Coca-Cola Bottling Co. Consolidated — Q2 2014 Form 10-Q
Business context and period: The filing covers the quarter and first half ended June 29, 2014, compared with the corresponding 2013 periods. The company bottles, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, in the southeastern United States. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $459.5 | $429.0 | $848.1 | $812.5 |
| Gross margin | $185.5 | $170.3 | $341.9 | $324.0 |
| Gross margin rate | 40.4% | 39.7% | 40.3% | 39.9% |
| Operating income | $31.3 | $26.9 | $43.4 | $42.4 |
| Net income attributable to company | $13.8 | $11.2 | $16.2 | $16.1 |
| Diluted earnings per share | $1.48 | $1.21 | $1.74 | $1.73 |
- Q2 sales rose 7.1%, primarily on 5.3% higher bottle/can retail volume and a 2.1% increase in per-unit pricing. First-half sales rose 4.4%, on 3.6% higher volume and 1.4% higher per-unit pricing.
- First-half operating income increased 2.3%, slower than sales growth, as selling, delivery and administrative expenses rose 6.0%. Those expenses were 35.2% of sales versus 34.7% a year earlier.
- First-half operating cash flow was $11.8 million, down from $25.0 million. The filing attributes the decline mainly to higher income-tax payments and inventory investment. Capital expenditures were $37.0 million; investing cash outflow was $48.1 million, including the territory acquisition. Cash ended the period at $22.9 million.
- At June 29, 2014, debt was $453.7 million and capital lease obligations were $62.1 million; net debt and leases were $492.9 million. The company had $60 million drawn on its $200 million revolving facility, with $140 million available, plus $20 million outstanding on an uncommitted line.
- Current assets were $314.6 million and current liabilities $237.4 million; reported working capital was $77.3 million. The company reported compliance with its revolving-facility covenants. Dividends remained $0.25 per share per quarter.
Material changes and notable items
- On May 23, 2014, the company acquired distribution territories in Johnson City and Morristown, Tennessee, for $12.2 million cash. The acquired territories added 1.2 percentage points to Q2 and 0.6 points to first-half bottle/can volume growth; their reported financial impact was not material for the periods.
- The acquisition included a ten-year renewable beverage agreement and contingent sub-bottling payments estimated at $1.0–$1.8 million annually. The company recorded $13.0 million of contingent consideration, valued using forecast-based assumptions.
- First-half expenses included $5.1 million of pre-tax territory-expansion costs. Commodity hedging generated a $0.9 million favorable pre-tax mark-to-market adjustment in the first half, versus a $0.5 million unfavorable adjustment in 2013.
- First-half net income attributable to the company was nearly flat year over year despite higher consolidated net income, partly reflecting increased income attributable to Piedmont’s noncontrolling interest.
Outlook, risks and contingencies
- Management said it had sufficient resources for its business plan and expected to meet working-capital needs and maintain appropriate capital spending for at least 12 months. No specific revenue or earnings forecast was provided.
- Management projected 2014 capital additions of $80–$90 million, remaining-2014 income-tax cash payments of $10–$17 million, pension contributions of $5–$10 million, and postretirement medical payments of about $3 million. Tax projections exclude potential requirements from further territory expansion.
- The company was pursuing a potential further franchise-territory expansion with The Coca-Cola Company; there was no assurance an agreement or transaction would result. The company also noted that marketing support from beverage suppliers is not contractually assured.
- Key exposures include dependence on Coca-Cola products and beverage agreements, customer concentration (Wal-Mart represented 15% of first-half net sales), commodity costs, interest rates, and competition. Management estimated that a 10% rise in relevant commodity prices could increase costs by about $26 million over the next 12 months, assuming unchanged volume.
- The company guaranteed $35.0 million of cooperative debt and disclosed $23.4 million in standby letters of credit. It reported ordinary-course legal matters and tax audits, but did not expect these to have a material adverse effect. A multi-employer pension plan was in critical status; contribution increases were to begin in January 2015.
- Second- and third-quarter sales are typically seasonally higher, so the second quarter is not necessarily representative of full-year performance. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Investor facts to verify
- Whether the volume, pricing and margin trends continued after Q2, particularly given seasonality and higher operating expenses.
- Working-capital and operating-cash-flow performance, including inventory levels and tax-payment timing.
- Debt and liquidity capacity, covenant headroom, and the planned refinancing of $100 million of notes maturing in April 2015.
- Final acquisition accounting and the assumptions and recurring cost implications of the $13.0 million contingent-consideration liability.
- Progress and terms, if any, for the proposed additional franchise expansion, alongside commodity, supplier-funding and pension-plan exposures.