Coca-Cola Bottling Co. Consolidated — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017 (52 weeks), compared with fiscal 2016 ended January 1, 2017 (52 weeks). The filing also reports fourth-quarter results. CCBCC distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia; approximately 93% of retail bottle/can volume consists of Coca-Cola Company products.
Financial results
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $4.324 billion | $3.156 billion | +37.0% |
| Gross profit / gross margin | $1.541 billion / 35.6% | $1.216 billion / 38.5% | Margin down about 2.9 points |
| Selling, delivery and administrative expenses | $1.445 billion | $1.088 billion | +32.8% |
| Operating income / operating margin | $96.2 million / 2.2% | $127.9 million / 4.1% | Operating income down 24.8% |
| Net income attributable to CCBCC | $96.5 million | $50.1 million | +92.5% |
| Basic earnings per share | $10.35 | $5.39 | +92.0% |
| Cash from operating activities | $307.8 million | $162.0 million | +$145.8 million |
| Cash used in investing activities | $458.9 million | $452.0 million | — |
| Cash provided by financing activities | $146.1 million | $256.4 million | — |
FY 2017 cost of sales was $2.783 billion. Net income included a $39.8 million income tax benefit, versus $36.0 million of tax expense in 2016; the 2017 effective tax rate was negative 63.2%. The filing’s non-GAAP comparable results were $38.3 million net income and $4.11 basic EPS in 2017, versus $49.8 million and $4.64 in 2016. These measures exclude specified acquisition, transformation, tax and other items and should be read alongside GAAP results.
Liquidity and debt: At year-end, cash was $16.9 million, working capital was $155.1 million, current assets were $794.5 million and current liabilities were $639.5 million. Debt was $1.088 billion and capital lease obligations were $43.5 million; net debt and leases were $1.115 billion. The $450 million revolving facility had $207 million drawn. The company reported compliance with debt covenants and stable BBB / Baa2 ratings.
Fourth-quarter results
For the quarter ended December 31, 2017, net sales were $1.126 billion, gross profit was $383.4 million, net income attributable to CCBCC was $77.9 million, and basic EPS was $8.35. In the year-earlier quarter, net sales were $841.6 million, gross profit $324.9 million, attributable net income $21.4 million and basic EPS $2.31. Fourth-quarter 2017 earnings included the estimated $66.6 million net benefit from the Tax Act, so reported quarterly earnings are not directly indicative of underlying performance.
Material changes and drivers
- FY sales rose substantially as the System Transformation expanded territories and manufacturing operations. 2017 and 2016 acquired territories/facilities contributed $1.752 billion of 2017 sales and $29.7 million of operating income, as presented in the company’s comparable-results reconciliation. Overall equivalent case volume increased 31.6%; excluding 2017 and 2016 expansion territories, bottle/can volume increased 1.6%.
- Sales growth outpaced gross-profit growth: cost of sales rose 43.4%, and gross margin contracted. Management cited acquired operations, finished-goods purchases, raw material and manufacturing costs. S,D&A rose 32.8%, while its share of sales decreased to 33.4% from 34.5%.
- Operating income declined despite higher sales, reflecting lower margins, higher costs and $49.5 million of System Transformation acquisition and transition expenses. Net interest expense increased 15.3% to $41.9 million, primarily due to acquisition-related borrowing.
- Operating cash flow included one-time receipts: a $91.5 million bottling-agreement conversion fee and $43.0 million Legacy Facilities Credit (of which $12.4 million was recognized as a gain and the balance deferred). The company’s cash-source analysis excluding certain one-time and specified items reported adjusted operating cash of $235.2 million.
- Capital spending, excluding acquired assets, was $176.6 million; investing cash outflow also reflected $265.1 million of net territory/facility acquisition spending. Year-end cash decreased $4.9 million.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of $200–$230 million, income tax cash payments of $5–$15 million, and pension-plan contributions of $10–$20 million. It expected annual acquisition-related contingent payments of $23–$47 million and planned to complete the CONA information-system transition by the end of 2018.
- The Tax Act reduced the federal corporate rate from 35% to 21% beginning in 2018. The $66.6 million 2017 net tax benefit was provisional and may change; management expected further 2018 benefits, partly offset by limits on deductions and repeal of the domestic production activities deduction.
- Key risks include successful integration of the expanded business, execution of the CONA system transition, commodity and fuel cost volatility, reliance on Coca-Cola brands and agreements, pricing constraints, and customer concentration. Walmart, Kroger and Food Lion represented about 35% of bottle/can volume and 24% of net sales in 2017.
- The Coca-Cola Company’s agreements require sub-bottling payments for acquired territories and impose performance, capital investment and other conditions. The related contingent consideration liability was $381.3 million at year-end, with fair value sensitive to forecasts and discount-rate assumptions.
- Other disclosed exposures include variable-rate debt (a 1-point rate increase was estimated to add about $5.1 million of annual interest expense), commodity risk (a 10% price increase was estimated to add about $47.6 million of costs over 12 months, assuming unchanged volume), a $23.9 million guarantee of SAC debt, and ordinary-course litigation. Management did not expect litigation or the SAC guarantee to cause a material loss.
- The Harrison family controlled approximately 86% of voting power. The Coca-Cola Company held approximately 35% of common shares but about 5% of combined voting power. PwC issued an unqualified audit opinion and concluded internal control over financial reporting was effective.
Investor verification priorities
- Separate organic operating trends from acquired-territory growth, and assess whether modest legacy-market volume gains can support margins after the transformation.
- Reconcile GAAP earnings to comparable earnings, particularly the $66.6 million provisional Tax Act benefit, transition expenses, and other transaction-related gains and adjustments.
- Review operating cash flow quality and recurring cash generation after excluding one-time conversion and facilities-credit receipts; compare cash generation with planned capital spending and debt service.
- Track gross-margin recovery, distribution costs, commodity exposure, and the profitability of acquired operations.
- Monitor the $381.3 million contingent consideration liability, future sub-bottling payments, debt maturities and floating-rate borrowing exposure.
- Confirm CONA implementation progress and integration effectiveness, including financial controls and service costs; review customer concentration and Coca-Cola agreement requirements.