Coca-Cola Bottling Co. Consolidated — Q3 2017 Form 10-Q
Period: 13 weeks ended October 1, 2017; year-to-date figures cover 39 weeks. Amounts below are in millions unless stated otherwise. The company is a major independent U.S. Coca-Cola bottler, producing, marketing and distributing beverages across 14 states and the District of Columbia. Expansion of bottling territories and manufacturing operations through acquisitions and exchanges materially affected year-over-year comparisons.
Financial performance
| Metric | Q3 2017 | Q3 2016 | First 3 quarters 2017 | First 3 quarters 2016 |
|---|---|---|---|---|
| Net sales | $1,162.5 | $849.0 | $3,197.5 | $2,314.9 |
| Gross profit | $410.3 | $327.2 | $1,157.5 | $890.8 |
| Income from operations | $36.1 | $39.8 | $97.1 | $106.9 |
| Net income attributable to company | $17.3 | $23.1 | $18.6 | $28.8 |
| Basic earnings per share | $1.86 | $2.48 | $2.00 | $3.09 |
| Operating cash flow | Not separately provided | Not separately provided | $202.4 | $128.1 |
Q3 gross margin was approximately 35.3% versus 38.5%; operating margin was 3.1% versus 4.7%. Year-to-date gross margin was 36.2% versus 38.5%, and operating margin was 3.0% versus 4.6%. Cost of sales and selling, delivery and administrative expenses both grew more slowly than sales in the quarter, but operating income and attributable net income declined.
Reported Q3 sales rose 36.9% and year-to-date sales rose 38.1%, largely reflecting acquired territories and facilities: these contributed $478.3 million of Q3 sales and $1.216 billion year to date. Excluding those acquired operations, retail bottle/can volume increased 1.0% in Q3 and 1.6% year to date. Still-beverage volume grew faster than sparkling-beverage volume.
Management’s non-GAAP comparable results were Q3 basic EPS of $1.65 versus $2.34 and year-to-date basic EPS of $4.46 versus $4.91. These measures adjust for acquisition effects and expenses, commodity hedge fair-value changes, and other specified items; they are not GAAP results.
Cash, liquidity and debt
- Cash was $11.9 million at October 1, down from $21.9 million at January 1. Year-to-date operating cash flow of $202.4 million included an $87.1 million one-time bottling-agreement conversion fee. Investing used $407.9 million and financing provided $195.5 million, resulting in a $9.9 million net cash decrease.
- Current assets were $942.7 million and current liabilities $587.1 million; working capital was $355.6 million. Current assets included $129.0 million of assets held for sale related to a transaction completed just after quarter-end.
- Long-term debt was $1.128 billion, up from $907.3 million at year-end; capital lease obligations were $43.1 million. Management-reported net debt and lease obligations were $1.159 billion. The company issued $125 million of 3.28% senior notes due 2023 and had $247 million drawn on its $450 million revolving facility and a $300 million term loan.
- The company reported compliance with its debt covenants. Its revolving facility matures in 2019 and its term loan in 2021. A 1 percentage-point rise in market rates was estimated to increase next-12-month interest expense by approximately $5.5 million, assuming no change in capital structure.
Changes, outlook and key risks
- Acquisition-related growth expanded the business but also increased operating costs, depreciation, debt and interest expense. The company reported $32.4 million of year-to-date transaction and transition expenses. It also recorded a $23.1 million noncash year-to-date charge from remeasuring acquisition-related contingent consideration.
- On October 2, 2017, the company completed additional territory and facility acquisitions and exchanges, including a Memphis territory acquisition and exchanges with Coca-Cola Refreshments and another bottler. At quarter-end, $129.0 million of related assets and $20.0 million of liabilities were classified as held for sale. Purchase-price allocations remained incomplete; management expected gains on two exchanges, subject to final calculations.
- Management expected remaining 2017 capital expenditures of $70 million to $95 million, excluding the October transactions. No specific earnings or revenue guidance was provided. Management cited territory and manufacturing expansion, revenue management, product innovation, distribution-cost management and productivity as priorities, and stated it expected available capital sources to meet needs for at least the next 12 months.
- The fair value of contingent consideration was $308.9 million, based on significant unobservable assumptions; annual payments under these arrangements were estimated at $19 million to $37 million. Changes in discount rates and business forecasts could materially affect noncash earnings.
- A 10% increase in relevant commodity prices was estimated to increase costs over the next 12 months by approximately $54.8 million, assuming unchanged volume. Other exposures include dependence on Coca-Cola brands and relationships, competitive and weather-sensitive sales, and customer concentration: Walmart represented 14% of year-to-date sales.
- Guarantees for manufacturing cooperatives were $32.5 million; maximum exposure including equity investments was $74.3 million. Future marketing-contract payments totaled $124.4 million, and standby letters of credit were $35.6 million. The company reported no legal proceedings expected to have a material adverse effect and no material change in previously disclosed risk factors.
Important facts for investors to verify
- How much of sales and cash generation reflects acquired territories versus underlying volume, pricing and sustainable operations.
- Whether acquisition integration and distribution costs improve sufficiently to restore operating margins and earnings growth.
- Final accounting, purchase-price adjustments and realized gains or losses from the October 2017 transactions, and the effect on debt and cash.
- The assumptions and cash-payment profile underlying the $308.9 million contingent consideration liability.
- Commodity and floating-rate exposure, as well as available liquidity after acquisition spending and planned capital expenditures.