Coca-Cola Bottling Co. Consolidated — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 27, 2015; comparisons are with the quarter ended September 28, 2014, and the first nine months of 2015 versus the first nine months of 2014. Financial amounts below are in millions of dollars unless stated otherwise. The company bottles and distributes nonalcoholic beverages, primarily Coca-Cola products, in the United States.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Net sales | $618.8 | $457.7 | $1,686.7 | $1,305.7 |
| Gross margin | $238.5 (38.5%) | $184.9 (40.4%) | $660.2 (39.1%) | $526.8 (40.3%) |
| Operating income | $27.7 | $28.4 | $82.9 | $71.8 |
| Net income attributable to the company | $25.6 | $12.1 | $54.7 | $28.4 |
| Diluted earnings per share | Common $2.74; Class B $2.73 | Common and Class B $1.30 | Common $5.87; Class B $5.85 | Common $3.05; Class B $3.04 |
| Net cash from operating activities | Not presented separately | Not presented separately | $72.5 | $50.0 |
Q3 sales rose 35.2%; first-nine-month sales rose 29.2%. Growth reflected expanded distribution territories, higher legacy-territory bottle/can volumes and pricing, and increased energy and still beverage sales. In legacy territories, Q3 bottle/can volume increased 6.8% and pricing per unit increased 5.4%. Cost of sales grew faster than sales in both periods, reducing gross margin rates. Q3 operating income declined 2.7% despite higher sales; first-nine-month operating income increased 15.4%.
Reported earnings benefited from a $22.7 million gain on the sale of BYB Brands in Q3 and an $8.8 million gain on the Lexington-for-Jackson territory exchange during the first nine months. These gains are not recurring operating revenue. Results also included acquisition and transition costs of $6.9 million in Q3 and $14.2 million year to date, and unfavorable noncash contingent-consideration fair-value adjustments of $4.0 million in Q3 and $3.0 million year to date. Commodity hedging adjustments were unfavorable by $2.1 million in Q3 and $2.2 million year to date.
Cash, liquidity and debt
- At September 27, 2015, cash was $40.5 million and current assets were $415.4 million, versus current liabilities of $476.3 million, a working-capital deficit of $60.9 million.
- Total debt was $548.9 million; capital-lease obligations were $57.5 million. Combined debt and leases totaled $606.4 million, or $565.9 million net of cash. The comparable combined balance was $503.8 million at December 28, 2014.
- The $450 million revolving credit facility had $275 million drawn and $175 million available. The company was in compliance with its financial covenants.
- $164.8 million of senior notes mature in June 2016; management said it intends to refinance them. The company reported weighted-average interest of 4.4% on debt and lease obligations at quarter-end. A 1 percentage-point rise in market rates was estimated to increase next-12-month interest expense by approximately $2.8 million.
- Year-to-date operating cash flow was $72.5 million. Investing activities used $130.5 million, including $104.4 million of capital expenditure and $52.7 million for territory acquisitions, partly offset by $26.4 million from the BYB sale. Financing activities provided $89.4 million. Cash increased $31.4 million to $40.5 million.
- Capital expenditures were $104.4 million year to date, compared with $61.4 million in the prior-year period. Dividends were $0.25 per share in Q3 and $0.75 per share year to date for both common share classes.
Material developments, outlook and risks
- The company completed distribution-territory acquisitions in Tennessee, Kentucky and Indiana and exchanged its Jackson, Tennessee territory for Lexington, Kentucky. Acquired territories involve continuing sub-bottling payments; the estimated fair-value liability was $93.1 million at quarter-end. Expected annual payments were estimated at $6 million to $11 million.
- The company sold BYB to The Coca-Cola Company for $26.4 million cash on August 24, 2015. BYB contributed $21.8 million of year-to-date sales before its sale.
- A September 2015 agreement provides for further distribution-territory expansion, with the first closing occurring October 30, 2015. The company also entered a definitive agreement after quarter-end to acquire three manufacturing facilities, with closings anticipated in the first half of 2016. Additional expansion transactions were contemplated but were not all definitive at the filing date.
- Management stated that available capital was expected to support refinancing, planned expansion, working capital and capital spending for at least the next 12 months. It projected $5 million to $12 million of cash income-tax requirements and $0 to $2 million of pension contributions for the remainder of 2015; these estimates exclude certain future expansion-related tax needs.
- Key risks include commodity-price exposure (management estimated that a 10% increase in relevant commodity prices could add about $25 million to costs over 12 months, assuming unchanged volume), interest-rate exposure, and dependence on marketing support from The Coca-Cola Company, which is not contractually assured. Wal-Mart represented approximately 15% of net sales.
- The company guarantees $32.9 million of cooperative debt and reported $26.4 million of standby letters of credit and $43.8 million of future marketing-contract payments. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
- Future Coca-Cola agreements and the national product supply governance arrangement may affect investment and sourcing decisions. The disclosed Final CBA terms include buyer-approval provisions for certain business sales, minimum capital-spending and volume-performance requirements, and potential limits on a change in control. Management also cautioned that fair-value changes to the long-term sub-bottling liability could materially affect reported noncash expense or income.
Important facts for investors to verify
- How much of sales and earnings growth reflects acquired territories versus organic volume, price and product mix—and the ongoing profitability of those territories after transition costs and sub-bottling payments.
- The refinancing plan and terms for the $164.8 million of notes due in June 2016, alongside capital spending and planned acquisitions.
- The assumptions behind the $93.1 million contingent-consideration valuation and the sensitivity of future reported earnings to discount rates and forecast payments.
- The recurring earnings picture excluding the BYB sale gain and territory-exchange gain, and the reasons gross margin rates declined.
- Final terms, costs and timing of the next distribution and manufacturing expansions, including the governance and sale restrictions in Coca-Cola agreements.
- Commodity-cost exposure, customer concentration, and the possibility that Coca-Cola marketing support varies or declines.