Coca-Cola Bottling Co. Consolidated — Q3 2014 Form 10-Q
Reporting period: Quarter and first nine months ended September 28, 2014. The filing is under the company’s then-registered name, Coca-Cola Bottling Co. Consolidated. Unless noted, amounts below are in U.S. dollars.
Business context and results
The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, across eleven states, chiefly in the Southeast. It is highly reliant on The Coca-Cola Company for products and concentrate. Results are seasonal, with generally higher unit sales in the second and third quarters.
- Q3 revenue: $457.7 million, up 5.3% year over year. Bottle/can volume to retail customers rose 5.4% and sales price per unit rose 1.4%; still beverages and the Johnson City/Morristown territory acquisition contributed to volume growth.
- Q3 profitability: Gross margin was $184.9 million; gross margin percentage edged down to 40.4% from 40.5%. Operating income was $28.4 million, down 5.8%; net income attributable to the company was $12.1 million, down 25.0%. Diluted EPS was $1.30 versus $1.74.
- First nine months: Revenue was $1.306 billion, up 4.7%; gross margin was $526.8 million, with margin percentage up to 40.3% from 40.1%. Operating income was $71.8 million, down 1.0%; company-attributable net income was $28.4 million, down 12.1%. Diluted EPS was $3.05 for Common Stock and $3.04 for Class B, versus $3.47 and $3.46, respectively.
- Cash flow, first nine months: Operating cash flow was $50.0 million versus $75.0 million a year earlier. Investing used $72.3 million, including $61.4 million of property and equipment additions and $12.2 million for the territory acquisition. Financing provided $33.6 million; cash increased $11.3 million to $23.1 million.
- Balance sheet and liquidity: At September 28, cash was $23.1 million, current assets $303.9 million and current liabilities $217.8 million; working capital was $86.0 million. Debt was $443.7 million and capital lease obligations $60.6 million, for total net debt and leases of $481.2 million. The company had $150 million available on its then-existing $200 million revolving facility.
Changes versus the comparable period
- Revenue growth did not translate into higher operating profit: selling, delivery and administrative expenses rose 7.3% in Q3 and 6.4% year to date, exceeding sales growth. Reported drivers included compensation and incentives, marketing, territory-expansion costs, and insurance expense.
- Q3 net income was also affected by higher income tax expense ($7.4 million versus $4.8 million). Year-to-date tax expense rose to $17.8 million from $14.6 million, in part because 2013 included favorable tax legislation and uncertain-tax-position adjustments.
- Year-to-date operating cash flow declined, with management citing higher tax and pension payments and a larger inventory increase. Capital spending was also higher than in 2013.
- The May 2014 Johnson City and Morristown, Tennessee acquisition cost $12.2 million and had no significant reported impact on Q3 or nine-month results. It added $13.8 million of identifiable intangible assets and a $13.0 million estimated contingent-consideration liability.
Outlook, risks and unusual items
- Management projected 2014 property, plant and equipment additions of $80–$90 million, remaining-2014 income tax cash requirements of $3–$8 million, and pension contributions of $1–$3 million. No earnings or revenue guidance was provided in the supplied filing text.
- After quarter-end, the company replaced its $200 million revolver with a $350 million unsecured facility maturing in October 2019, with up to $50 million available for letters of credit and potential expansion to $450 million subject to conditions. It reported compliance with facility covenants. The $20 million uncommitted line was refinanced under the new facility on October 31. The company expected to use the facility to repay $100 million of senior notes due April 2015.
- Further territory developments after quarter-end: Knoxville closed on October 24 for approximately $29.5 million, subject to adjustment. An exchange involving Lexington, Kentucky and Jackson, Tennessee was expected to close in the first half of 2015; additional proposed territory expansion remained subject to agreement and completion.
- Commodity exposure is material: management estimated that a 10% increase in relevant commodity prices could increase costs by approximately $26 million over the next 12 months, assuming unchanged volume. A 1% increase in market interest rates was estimated to increase next-12-month interest expense by about $0.7 million.
- Concentration and supply risks include approximately 89% of year-to-date bottle/can volume being Coca-Cola products and Wal-Mart accounting for approximately 15% of year-to-date net sales. The company also relies on two domestic can suppliers and cooperative suppliers for substantial packaging and finished-product needs. Reduced marketing support from beverage suppliers could adversely affect results.
- Off-balance-sheet and other commitments include $32.7 million of guarantees of cooperative debt, $23.4 million of standby letters of credit, and $40.0 million of future long-term marketing-contract payments. Management did not expect material loss from ordinary-course litigation or the guarantees, but outcomes are uncertain. A multi-employer pension plan was in critical status; contribution rates were expected to increase from January 2015.
- Unusual comparability items included Q3 2013’s $3.1 million favorable refund of prior cooperative marketing funds; 2014 territory-expansion costs of $2.6 million in Q3 and $7.6 million year to date; and tax benefits in 2013 from legislation and uncertain-tax-position changes. Commodity hedge fair-value changes were a $0.3 million Q3 2014 loss and a $0.6 million year-to-date gain.
Important facts for investors to verify
- Whether sales growth and still-beverage momentum can offset continuing cost growth and restore operating-profit and earnings growth.
- How much of growth reflects the acquired territories, and the eventual cash and earnings impact of contingent sub-bottling payments and the Knoxville acquisition.
- Execution of the new credit facility, refinancing of the April 2015 notes, debt levels, and covenant headroom.
- Cash conversion, inventory growth, and delivery and capital-spending trends, especially given seasonality.
- Exposure to Coca-Cola supply and marketing support, major customers, commodity prices, cooperative guarantees, and pension-plan obligations.