Coca-Cola Bottling Co. Consolidated — Q2 2015 Form 10-Q
Reporting period: Quarter and first half ended June 28, 2015. Unaudited results; financial amounts below are in USD millions unless noted.
Business context
The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, across territories in the southeastern United States. During 2015 it completed purchases of additional territories in Tennessee, Kentucky and Indiana, and exchanged its Jackson, Tennessee territory for Lexington, Kentucky. Newly acquired territory results are included from their respective closing dates, so reported growth is not solely organic.
Financial results
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $614.7 | $459.5 | $1,067.9 | $848.1 |
| Gross margin | $237.3 | $185.5 | $421.7 | $341.9 |
| Gross margin % | 38.6% | 40.4% | 39.5% | 40.3% |
| Operating income | $38.3 | $31.3 | $55.2 | $43.4 |
| Net income attributable to company | $26.9 | $13.8 | $29.2 | $16.2 |
| Basic earnings per share | $2.90 | $1.49 | $3.14 | $1.75 |
| Net interest expense | $6.7 | $7.3 | $14.1 | $14.6 |
Q2 sales rose 33.8%; first-half sales rose 25.9%. Q2 operating income increased 22.6%, while company-attributable net income increased 95.4%. First-half operating income rose 27.3% and company-attributable net income rose 79.6%. Selling, delivery and administrative expense as a share of sales declined to 32.4% from 33.6% in Q2 and to 34.3% from 35.2% in the first half.
Reported earnings benefited from unusual items: Q2 included an $8.8 million gain on the Lexington-Jackson territory exchange and $6.1 million of noncash other income from revaluing acquisition-related contingent consideration. The first half included the same $8.8 million exchange gain and $1.0 million of favorable contingent-consideration revaluation income. Q2 also included $4.3 million of territory acquisition and transition expenses; first-half expenses were $7.2 million.
Cash flow, liquidity and debt
- First-half operating cash flow was $33.0 million, versus $11.8 million in 2014. Investing activities used $108.3 million, including $57.1 million of property and equipment additions and $51.3 million for territory acquisitions. Financing activities provided $110.0 million. Cash increased $34.7 million to $43.8 million.
- At June 28, current assets were $437.9 million and current liabilities were $310.5 million; working capital was $127.5 million. Management attributed working-capital movements in part to seasonal sales and acquired territories.
- Total debt and capital lease obligations were $623.0 million, including $563.9 million of debt and $59.2 million of leases. Cash-adjusted net debt and lease obligations were $579.2 million. Debt and lease obligations were $503.8 million at year-end 2014.
- The $450 million revolving credit facility had $290.0 million drawn and $160.0 million available. The company was in compliance with its financial covenants. It expects to refinance $164.8 million of senior notes due June 2016 and classified them as long-term debt.
- Weighted-average interest rate on debt and capital leases was 4.3% at quarter-end; $290.0 million was exposed to short-term rate changes. Management estimated a 1 percentage-point rate increase would add approximately $2.9 million to interest expense over the following 12 months.
Changes, outlook and risks
- Acquired expansion territories contributed $72.5 million of Q2 sales and $2.7 million of Q2 operating income; first-half contribution was $90.5 million and $4.4 million. Separately, management reported that the expansion and exchange territories together contributed $114.0 million of Q2 sales and $3.6 million of operating income. Acquisitions and territory exchanges materially affect period comparisons.
- In legacy territories, Q2 retail bottle-and-can volume increased 5.4% and price per unit increased 5.6%. Growth was led by energy products, including newly broadened Monster distribution, and still beverages. Management cited revenue management, product innovation, territory expansion, distribution-cost management and productivity as priorities. The business is seasonal, with typically higher unit sales in the second and third quarters.
- Gross margin percentage declined year over year, reflecting, among other factors, higher raw-material and finished-product costs and a changed sales mix. Management noted that price and volume gains helped offset cost increases. A 10% increase in certain commodity prices was estimated to raise costs by approximately $26 million over 12 months, assuming unchanged volume.
- Management expects 2015 property and equipment additions of $130 million to $160 million, cash income-tax requirements of $15 million to $25 million and pension contributions of $7 million to $10 million during the remainder of 2015. It stated that available resources should cover operating and capital needs for at least 12 months. No specific revenue or earnings guidance is provided.
- Future sub-bottling payments for acquired territories are contingent on sales; the recorded liability was $94.1 million, with anticipated annual payments of $6 million to $11 million. Its Level 3 fair value depends on forecasts and discount-rate assumptions and may cause material noncash earnings changes.
- Other exposures include $33.7 million of guarantees of cooperative debt, $26.4 million of standby letters of credit, commodity and interest-rate risk, and ongoing ordinary-course legal matters. Management said it did not expect legal matters to have a material adverse effect. The company’s 2015 proposed territory expansion remained subject to a nonbinding letter of intent, with no assurance of a definitive agreement.
- Subsequent to quarter-end, the company agreed to sell its BYB Brands subsidiary to The Coca-Cola Company for approximately $25 million; closing was expected in August 2015. The filing does not state the transaction’s completed outcome.
Investor verification priorities
- Separate underlying operating performance from acquisition contributions, the $8.8 million exchange gain and contingent-consideration revaluation income.
- Track gross-margin pressure, commodity costs, pricing and volume trends, and the extent to which recent growth depends on acquired territories and energy beverages.
- Review leverage, revolver usage, refinancing plans for the June 2016 notes, and interest-rate sensitivity.
- Assess assumptions behind the $94.1 million contingent-consideration liability and the expected $6 million to $11 million annual payments.
- Confirm delivery of projected capital spending, cash requirements, the proposed territory expansion and the BYB Brands sale.