Coca-Cola Bottling Co. Consolidated — Q3 2016 Form 10-Q
Business context and period. The filing covers the 13 and 39 weeks ended October 2, 2016, compared with the equivalent periods in 2015. The company distributes and produces nonalcoholic beverages, primarily Coca-Cola products. Results reflect substantial territory and manufacturing expansion transactions, so reported growth is not a like-for-like comparison. Unless stated otherwise, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | First 3 quarters 2016 | First 3 quarters 2015 |
|---|---|---|---|---|
| Net sales | $849.0 | $618.8 | $2,314.9 | $1,686.7 |
| Gross profit | $327.2 | $238.5 | $890.8 | $660.2 |
| Gross margin | 38.5% | 38.6% | 38.5% | 39.1% |
| Operating income | $39.8 | $27.7 | $106.9 | $82.9 |
| Operating margin | 4.7% | 4.5% | 4.6% | 4.9% |
| Net income attributable to the company | $23.1 | $25.6 | $28.8 | $54.7 |
| Basic earnings per share | $2.48 | $2.75 | $3.09 | $5.89 |
| Net interest expense | $8.5 | $6.7 | $27.6 | $20.8 |
Third-quarter sales rose 37.2%; operating income rose 43.8%, while company-attributable net income fell 9.4%. For the first three quarters, sales rose 37.2%, but company-attributable net income declined 47.4%. Margins above are calculated from reported figures. Management’s non-GAAP comparable basic EPS was $2.45 versus $2.05 for Q3 and $5.06 versus $4.51 year to date; these adjusted measures exclude specified items and are not GAAP results.
- Cash flow: First-three-quarter operating cash flow was $128.1, versus $72.5 in 2015. Investing cash outflow was $306.1, including $174.6 of net acquisition spending and $124.6 of property, plant and equipment additions. Financing provided $176.6. Cash declined $1.3 during the period to $54.2.
- Liquidity: Current assets were $580.7 and current liabilities $434.8, leaving working capital of $145.8. The revolving facility had $65.0 drawn and $385.0 available at October 2. The company reported compliance with its credit facility and term-loan covenants.
- Debt: Reported debt was $820.1, including $300.0 under a floating-rate term loan and $65.0 drawn on the revolving facility. Capital lease obligations were $50.5. Net debt and capital leases, less cash, totaled $816.4, compared with $619.9 at January 3, 2016. The company repaid $164.8 of notes that matured in June.
- Dividends: Cash dividends were $0.25 per share for Q3 and $0.75 per share for the first three quarters, unchanged from 2015.
Material changes and operating drivers
- Expansion territories and related facilities contributed $298.3 of Q3 sales and $2.4 of operating income; for the first three quarters they contributed $727.9 of sales and $19.7 of operating income. Management attributed most of reported sales growth to acquired territories. Excluding the 2015 and 2016 expansion territories, bottle/can retail volume increased 2.7% in Q3 and 4.7% year to date, with still beverages particularly strong.
- Q3 2016 sales growth also included $11.8 from increased legacy-territory and earlier-expansion volume. Year-to-date growth included $57.6 from volume and $21.3 from higher bottle/can pricing in those territories. Still beverages’ share of bottle/can volume increased; energy products, including expanded Monster distribution, contributed to growth.
- Year-to-date gross margin declined about 0.7 percentage points. Cost of sales rose 38.7%, faster than sales, while selling, delivery and administrative expenses rose 35.8%; the latter declined as a share of sales to 33.9% from 34.2%.
- Depreciation expense increased with the larger asset base. Capital expenditure additions excluding acquisitions were $124.6, compared with $104.4 in 2015. Total assets increased to $2.25 billion from $1.85 billion at January 3, 2016.
Outlook, commentary, risks and unusual items
- Outlook: No earnings or revenue guidance is provided. Management expected $50–$100 of additional capital expenditure for the remainder of fiscal 2016, excluding acquisitions, and stated that available capital should meet needs for at least the next 12 months. It also cited annual contingent sub-bottling payments of approximately $10–$18 for the 2015 and 2016 expansion territories.
- Expansion plans: On September 1, 2016, the company signed agreements for further distribution and manufacturing assets. Initial closings occurred October 28, after the reporting date. Additional proposed territory transactions and exchanges remained subject to definitive agreements or completion.
- Noncash valuation items: The fair-value liability for future sub-bottling payments was $218.4 at October 2, up from $136.6 at year-end. A $26.1 year-to-date noncash expense reduced reported earnings, including a favorable $7.4 adjustment in Q3. Management cautioned that valuation depends on long-term forecasts and discount-rate assumptions and could change materially.
- Other comparability items: Year-to-date 2016 included $23.2 of expansion and transition expenses, a $4.0 charitable contribution, and $4.2 of favorable commodity-hedge mark-to-market adjustments. 2015 included a $22.7 gain on the sale of BYB and an $8.8 gain on a territory exchange.
- Risk exposures and contingencies: A 1% increase in average market rates over the next 12 months was estimated to raise interest expense by about $3.7. A 10% increase in relevant commodity prices was estimated to increase next-12-month costs by about $38, assuming unchanged volume. The company guaranteed $32.5 of cooperative debt; maximum exposure including its equity investments was $71.5. It also had $29.7 of standby letters of credit and $68.9 of future marketing-contract payments. Management reported no material change to the risk factors in its 2015 annual report and did not expect ordinary-course legal claims to have a material adverse effect.
- Dependence and agreements: The company’s business is primarily tied to Coca-Cola products and its relationship with The Coca-Cola Company. New territory agreements require continuing sub-bottling payments and impose operating obligations. The contemplated final beverage agreement includes volume, capital spending, termination and potential-sale restrictions.
Important facts for investors to verify
- How much of subsequent sales and earnings growth comes from acquired territories versus comparable volume, pricing and mix, and whether acquired-territory operating returns improve.
- The full economics of expansion transactions: purchase-price adjustments, expected capital spending, ongoing sub-bottling payments and the $218.4 fair-value liability’s sensitivity to assumptions.
- Debt and liquidity after the October 28 acquisitions, including floating-rate exposure, covenant headroom and remaining revolver availability.
- Whether commodity, distribution and labor costs can be offset by pricing and productivity without weakening volumes or margins.
- The terms and status of proposed territory exchanges and the final beverage agreement, including its operational requirements and restrictions on a sale of the business.