Coca-Cola Consolidated, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks). The filing also reports fourth-quarter results. The company distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia, serving approximately 66 million consumers. Coca-Cola Company products accounted for approximately 88% of bottle/can sales volume to retail customers.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $4.625 billion | $4.288 billion |
| Gross profit / gross margin | $1.556 billion / 33.6% | $1.505 billion / 35.1% |
| SD&A expenses / share of sales | $1.498 billion / 32.4% | $1.403 billion / 32.7% |
| Operating income / margin | $57.9 million / 1.3% | $101.5 million / 2.4% |
| Net income (loss) attributable to the company | $(19.9) million | $96.5 million |
| Operating cash flow | $168.9 million | $307.8 million |
| Capital expenditures | $138.2 million | $176.6 million |
- FY2018 net sales rose 7.9%; physical case volume increased 4.3%. Excluding acquisition- and divestiture-related activity, organic bottle/can sales grew 3.4%, while organic case volume was essentially flat, up 0.1%.
- Still beverages increased to 30.1% of bottle/can volume from 29.0%; their volume grew 8.1%, compared with 2.7% growth for sparkling beverages.
- Cash and equivalents were $13.5 million; working capital was $195.7 million, up $40.6 million. Current assets were $797.4 million and current liabilities $601.7 million.
- Debt was $1.104 billion and capital lease obligations $35.2 million. Net debt and capital leases, after cash, totaled $1.126 billion. The $500 million revolving credit facility had $80 million drawn and $420 million available; the company reported compliance with debt covenants.
- Cash from operations less capital expenditures was approximately $30.6 million, calculated from reported figures. Operating cash flow declined $138.9 million year over year.
- Common and Class B dividends were each $1.00 per share in 2018; total cash dividends paid were $9.4 million.
Material changes and unusual items
- Revenue growth reflected pricing, higher volume and the contribution of territories acquired in 2017. Those acquisitions contributed $1.191 billion of 2018 sales and $25.5 million of operating income. Management said Q4 was comparable on a territory basis after cycling the transformation transactions.
- Gross margin declined year over year, with cost of sales increasing 10.3%, faster than sales growth of 7.9%. Management cited commodity costs, product mix, acquired-territory costs and transportation. Pricing initiatives helped improve adjusted Q4 gross margin to 34.2% from 33.5%; reported Q4 gross margin was 33.5% in both years.
- Operating income fell 43.0%. Key 2018 items included $43.3 million of System Transformation expenses, an $28.8 million noncash unfavorable fair-value adjustment to acquisition-related contingent consideration, and $14.7 million of unfavorable commodity-hedge mark-to-market adjustments. The company also recorded $8.6 million of workforce-optimization costs.
- FY2018 included a $10.2 million gain from final post-closing adjustments to exchange transactions. 2017 net income benefited from a $66.6 million Tax Act benefit; consequently, reported net income comparisons are affected by tax and other one-time items.
- Q4 net sales were $1.137 billion, up 1.7%; operating income was $12.8 million versus $0.5 million. The company reported a Q4 attributable net loss of $27.0 million, compared with income of $77.9 million in Q4 2017. Q4 adjusted operating income was $38.7 million, up $21.6 million year over year.
- A $6.9 million out-of-period adjustment for the company’s share of CONA historical operating losses was recorded in Q4 SD&A; management said prior-period and current-period effects were not material.
Outlook, risks and contingencies
- Management expects 2019 capital expenditures of $150 million to $180 million and $5 million to $7 million of System Transformation costs in the first half as IT conversion work is completed. It estimates 2019 income-tax payments of $2 million to $10 million and annual contingent-consideration payments of $25 million to $48 million.
- Management’s priorities include cost and distribution-network optimization, revenue management, free-cash-flow generation and debt repayment. It estimated workforce optimization could generate annual savings of $30 million to $37 million.
- The company intends to refinance debt principal due in 2019. After year-end, it agreed to sell $100 million of 3.93% senior notes due 2026, with proceeds expected to fund refinancing and general corporate purposes. Standard & Poor’s affirmed BBB but revised its outlook to negative; Moody’s outlook was stable.
- Risks include dependence on Coca-Cola brands and agreements, commodity and fuel costs, limited suppliers for cans and bottles, intense competition, changing consumer preferences and regulation, and concentration in Walmart and Kroger, which together represented 22% of net sales. A 10% increase in relevant commodity prices was estimated to add approximately $58.9 million to costs over the next 12 months, assuming unchanged volume.
- Long-term obligations include a $382.9 million acquisition-related contingent-consideration liability, $544.1 million estimated SAC product-purchase commitments, and $173.9 million of long-term marketing commitments. The company also guaranteed $23.9 million of SAC debt. Management did not expect a material loss from the guarantee or ordinary-course legal matters.
- Adoption of the new lease accounting standard was expected to materially increase reported balance-sheet assets and liabilities; the income-statement impact was still under evaluation. Management expected an approximately $20 million increase to opening retained earnings from a separate tax-effects accounting change.
Important facts for investors to verify
- How much of reported sales growth and future earnings comes from acquired territories versus organic volume, pricing and mix.
- Whether pricing and cost-control actions can restore gross and operating margins amid commodity, freight and labor pressures.
- The pace of operating-cash-flow recovery, capital spending and debt reduction, including refinancing of 2019 maturities and the effect of the negative S&P outlook.
- The assumptions underlying the $382.9 million contingent-consideration valuation and expected annual payments.
- Whether cost savings, IT integration and distribution-network optimization are achieved, and how customer concentration and Coca-Cola system agreements affect flexibility.