Coca-Cola Bottling Co. Consolidated — Q1 2014 Form 10-Q
Reporting period: First quarter ended March 30, 2014. Unaudited financial statements; amounts below are U.S. dollars in millions unless noted. The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, across 11 states, largely in the Southeast. Results are seasonal, with higher unit sales historically in the second and third quarters.
Financial results and position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $388.6 | $383.6 | +1.3% |
| Gross margin | $156.3 | $153.7 | +1.7% |
| Gross margin rate | 40.2% | 40.1% | +0.1 percentage point |
| Income from operations | $12.1 | $15.5 | -21.8% |
| Net income | $3.1 | $5.7 | -45.3% |
| Net income attributable to the company | $2.4 | $4.9 | -49.6% |
| Diluted earnings per share | $0.26 | $0.52 | -50.0% |
| Net cash used in operating activities | $7.3 | $13.8 | $6.5 less cash used |
- Margins and expenses: Selling, delivery and administrative expenses rose 4.3% to $144.2 million, or 37.1% of sales versus 36.0%. The increase reflected higher marketing, professional fees, insurance and salary costs. Operating income declined despite higher sales and gross margin.
- Cash flow and investment: Investing activities used $16.9 million, including $17.8 million of cash capital expenditures. Financing activities provided $31.2 million, primarily from $35.0 million of revolving-credit borrowings. Cash increased $7.0 million to $18.8 million.
- Liquidity: Current assets were $280.4 million and current liabilities $222.3 million at quarter-end. The company reported $160 million available on its $200 million revolving credit facility and said it was in compliance with its financial covenants.
- Debt: Debt was $433.6 million and capital lease obligations $63.5 million; combined obligations totaled $497.2 million. After cash, net debt and capital lease obligations were $478.4 million, up from $451.8 million at year-end 2013. A $100 million senior note matures in April 2015; management expected to repay it using cash and revolving-facility borrowings.
- Dividends: Quarterly dividends were $0.25 per share for both common classes, unchanged from Q1 2013.
Changes versus the prior-year quarter
- Sales growth came primarily from a 1.7% increase in bottle/can volume to retail customers, led by still beverages, and a 0.6% increase in bottle/can price per unit. Still-beverage bottle/can volume increased 11.8%; sparkling volume declined 0.3%.
- Sales to other Coca-Cola bottlers fell 8.9%, partly offsetting retail growth. The still-beverage mix also carried higher unit costs.
- Gross margin rate was nearly flat, while higher S,D&A costs reduced operating profitability. Net interest expense declined 2.1%, although the overall weighted average rate on debt and lease obligations increased to 5.9% from 5.7%.
- Q1 2014 included a $0.8 million favorable pre-tax commodity-hedge mark-to-market adjustment; Q1 2013 included a $0.5 million unfavorable adjustment. Q1 2013 also benefited from a $0.4 million tax-expense reduction associated with the American Taxpayer Relief Act.
Outlook, commentary and risks
- Management outlook: No specific revenue or earnings forecast was provided. Management said it expected sufficient resources for at least the next 12 months. It projected 2014 capital expenditures of $80–$90 million, remaining-2014 income-tax cash needs of $25–$30 million, pension contributions of $4–$10 million, and postretirement medical payments of approximately $3 million.
- Expansion: On May 7, 2014, after quarter-end, the company signed an agreement to acquire assets serving the Johnson City and Morristown, Tennessee territories for approximately $12.4 million cash, with closing expected by the end of May. A broader proposed territory expansion remained subject to definitive agreement; completion was not assured.
- Exposure and contingencies: Approximately 88% of Q1 bottle/can volume to retail customers consisted of Coca-Cola products. Wal-Mart represented about 15% of total net sales. Management estimated a 10% rise in relevant commodity prices could increase costs by approximately $26 million over the next 12 months, assuming unchanged volume. The company had $31.2 million of guarantees of cooperative debt, $22.9 million of standby letters of credit and substantial purchase and other contractual commitments. Management did not expect ordinary-course legal matters or cooperative guarantees to cause a material loss.
- Other risks and unusual items: Commodity prices, concentrate pricing, marketing support, customer concentration, labor negotiations and interest rates could affect results. One multi-employer pension plan was in critical status; required contribution rates were scheduled to increase beginning in January 2015. Management cited no Q1 goodwill or franchise-rights impairment triggers. It noted that first-quarter results are not representative of full-year results because of seasonality.
Important facts for investors to verify
- Whether sales and still-beverage growth continue, and whether they translate into improved operating income as S,D&A expenses rise.
- Execution, closing terms and ongoing costs of the Tennessee territory acquisition, as well as the status of any broader territory expansion.
- Availability and cost of refinancing or repaying the $100 million April 2015 note, and continued compliance with revolving-credit covenants.
- Actual commodity, concentrate and marketing-support costs compared with management’s estimates and hedge coverage.
- Cash requirements from capital spending, working capital, pension obligations, cooperative guarantees and other contractual commitments.