Coca-Cola Bottling Co. Consolidated — Q1 2015 Form 10-Q
Reporting period: Quarter ended March 29, 2015. The filing is for Coca-Cola Bottling Co. Consolidated, the registrant name used in this 2015 report.
Business context and results
The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, in the southeastern United States. Results include recently acquired distribution territories in Tennessee, Kentucky and Indiana. The first quarter is typically a seasonally weaker period.
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $453.3 million | $388.6 million | +16.6% |
| Gross profit | $184.4 million | $156.3 million | +17.9% |
| Gross margin | 40.7% | 40.2% | +0.5 percentage points |
| Operating income | $16.9 million | $12.1 million | +39.5% |
| Income before tax | $4.5 million | $4.9 million | -8.7% |
| Net income | $3.0 million | $3.1 million | -4.8% |
| Net income attributable to the company | $2.2 million | $2.4 million | -9.2% |
| Basic EPS, Common and Class B | $0.24 | $0.26 | Down $0.02 |
Revenue growth reflected $53.3 million from expansion territories acquired in 2014 and Q1 2015, higher legacy-territory bottle/can pricing, and increased freight revenue. Excluding the acquired territories, retail bottle/can volume declined 0.3%; sparkling beverage volume declined 2.2%, while still beverage volume rose 8.3%. Selling, delivery and administrative expenses increased 16.1%, but declined as a share of sales to 36.9% from 37.1%.
Cash flow, liquidity and debt
- Operating cash flow was negative $1.8 million, versus negative $7.3 million in Q1 2014. The filing cites working-capital investment, including higher receivables and inventory.
- Investing cash outflow was $64.1 million, including $33.4 million for territory acquisitions and $30.8 million of property and equipment additions. Financing cash inflow was $78.0 million, including $82.0 million of revolving-credit borrowings.
- Cash was $21.2 million at quarter-end. Current assets of $340.7 million and current liabilities of $239.2 million imply working capital of $101.5 million and a current ratio of approximately 1.42.
- Debt was $526.8 million and capital lease obligations were $57.6 million; combined obligations less cash were $563.2 million. The company had $153.0 million drawn on its $350 million revolving facility and $197.0 million available at March 29. It was in compliance with facility covenants.
- After quarter-end, the company increased revolving commitments to $450 million. As of May 1, borrowings were approximately $300 million, including funds used to repay $100 million of notes due in April and to finance subsequent territory transactions.
Material changes, outlook and risks
- Territory expansion supported growth: the acquired territories included in Q1 2015 contributed $53.3 million in sales and $2.9 million in operating income. Q1 acquisitions in Cleveland/Cookeville and Louisville/Evansville contributed $18.1 million in sales and $1.8 million in operating income. The company completed additional Kentucky and territory-exchange transactions on May 1, 2015.
- Other expense included a noncash $5.1 million unfavorable remeasurement of acquisition-related contingent consideration, principally due to a change in the discount rate. The related Level 3 liability was $98.5 million at quarter-end; expected annual payments under the arrangements were estimated at $6 million to $11 million.
- Management forecast 2015 capital expenditures of $130 million to $160 million, cash income-tax requirements of $15 million to $22 million, and pension contributions of $7 million to $10 million for the remainder of 2015. Management stated it believed resources were adequate for at least the next 12 months. These are forward-looking estimates, not guarantees.
- Key exposures include commodity prices, floating interest rates, reliance on Coca-Cola brands and marketing support, customer concentration, and integration and ongoing payments associated with territory expansion. A 10% increase in relevant commodity prices was estimated to raise costs by approximately $26 million over 12 months, assuming no volume change; a 1% rate increase was estimated to add approximately $1.5 million of interest expense over 12 months.
- The company guaranteed $34.1 million of debt for manufacturing cooperatives and had $23.4 million in standby letters of credit. Management said ordinary-course legal matters were not expected to have a material adverse effect and reported no material risk-factor changes from its 2014 Form 10-K.
Important facts for investors to verify
- How much reported revenue and operating-income growth is sustainable after separating acquired-territory contributions from legacy performance.
- Whether legacy sparkling-beverage volume, pricing and mix support future gross-margin improvement.
- How the $98.5 million contingent-consideration liability and its valuation assumptions evolve, including continuing sub-bottling payments.
- Whether operating cash flow can fund planned capital spending, working capital, dividends and expansion without materially increasing borrowings.
- Post-quarter debt, facility availability and covenant headroom following the April note repayment and May territory transactions.