Coca-Cola Bottling Co. Consolidated — Q2 2017 Form 10-Q
Business context and period. The filing covers the 13 weeks and 26 weeks ended July 2, 2017; comparative periods ended July 3, 2016. The company produces, markets and distributes nonalcoholic beverages in 16 states and is expanding its bottling and manufacturing footprint through territory and facility acquisitions from Coca-Cola Refreshments USA. Coca-Cola products accounted for approximately 93% of bottle/can volume to retail customers.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $1,169.3 million | $840.4 million | $2,035.0 million | $1,465.8 million |
| Gross profit | $415.2 million | $319.7 million | $747.2 million | $563.6 million |
| Income from operations | $47.3 million | $54.7 million | $60.9 million | $67.1 million |
| Net income attributable to company | $6.3 million | $15.7 million | $1.3 million | $5.6 million |
| Basic earnings per share | $0.68 | $1.68 | $0.14 | $0.60 |
- Sales rose 39.1% in Q2 and 38.8% in the first half, largely reflecting acquired territories. The 2017 and 2016 expansion transactions contributed $472.6 million of Q2 sales and $737.6 million of first-half sales.
- Margins compressed: gross margin was approximately 35.5% in Q2 versus 38.0%, and 36.7% for the first half versus 38.4%. Operating margin was approximately 4.0% versus 6.5% in Q2 and 3.0% versus 4.6% in the first half.
- Excluding the newly acquired territories, retail bottle/can volume increased 1.3% in Q2 and 1.9% in the first half. Comparable-period pricing increased 2.1% in Q2 and 1.2% in the first half.
- Reported earnings declined despite sales growth. Management cited higher operating costs from expansion, lower operating income, and increased other expense, including fair-value charges on acquisition-related contingent consideration.
- Management’s non-GAAP comparable results were Q2 net income of $22.2 million and basic EPS of $2.36, versus $19.7 million and $2.11; first-half comparable net income was $26.4 million and EPS $2.81, versus $23.9 million and $2.56. These measures exclude specified items and should be considered alongside GAAP results.
Cash flow, liquidity and debt
- First-half operating cash flow was $179.0 million, compared with $61.2 million in 2016; it included an $87.1 million one-time fee from CCR related to conversion of bottling agreements. Investing cash outflow was $315.2 million, including $227.8 million for acquisitions and $79.6 million of property and equipment additions. Financing cash inflow was $157.9 million. Cash ended at $43.5 million, up from $21.9 million at fiscal year-end.
- At July 2, 2017, current assets were $811.4 million and current liabilities $602.1 million, for working capital of $209.3 million and a current ratio of approximately 1.35. Management said it expected adequate capital sources for at least the next 12 months.
- Long-term debt was $1.081 billion, up from $907.3 million at January 1; capital lease obligations were $45.0 million. Total net debt and leases, less cash, were $1.082 billion. Debt included $200 million drawn on a $450 million revolving facility, a $300 million term loan, and $585 million of senior notes before discounts and issuance costs. The company reported covenant compliance.
- Q2 and first-half interest expense was $10.4 million and $19.9 million, respectively. A 1 percentage-point increase in average market rates was estimated to add approximately $5 million to interest expense over 12 months, assuming no change in capital structure.
Material changes, outlook and risks
- First-half expansion acquisitions added distribution territories in Indiana and Ohio and facilities in Indiana and Ohio. Acquired assets totaled $278.7 million; purchase-price allocations remain preliminary and certain prices remain subject to adjustment.
- On March 31, the company converted legacy bottling agreements to a new comprehensive beverage agreement and recorded acquired legacy franchise rights as distribution rights. CCR paid a finalized one-time $91.5 million conversion fee, recorded as deferred proceeds to be amortized against cost of sales over 40 years.
- Other expense included a $28.4 million first-half noncash unfavorable fair-value adjustment to acquisition-related contingent consideration and a $9.4 million charge for post-acquisition adjustments relating to a 2016 transaction. The contingent consideration liability was $319.1 million at quarter-end; expected annual payments under the arrangements are $20 million to $37 million. Valuation is sensitive to discount-rate assumptions and forecasts.
- Management forecast $100 million to $150 million of property and equipment additions for the remainder of 2017, excluding additional acquisitions, and $10 million to $12 million of pension contributions. No specific revenue or earnings guidance was provided.
- Commodity prices, labor and distribution costs, competitive pricing, seasonality and weather may affect results. A 10% increase in specified commodity prices was estimated to raise costs by about $54.9 million over the next 12 months, assuming unchanged volume. The company uses commodity derivatives as economic hedges, not for trading.
- The company guarantees cooperative debt; maximum exposure including equity investments was $74.3 million. It also had $35.6 million of standby letters of credit and $126.3 million of future marketing-contract payments. Management did not expect material loss from guarantees or ordinary-course legal matters. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- How much of reported sales growth and future earnings comes from acquired territories, and whether the acquired operations improve margins after integration costs.
- Cash generation excluding the $87.1 million one-time conversion fee, alongside acquisition spending, capital expenditures and debt growth.
- The assumptions and sensitivity behind the $319.1 million contingent consideration liability and projected annual payments.
- Whether commodity, labor, distribution and interest-rate pressures can be offset by pricing, productivity and continued volume growth.
- Progress on planned additional territory and facility transactions, remaining purchase-price adjustments, and the company’s ability to maintain liquidity and covenant compliance.
- Customer concentration: Walmart represented approximately 14% of first-half net sales; Coca-Cola-related products made up approximately 93% of bottle/can retail volume.