Coca-Cola Bottling Co. Consolidated — Q1 2018 Form 10-Q
Business context and period. The filing covers the 13 weeks ended April 1, 2018; the comparable period ended April 2, 2017. The company distributes, markets and manufactures nonalcoholic beverages across 14 states and the District of Columbia. Results reflect the expanded territories and facilities acquired in the 2017 System Transformation. Unless noted, amounts below are in millions of dollars.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,072.1 | $865.7 |
| Gross profit / gross margin | $364.9 / 34.0% | $332.0 / 38.4% |
| Operating income (loss) | $(19.0) | $15.0 |
| Net loss attributable to company | $(14.2); $(1.52) per share | $(5.1); $(0.54) per share |
| Operating cash flow | $(80.7) | $116.5 |
| Capital expenditures | $42.0 | $41.6 |
- Sales rose 23.8%; physical case volume increased 19.6%, to 78.0 million cases. On management’s non-GAAP organic basis, bottle/can sales increased 2.4% and volume 2.2%.
- Cost of sales rose 32.5%, faster than sales, compressing gross margin. Selling, delivery and administrative expense increased 21.1% to $383.9 million, while declining as a share of sales to 35.8% from 36.6%.
- Cash and cash equivalents were $8.5 million at April 1, versus $16.9 million at year-end. Current assets were $828.9 million and current liabilities $575.0 million; reported working capital was $253.9 million.
- Long-term debt was $1,211.1 million, up from $1,088.0 million at year-end. Net debt plus capital lease obligations was $1,244.0 million. The company issued $150 million of 3.96% senior notes due 2030 during the quarter. It reported compliance with debt covenants.
- Cash dividends were $0.25 per share for each common-stock class.
Material changes and management commentary
- Acquisitions from the 2017 System Transformation contributed $274.5 million of Q1 2018 sales, but a $(0.9) million operating loss. The prior-year quarter included $70.9 million of sales and $6.0 million of operating income from territories later divested. These changes materially affect year-over-year comparability.
- Management cited commodity and transportation cost increases, lower-margin acquired territories, a mix shift toward still beverages, and structural changes in distribution-right amortization and bottler sales margins as causes of margin pressure. It expects these pressures to continue through 2018 and is taking pricing actions in certain markets.
- Management also cited poor weather and product-sourcing challenges associated with the evolving integrated business platform; the timing of Easter partly offset these effects. Integration and conversion to the CONA information-technology system continued.
- Q1 included $12.5 million of System Transformation expenses. Management expects a further $30–$35 million during the remainder of 2018 and says the system conversion is expected to finish later in the year. Capital expenditure guidance was reduced to $160–$180 million for 2018, with $120–$135 million expected for the remainder of the year.
- Operating cash flow turned negative, principally reflecting working-capital outflows and the absence of the $87.1 million Territory Conversion Fee received in Q1 2017. Cash used in operating activities was $80.7 million; inventory, receivables and payments of accrued compensation and other liabilities contributed to working-capital use.
Outlook, risks and unusual items
- Management said it believes available capital sources are sufficient for at least the next 12 months. S&P reaffirmed its BBB rating after quarter-end but changed the outlook from stable to negative; Moody’s outlook was stable.
- A 1 percentage-point increase in average market rates over the next 12 months would, under the company’s stated assumptions, increase interest expense by about $4.8 million. A 10% increase in relevant commodity prices could raise costs by about $54.6 million over 12 months, assuming unchanged volume.
- Estimated annual sub-bottling payments tied to acquired territories are $23–$47 million; the related contingent-consideration liability was $368.8 million. Its fair value depends on forecasts and discount-rate assumptions and may fluctuate.
- The company guarantees $23.9 million of South Atlantic Canners debt; maximum exposure including its investment was $31.3 million. Management did not expect a material loss. It also disclosed $126.2 million of future marketing-contract payments and ordinary-course litigation and tax audits, with no material adverse outcome expected based on management’s assessment.
- Other notable items: a favorable $5.2 million noncash fair-value adjustment to contingent consideration helped other income; commodity-hedge mark-to-market effects were unfavorable by $3.0 million pre-tax. The company’s adjusted net loss was $7.7 million, or $0.82 per share, a non-GAAP measure that excludes specified items.
Important facts for investors to verify
- How much of reported sales and volume growth is acquisition-related versus sustainable organic growth, and whether acquired operations improve profitability.
- Whether gross-margin pressure, commodity and freight costs, and the lower-margin product mix persist or are offset by pricing and integration efficiencies.
- Working-capital trends, cash generation, planned capital spending, and the company’s ability to manage higher debt and upcoming maturities.
- Actual System Transformation costs and completion timing for the CONA system conversion compared with management’s estimates.
- Changes in S&P’s negative outlook, floating-rate exposure, commodity sensitivity, and the valuation assumptions underlying contingent consideration.