Coca-Cola Bottling Co. Consolidated — Q1 2017 Form 10-Q
Business context and period. The company produces, markets and distributes nonalcoholic beverages in 16 states. This unaudited report covers the 13 weeks ended April 2, 2017; comparisons are with the 13 weeks ended April 3, 2016. The quarter includes major territory and facility acquisitions from Coca-Cola Refreshments USA (CCR), as Coca-Cola Company continued refranchising its North American bottling operations.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Net sales | $865.7 million | $625.5 million | Up 38.4%; $264.9 million of 2017 sales came from 2016 and Q1 2017 expansion transactions. |
| Gross profit / margin | $332.0 million / 38.4% | $243.9 million / 39.0% | Gross profit up 36.1%; margin down about 0.6 percentage points. |
| Operating income / margin | $13.6 million / 1.6% | $12.4 million / 2.0% | Operating income up 9.7%, slower than sales growth. |
| Net loss attributable to the company | $(5.1) million | $(10.0) million | Loss per share was $(0.54), versus $(1.08). |
| Interest expense, net | $9.5 million | $9.4 million | Up $0.1 million. |
| Operating cash flow | $116.5 million | $(15.2) million | 2017 included an $87.1 million one-time CCR fee and cash generated by acquired territories. |
| Investing / financing cash flow | $(197.1) million / $90.6 million | $(138.8) million / $131.1 million | Investing outflow primarily reflected acquisitions and capital spending. |
Management’s non-GAAP comparable results were net income of $4.2 million and basic EPS of $0.45 in Q1 2017, versus $4.2 million and $0.45 in Q1 2016. These measures adjust for items including acquisitions and transition costs, commodity hedge fair-value changes, and acquisition-related contingent consideration remeasurement; they are not substitutes for GAAP results.
Financial position and liquidity
- At April 2, 2017, cash was $31.9 million, current assets $659.2 million, and current liabilities $466.3 million. Working capital was $192.9 million; the current ratio was approximately 1.41.
- Total debt was $1.002 billion, up from $907.3 million at January 1, 2017. Capital lease obligations were $46.9 million; net debt and capital leases were $1.017 billion.
- Debt included $122 million drawn on a $450 million revolving facility, a $300 million term loan, and $585 million of senior notes before discounts and issuance costs. The company issued $125 million of 3.28% notes due 2023 during the quarter.
- The company reported compliance with its financial covenants. Management said it had sufficient capital sources for at least the next 12 months. A 1 percentage-point increase in floating rates was estimated to raise next-12-month interest expense by approximately $4.2 million.
Material changes and unusual items
- Net sales increased $240.2 million year over year. Expansion transactions accounted for $229.6 million of the increase; legacy and earlier expansion-territory retail bottle/can volume rose 2.6%, led by still beverages.
- Expansion transactions contributed $264.9 million in sales and $4.5 million in operating income in Q1 2017. Related transaction and transition expenses were $7.7 million.
- The company converted legacy-territory bottling agreements to a final comprehensive beverage agreement (Final CBA) on March 31. CCR paid a one-time $87.1 million fee, recorded as a deferred liability and to be amortized as a reduction of cost of sales over 40 years.
- Other expense included a noncash $12.2 million unfavorable fair-value adjustment to acquisition-related contingent consideration, compared with $17.2 million in Q1 2016. The liability was $304.0 million at quarter-end; management estimated annual payments under the arrangements could range from $20 million to $36 million.
- Debt and lease obligations, property and equipment, and intangible assets rose with the territory and facility expansion. The company paid $15.6 million for Glacéau distribution rights and incurred $41.6 million in capital expenditures, excluding acquired assets.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management identified territory and manufacturing expansion, revenue management, product innovation, distribution-cost management and productivity as priorities.
- Expected capital expenditures for the remaining three quarters of 2017 were $150 million to $200 million, excluding further expansion acquisitions. Planned 2017 contributions to company-sponsored pension plans were $10 million to $12 million.
- The company completed another Ohio territory and facility acquisition on April 28, 2017, for $87.7 million, subject to adjustment. It also disclosed nonbinding letters of intent for other potential territory transactions.
- Key risks include acquisition integration and continuing sub-bottling payments; the Final CBA’s performance, capital-spending, product and potential-buyer requirements; commodity and floating-rate exposure; and seasonality and weather. Management estimated a 10% increase in relevant commodity prices could increase costs by about $43.2 million over 12 months, assuming no volume change.
- The company guaranteed $28.1 million of manufacturing-cooperative debt; maximum exposure including its equity investments was $71.1 million. It also had $84.1 million of future marketing-contract payments and $29.7 million of standby letters of credit. Management did not expect ordinary-course legal matters or cooperative guarantees to have a material adverse effect.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the prior annual report’s risk factors were reported.
Important facts for investors to verify
- How much reported sales and cash-flow growth is recurring versus attributable to acquired territories and the one-time $87.1 million CCR fee.
- Whether acquired territories can improve operating margins, which declined year over year despite higher sales.
- The expected scale and timing of sub-bottling payments, and the assumptions behind the $304.0 million Level 3 contingent-consideration valuation.
- Funding needs and returns from planned capital spending, additional acquisitions, and the increase in debt.
- Final purchase-price allocations and adjustments for recent acquisitions, and the terms and status of post-quarter proposed transactions.