Coca-Cola Consolidated, Inc. — Q3 2019 Form 10-Q
Reporting period: Third quarter was the 13 weeks ended September 29, 2019; year-to-date was the first 39 weeks of fiscal 2019. Comparisons are with the corresponding 2018 periods. Unless indicated otherwise, amounts below are in millions of dollars.
Business context
The company manufactures, markets and distributes nonalcoholic beverages across 14 states and the District of Columbia. It is the largest Coca-Cola bottler in the United States; about 85% of bottle/can sales volume to retail customers is from Coca-Cola Company products. The Nonalcoholic Beverages segment accounts for most consolidated revenue and operating income.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,271 | $1,204 | $3,648 | $3,489 |
| Gross profit | $432 | $413 | $1,257 | $1,175 |
| Income from operations | $54 | $44 | $141 | $45 |
| Net income attributable to Coca-Cola Consolidated | $13 | $25 | $22 | $7 |
| Diluted EPS, Common Stock | $1.38 | $2.69 | $2.29 | $0.75 |
| Net cash provided by operating activities | Not reported by quarter | Not reported by quarter | $205 | $26 |
- Q3 sales grew 5.6%, primarily on 4.6% higher bottle/can volume; bottle/can revenue rose 7.4%. Sparkling revenue increased 6.1% and Still revenue increased 9.4%, with Still growth supported by BodyArmor.
- First-nine-month sales increased 4.6%, with bottle/can volume up 1.8%. Pricing and product mix contributed to growth; sales to other Coca-Cola bottlers declined.
- Gross margin was 34.0% in Q3 versus 34.3% a year earlier; it improved to 34.5% for the first nine months from 33.7%. Management cited product mix and manufacturing optimization costs as Q3 pressures and prior pricing actions as supporting year-to-date improvement.
- Q3 operating income improved, but attributable net income fell 48% year over year, mainly reflecting a noncash fair-value expense on acquisition-related contingent consideration and the absence of the prior-year exchange gain. For the first nine months, attributable net income increased to $22 million from $7 million.
- Interest expense declined: $11 million in Q3 and $36 million year to date, primarily due to lower average debt and interest rates.
- Operating cash flow was $205 million year to date, versus $26 million. Capital spending was $97 million; operating cash flow less capital spending was approximately $108 million, a simple derived measure. Cash declined to $6 million from $14 million at fiscal year-end 2018.
- At September 29, 2019, current assets were $852 million and current liabilities $613 million, giving working capital of $239 million. Long-term debt was $1.027 billion; total debt less cash was approximately $1.021 billion. Lease liabilities totaled about $146 million and are separate from reported long-term debt.
Material changes and unusual items
- The acquisition-related contingent consideration liability rose to $425 million from $383 million at year-end. Its $62 million year-to-date fair-value increase was recorded in other expense and was noncash; the Q3 increase was $18.7 million. Management attributed the 2019 increase primarily to a lower discount rate and changes in projected cash flows. Estimated annual payments under these arrangements are $25 million to $49 million.
- Long-term debt fell from $1.104 billion to $1.027 billion. The company issued $100 million of 3.93% senior notes due 2026, using proceeds to refinance notes that matured in April 2019. It had $35 million drawn on its $500 million revolving facility, with $465 million available.
- The company adopted the lease accounting standard in 2019, recognizing operating-lease right-of-use assets and liabilities. It also reclassified $19.7 million of stranded tax effects from accumulated other comprehensive loss to retained earnings; this was an accounting reclassification, not an operating gain.
- Prior-year revenue and SD&A presentation was revised to classify certain customer payments as reductions to net sales rather than marketing expense. The revision reduced both reported sales and SD&A by $7.6 million in Q3 2018 and $22.2 million year to date, with no effect on net income or EPS.
Outlook, risks and contingencies
- Management expects 2019 capital spending of $150 million to $180 million, including $50 million to $80 million for the remainder of the year, and an annualized effective tax rate in the low-30% range. No specific full-year revenue or earnings guidance is provided.
- Management said it had adequate capital sources for at least the next 12 months and remained focused on free cash flow, debt reduction, cost optimization and distribution-network efficiency. It planned to consolidate two Memphis-area manufacturing plants by the end of fiscal 2020.
- Market risks include variable-rate debt and commodity costs. A 1 percentage-point increase in market rates was estimated to add about $2.1 million to interest expense over the next 12 months. A 10% rise in relevant commodity prices was estimated to increase costs by about $58.3 million over 12 months, assuming unchanged volume.
- The company guaranteed $23.9 million of South Atlantic Canners debt and reported $35.6 million of standby letters of credit. It also had $197.6 million of future payments under long-term marketing contracts. Management did not expect these matters or ordinary-course legal proceedings to have a material adverse effect.
- Standard & Poor’s outlook was negative and Moody’s outlook stable; ratings were BBB and Baa2, respectively. The company reported compliance with its nonpublic debt covenants. Management identified no material change in risk factors from its 2018 Form 10-K.
Important facts for investors to verify
- Whether Q3 sales and volume momentum, particularly Still beverage growth, continues and supports margins.
- How much reported earnings remain affected by recurring fair-value changes in the contingent consideration liability, and the assumptions behind its valuation.
- Progress on cash generation, debt reduction and planned capital spending, given low cash on hand and substantial debt and lease obligations.
- Exposure to commodity inflation, variable interest rates, major retail customers and Coca-Cola-related agreements and transactions.
- Execution, costs and expected benefits of manufacturing and distribution optimization, including the planned Memphis consolidation.