Coca-Cola Consolidated, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The company distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia. The filing covers the 13 weeks ended June 30, 2019 and the 26-week first half; comparisons are to the corresponding 2018 periods. Financial amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $1,273.7 | $1,220.0 | $2,376.6 | $2,284.8 |
| Gross profit / margin | $435.8 / 34.2% | $404.7 / 33.2% | $825.1 / 34.7% | $762.3 / 33.4% |
| Operating income / margin | $67.2 / 5.3% | $19.7 / 1.6% | $87.4 / 3.7% | $0.7 / 0.0% |
| Net income (loss) attributable to Coca-Cola Consolidated | $15.4 | $(3.9) | $8.5 | $(18.1) |
| Basic EPS | $1.64 | $(0.42) | $0.91 | $(1.94) |
| Operating cash flow | — | $88.6 | $57.2 |
- Q2 sales increased 4.4%; first-half sales increased 4.0%. Bottle/can sales rose 6.1% in Q2 and 6.0% in the first half. First-half physical bottle/can volume increased 0.3%.
- Q2 net cash used in investing activities was $61.9 million and net cash used in financing was $34.5 million. First-half capital expenditures were $57.6 million. Cash fell from $13.5 million at December 30, 2018 to $5.7 million at June 30, 2019.
- At June 30, current assets were $863.9 million and current liabilities $602.0 million, implying working capital of $262.0 million. Long-term debt was $1,092.2 million. The company had $100 million drawn on its $500 million revolving facility, leaving $400 million available. Lease liabilities are reported separately.
Material changes and unusual items
- Improved pricing and product mix, including stronger still-beverage sales, supported revenue and gross-margin gains. Management cited pricing actions begun in the second half of 2018 and lower transportation costs as contributors to margin improvement.
- SD&A expense fell 4.3% in Q2 and 3.2% in the first half, primarily due to lower System Transformation costs and workforce optimization. System Transformation costs were $2.2 million in Q2 2019 versus $9.8 million in Q2 2018, and $6.9 million in the first half versus $22.3 million.
- Other expense was $31.2 million in Q2 and $47.0 million in the first half, largely reflecting noncash fair-value increases in acquisition-related contingent consideration: $29.2 million and $43.3 million, respectively. The liability was $412.5 million at quarter-end; its valuation depends on discount rates and projected cash flows.
- The company revised prior-period presentation of certain payments to customers from SD&A expense to a reduction in net sales: $7.3 million for Q2 2018 and $14.6 million for the first half of 2018. It said the revision did not affect net income or EPS and was not material.
Outlook, risks and contingencies
- Management expects fiscal 2019 capital spending of $150–$180 million, including $90–$125 million in the second half, and an annualized effective tax rate in the low-30% range. It identifies free-cash-flow generation, debt repayment, revenue management, synergies and distribution-cost optimization as priorities.
- Management estimates annual contingent-consideration payments of $25–$49 million. It plans to expand its West Memphis, Arkansas plant by fiscal 2020 and close its Memphis, Tennessee plant after the expansion; remaining closure costs are expected to be immaterial.
- A 10% increase in relevant commodity prices would, assuming unchanged volume, increase costs over the next 12 months by an estimated $57.9 million. A 1% increase in average market rates would raise next-12-month interest expense by approximately $3.7 million, assuming no change in financial structure.
- The company depends substantially on Coca-Cola brands: approximately 85% of bottle/can sales volume to retail customers consists of Coca-Cola Company products. Walmart and Kroger represented approximately 22% of first-half net sales combined. The filing also discloses related-party transactions and leases.
- The company guarantees $23.9 million of South Atlantic Canners debt and reports $198.0 million of future marketing-contract payments. Management does not expect material loss from the guarantee or ordinary-course legal proceedings. No material risk-factor changes from the 2018 Form 10-K were reported; disclosure controls were deemed effective.
- The company was in compliance with nonpublic-debt covenants. S&P’s rating outlook was negative and Moody’s outlook stable. Management said it believes liquidity is sufficient for at least the next 12 months.
Important facts for investors to verify
- How much of the reported earnings recovery is sustainable after separating operating improvement from the large, noncash contingent-consideration remeasurement and other adjustments?
- Whether pricing and favorable mix can continue to offset commodity, concentrate and distribution costs, particularly as first-half bottle/can volume growth was modest.
- The assumptions behind the $412.5 million contingent-consideration liability and the expected annual payment range of $25–$49 million.
- Cash conversion, low cash on hand, debt repayment progress, refinancing needs and the implications of the negative S&P outlook.
- Exposure to commodity-price increases, major-customer concentration, Coca-Cola-related commercial arrangements, and the SAC guarantee.