Coca-Cola Bottling Co. Consolidated — FY2016 Form 10-K
Business and period: The company is the largest independent Coca-Cola bottler in the United States, producing, marketing and distributing nonalcoholic beverages. This 10-K covers the 52 weeks ended January 1, 2017; fiscal 2015 covered 53 weeks ended January 3, 2016. The company expanded substantially through territory and manufacturing acquisitions, and its products are sold entirely in the United States.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $3,156.4 million | $2,306.5 million | +36.9% |
| Gross profit / margin | $1,215.7 million / 38.5% | $901.0 million / 39.1% | Profit +34.9%; margin lower |
| Operating income / margin | $127.9 million / 4.1% | $98.1 million / 4.3% | Income +30.3% |
| Net income attributable to company | $50.1 million | $59.0 million | -15.0% |
| Basic EPS | $5.39 | $6.35 | -15.1% |
| Cash from operations | $162.0 million | $108.3 million | +$53.7 million |
| Cash used in investing | $452.0 million | $217.3 million | Greater acquisition and capital spending |
Reported sales growth primarily reflected newly acquired territories: 2016 Expansion Transactions contributed $592.3 million of sales and the 2014–2015 expansion territories contributed a further $630.9 million. In legacy territories, bottle/can retail volume rose 3.3%, including 10.3% growth in still beverages. Total bottle/can volume rose 36.4%, with still beverage volume up 47.3% and sparkling volume up 32.5%, largely reflecting the larger territory base.
The reported earnings comparison is affected by prior-year gains: FY2015 included a $22.7 million gain on sale of BYB, an $8.8 million territory-exchange gain and a $2.0 million bargain-purchase gain. FY2016 included $32.3 million of expansion and transition expenses, a $4.0 million special charitable contribution, and a $4.7 million pretax favorable commodity-hedge mark-to-market adjustment. Management’s non-GAAP comparable basic EPS was $5.79 in 2016 versus $5.15 in 2015; the adjustments exclude acquisition impacts and other specified items, so this measure is not a substitute for GAAP results.
Fourth-quarter snapshot: For the quarter ended January 1, 2017, sales were $841.6 million and net income attributable to the company was $21.4 million, compared with $619.7 million and $4.3 million, respectively, in the prior-year quarter. Acquisitions and unusual quarterly fair-value adjustments affected comparability.
Financial position and liquidity
- At year-end, cash was $21.9 million; working capital was $135.9 million, versus $108.4 million a year earlier. Current assets were $593.8 million and current liabilities $457.9 million.
- Total debt and capital lease obligations were $956.0 million, up from $675.4 million; net debt and leases were $934.1 million. Debt increased principally to finance acquisitions and investment. Interest expense rose 25.6% to $36.3 million.
- The $450 million revolving facility had $152 million drawn at year-end; a $300 million term loan matures in 2021. The company reported compliance with debt covenants and stable BBB / Baa2 ratings.
- Capital expenditures, excluding acquired assets, were $172.6 million. Operating cash flow less these expenditures was approximately negative $10.6 million before other investing items. Cash declined $33.6 million during the year.
- Acquisition-related contingent consideration was $253.4 million, including estimated future sub-bottling payments, generally extending over the useful lives of distribution rights. Management estimated annual payments of $14–$25 million.
Changes, outlook and risks
- The company acquired territories in Maryland, Virginia, Ohio and Kentucky and manufacturing facilities in Virginia, Maryland and Ohio during 2016. The transactions added $1.06 billion of sales and $24.3 million of operating income according to the MD&A’s summary; the acquisition note reports a broader combined expansion impact of $1.22 billion of sales and $29.2 million of operating income. These figures reflect differing groupings of acquired territories and periods.
- Further proposed territory transactions remained under non-binding letters of intent, although an Indiana territory transaction closed in January 2017 for $31.6 million. The company also issued $125 million of 3.28% notes due 2023 after year-end.
- No full-year revenue or earnings forecast is provided. Management expected 2017 capital expenditures of $200–$250 million, excluding additional expansion transactions; income tax cash payments of $5–$15 million, excluding specified potential transaction-related taxes; pension contributions of $10–$12 million; and postretirement medical payments of about $3.5 million.
- Key risks include successful integration of acquired operations and employees, execution and returns on expansion investments, high leverage and floating-rate exposure, customer concentration, commodity and fuel costs, dependence on Coca-Cola brands and agreements, and consumer or regulatory shifts concerning sugar, health and product labeling. Wal-Mart, Food Lion and Kroger represented about 24% of 2016 net sales combined. The filing estimates a 1% increase in relevant commodity prices could add about $44.1 million to costs over 12 months, assuming no volume change; a 1% increase in interest rates could add about $4.5 million to annual interest expense.
- Other notable exposures include $32.6 million of guaranteed cooperative debt, with maximum exposure including equity interests estimated at $70.8 million, and $81.7 million of long-term marketing commitments. Management said ordinary-course legal matters were not expected to have a material adverse effect. The Harrison family controlled approximately 86% of voting power.
Important facts for investors to verify
- How much of sales and earnings growth reflects acquired territories versus underlying legacy-market volume, pricing and margins.
- The reconciliation and assumptions behind the differing expansion contribution totals in the MD&A and acquisition note, and management’s non-GAAP comparable results.
- Integration costs, expected returns and funding needs for completed and pending acquisitions, including the contingent consideration valuation and payment estimates.
- Debt capacity, refinancing needs, covenant headroom and sensitivity to interest-rate and commodity-price changes.
- Customer concentration, Coca-Cola agreement terms and marketing support, as well as the status and expected effects of pending territory transactions.