverage sales increased 10.4%; sparkling-beverage sales increased 6.0%.
- COVID-19-related pantry loading boosted demand in the final three weeks of March; the company estimates about two-thirds of Q1 volume growth came in that period. Approximately 7% of bottle/can volume and sales shifted toward larger retail outlets.
- The channel and package shift toward take-home multipacks pressured margins: those products generally generate less revenue and gross profit per case than immediate-consumption products. Still beverages also generally carry lower gross margins than sparkling beverages.
- Operating income improved despite higher sales and cost of sales. Lower interest expense and a much smaller contingent-consideration fair-value charge also helped the year-over-year comparison: the charge was $0.7 million in 2020 versus $14.0 million in 2019.
- Commodity hedges generated $3.9 million of unfavorable pretax mark-to-market adjustments in Q1 2020, compared with $6.6 million of favorable adjustments in Q1 2019.
Liquidity, debt and other financial matters
- Working capital was $295.5 million at March 29, 2020. The $38.1 million increase in cash during the quarter was supported by increased net revolver borrowings.
- The $500 million revolving credit facility had $395 million available at quarter-end and matures June 8, 2023. Management said it believed liquidity and access to capital would remain adequate in the short term, and that it had sufficient capital sources for at least the next 12 months.
- The company was in compliance with its nonpublic debt covenants. A 1 percentage-point increase in market rates, assuming no capital-structure change, was estimated to increase interest expense by about $2.6 million over the next 12 months.
- Sub-bottling contingent consideration was $437.1 million at quarter-end; expected annual payments are estimated at $28 million to $51 million. The liability is fair-value sensitive to cash-flow forecasts and discount-rate assumptions.
- The company expects CARES Act payroll-tax deferrals to benefit 2020 operating cash flow by approximately $30 million to $40 million.
Outlook, risks and contingencies
- The filing does not provide numerical earnings or revenue guidance. Management expected Q2 2020 results to be negatively affected by restaurant, school and other on-premise closures, canceled public events and changed consumer purchasing patterns. It expected recovery to be gradual and the timing and extent to be uncertain.
- Management reported no material supply-chain or distribution interruptions at the filing date, but identified potential risks involving concentrate, packaging materials and carbon dioxide supply, as well as weaker demand and customer credit losses.
- Cost actions included furloughing approximately 700 employees through mid-June, reducing or deferring operating expenses, and curtailing capital expenditures. The company reported no Q1 impairment of goodwill, intangible or long-lived assets.
- Other disclosed exposures include a $14.7 million guarantee of South Atlantic Canners debt, $187.3 million of future payments under marketing arrangements, and ordinary-course legal claims that management did not expect to have a material adverse effect.
- Related-party and governance considerations include the company’s extensive operating relationship with The Coca-Cola Company and leases with entities connected to senior leadership. The Harrison family trusts and CEO controlled approximately 86% of total voting power.
Important facts for investors to verify
- How quickly on-premise demand and the more profitable product and channel mix recover, and whether Q1 pantry-loading demand persists.
- Whether the company achieves expected cost savings while maintaining service levels, and the effects of reduced capital spending.
- Cash generation, revolver usage, debt maturities and covenant headroom as pandemic-related conditions evolve.
- Assumptions behind the $437.1 million contingent-consideration valuation and the expected annual payment range.
- Exposure to commodity prices, customer credit quality, major retail customers and related-party arrangements.