Coca-Cola Bottling Co. Consolidated — 2014 Form 10-K
Business context and reporting period. The company is the largest independent Coca-Cola bottler in the United States, producing, marketing and distributing nonalcoholic beverages, primarily Coca-Cola products. The filing covers the 52-week fiscal year ended December 28, 2014; the company notes that fiscal 2015 will have 53 weeks. This is an annual filing, not a standalone fourth-quarter report.
Financial performance and liquidity
- Revenue: Net sales were $1.746 billion, up 6.4% from $1.641 billion. Bottle/can volume to retail customers increased 5.9%, including 3.2% attributable to acquired expansion territories; bottle/can pricing per unit rose 1.4%.
- Product mix: Still-beverage bottle/can volume rose 14.0% and sparkling-beverage volume rose 4.0%. Still beverages were 20.1% of bottle/can volume, versus 18.7% in 2013.
- Margins and earnings: Gross margin was $705.2 million, or 40.4% of sales, compared with $658.6 million, or 40.1%. Operating income increased 16.7% to $86.0 million; operating margin was approximately 4.9%, versus 4.5%. Net income attributable to the company was $31.4 million, up 13.3%; diluted EPS was $3.37 for Common Stock and $3.35 for Class B Common Stock.
- Cash flow and investment: Operating cash flow was $91.9 million, down from $96.4 million. Investing cash outflow was $124.3 million, including $84.4 million of property and equipment additions and $41.6 million for territory acquisitions. Financing provided $29.7 million. Cash ended the year at $9.1 million.
- Debt and liquidity: Debt and capital lease obligations totaled $503.8 million, versus $463.6 million a year earlier; net debt and capital lease obligations were $494.7 million. Year-end borrowings under the $350 million revolving facility were $71.0 million, leaving $279.0 million available. A $100 million senior note maturity was due in April 2015; management expected to refinance it through the facility. Total assets were $1.433 billion and net working capital was $59.6 million.
- Returns: Dividends were $1.00 per share for each common-stock class, or $9.3 million in total cash dividends.
Material changes and unusual items
- Sales increased $105.0 million year over year, led by retail bottle/can volume and pricing. Higher still-beverage sales were a notable driver; sales to other Coca-Cola bottlers declined 4.2% in volume.
- Two 2014 territory acquisitions contributed $45.1 million of sales and $3.4 million of operating income. Expansion-related selling, delivery and administrative expenses were $12.9 million. The company recorded a $46.9 million liability for estimated future sub-bottling payments and a $1.1 million unfavorable fair-value adjustment.
- Income tax expense increased to $19.5 million from $12.1 million, and the effective tax rate rose to 35.1% from 27.4%, reflecting, among other factors, prior-year tax-law benefits and adjustments to uncertain tax positions.
- Other comprehensive loss was $31.7 million, primarily from pension and postretirement actuarial losses associated with lower discount rates and updated mortality assumptions. The pension plan’s funded deficit increased to $67.0 million from $25.4 million.
- Quarterly data show fourth-quarter 2014 sales of $440.6 million and net income attributable to the company of $3.0 million; fourth-quarter 2013 sales were $394.3 million and the company recorded a $4.6 million net loss. 2014 fourth-quarter results included expansion costs and a contingent-consideration fair-value expense.
Outlook, risks and contingencies
- Management expects 2015 property, plant and equipment additions of $110 million to $130 million; cash income taxes of $12 million to $19 million; pension contributions of $7 million to $10 million; and pension expense of approximately $1.7 million. Postretirement benefit payments are expected to be about $3 million.
- Further territory transactions were pending after year-end, including the Paducah/Pikeville acquisition and the Jackson-for-Lexington asset exchange. The Louisville/Evansville transaction closed in February 2015. Management stated it had adequate resources for its business plan and anticipated expansion strategy for at least 12 months.
- Major risks include reliance on Coca-Cola Company products (about 88% of 2014 bottle/can retail volume), large-customer concentration (Walmart represented about 15% of sales; Food Lion about 6%), competition and changing consumer preferences, commodity and fuel costs, and dependence on a limited number of can and bottle suppliers.
- Expansion territories increase reliance on externally supplied finished goods and require ongoing sub-bottling payments. Integration, investment returns, and compliance with beverage-agreement requirements are risks. The 2014 expansion territories were excluded from management’s and the auditor’s internal-control assessment; they represented approximately 7.4% of year-end assets and 2.6% of annual sales. Controls for the assessed company were reported effective.
- Other exposures include floating-rate debt, pension and healthcare obligations, a multi-employer pension plan in critical status, and guarantees of cooperative debt. Guarantees totaled $30.9 million; management did not expect the cooperatives to default. Ordinary-course legal matters were not expected by management to have a material adverse effect.
- The Harrison family controlled approximately 86% of total voting power. The filing also discloses related-party leases involving entities associated with company directors and the CEO.
Important facts for investors to verify
- Whether growth and margins persist after separating acquired-territory contributions, expansion costs, and the 53-week 2015 comparison.
- Actual cash flow, capital spending, borrowing levels, and repayment or refinancing of the $100 million note due in April 2015.
- Integration progress and returns from acquired territories, including the final terms and annual cash burden of sub-bottling payments.
- Changes in Coca-Cola marketing support, concentrate and finished-goods pricing, and dependence on Walmart, Food Lion, and key packaging suppliers.
- Developments in pension funding, the multi-employer plan’s rehabilitation requirements, and the implications of related-party arrangements and concentrated voting control.