Coca-Cola Bottling Co. Consolidated — FY2015 Form 10-K
Reporting period: Fiscal year ended January 3, 2016 (53 weeks); comparison is primarily with the 52 weeks ended December 28, 2014. The filing also reports fourth-quarter results. The company produces, markets and distributes nonalcoholic beverages, predominantly Coca-Cola brands, across legacy and newly acquired territories in the southeastern and adjacent United States.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2,306.5 million | $1,746.4 million |
| Gross margin | $901.0 million; 39.1% of sales | $705.2 million; 40.4% of sales |
| Income from operations | $98.1 million; 4.3% of sales | $86.0 million; 4.9% of sales |
| Net income attributable to the company | $59.0 million; diluted EPS $6.33 common / $6.31 Class B | $31.4 million; diluted EPS $3.37 common / $3.35 Class B |
| Net cash provided by operating activities | $108.3 million | $91.9 million |
| Capital expenditures | $168.7 million | $86.4 million |
| Cash and cash equivalents at year-end | $55.5 million | $9.1 million |
| Debt and capital lease obligations | $679.7 million | $503.8 million |
| Net working capital | $109.5 million | $59.6 million |
- Sales increased 32.1%, principally reflecting acquired territories. Those territories contributed $437.0 million of FY2015 sales and $6.9 million of operating income. In legacy territories, bottle/can retail volume rose 6.0% and sales price per unit rose 4.9%.
- Still-beverage bottle/can volume grew 37.2% overall, versus 27.3% growth for sparkling beverages; acquisitions contributed materially to both reported category growth rates.
- Gross margin percentage fell 1.3 percentage points, reflecting higher raw-material costs and greater purchases of finished products, partly offset by pricing, volume and marketing support. Selling, delivery and administrative expenses rose 29.7%, but declined to 34.8% of sales from 35.5%.
- FY2015 net income included a $22.7 million gain on sale of BYB Brands, an $8.8 million gain on a territory exchange and a $2.0 million after-tax bargain-purchase gain. It also included $20.0 million of Expansion Transaction acquisition and transition costs and a $3.6 million noncash unfavorable fair-value adjustment to contingent consideration.
- Fourth-quarter net sales were $619.7 million versus $440.6 million a year earlier; net income attributable to the company was $4.3 million versus $3.0 million. Q4 included $5.8 million of expansion-related expenses, a $1.2 million commodity-hedge mark-to-market charge and a $3.3 million bargain-purchase gain.
Liquidity, debt and capital
- Year-end debt comprised $623.9 million of long-term debt and $55.8 million of capital lease obligations. Net debt and leases, after $55.5 million cash, were $624.2 million.
- The company issued $350 million of 3.8% unsecured senior notes due 2025. Its $450 million revolving credit facility had no borrowings outstanding at year-end; the company reported covenant compliance.
- $164.8 million of senior notes were due in June 2016; management intended to refinance them. Management stated it believed available capital sources were sufficient for at least the next 12 months.
- Operating cash flow was $108.3 million; investing cash use was $217.3 million, including $163.9 million of cash capital expenditures and $81.7 million for territory acquisitions. Financing activities provided $155.5 million.
- Recorded acquisition-related contingent consideration was $136.6 million, based on estimated future sub-bottling payments. Its valuation is sensitive to cash-flow forecasts and discount rates.
Material changes, outlook and risks
- Expansion: The company acquired multiple Tennessee, Kentucky, Indiana, Virginia and North Carolina distribution territories during 2015 and continued pursuing further territory and manufacturing expansions. Subsequent to year-end, it closed additional Maryland and Virginia distribution acquisitions and acquired the Sandston, Virginia manufacturing facility.
- Outlook: Management forecast 2016 property, plant and equipment additions of $175–$225 million, excluding further Expansion Transactions; pension contributions of $10–$12 million; and income-tax cash payments of $20–$30 million, excluding taxes from additional territory transactions. Management expected interest expense to increase with higher debt and anticipated acquisitions. No revenue or earnings guidance was provided.
- Business and contract exposure: Coca-Cola products represented about 87% of bottle/can retail volume. Distribution rights depend on compliance with bottling agreements; new comprehensive agreements impose ongoing payments, investment and operating obligations. Final agreement provisions include Coca-Cola approval rights over certain potential buyers of the business.
- Other key risks: Wal-Mart represented about 15% of sales and Food Lion about 5%; customer losses could be material. Other exposures include integration and return risks from expansion, concentrate and input-cost volatility, reliance on a small number of packaging suppliers and external finished-product supply, changing consumer preferences, weather, regulation, and benefit costs. A 10% commodity-price increase was estimated to raise costs by about $25 million over the next 12 months, assuming unchanged volume.
- Contingencies and governance: The company guaranteed $30.6 million of cooperative debt; maximum exposure including equity interests was estimated at $71.6 million if both cooperatives borrowed to capacity. Management did not expect ordinary-course legal proceedings to have a material adverse effect. The Harrison family controlled approximately 86% of voting power; Coca-Cola owned 34.8% of common stock but about 5% of combined voting power. The company reported effective internal control over financial reporting, and the auditor issued an unqualified opinion.
Important facts for investors to verify
- How much of reported growth and earnings improvement is sustainable after separating acquired-territory results, the extra fiscal week and transaction-related gains and costs.
- Whether expansion territories and planned manufacturing acquisitions can be integrated profitably, and the related future capital requirements and sub-bottling payments.
- The refinancing outcome for the $164.8 million June 2016 maturity, covenant headroom and liquidity after planned acquisitions and capital spending.
- Future gross-margin performance given input-cost exposure, pricing capacity, marketing support and finished-goods sourcing requirements.
- Terms and effects of the Final Comprehensive Beverage Agreement, including performance obligations, Coca-Cola’s buyer-approval rights and sale provisions.
- Customer concentration, particularly Wal-Mart, and the sensitivity of demand to consumer trends, regulation and weather.