Coca-Cola Bottling Co. Consolidated — Q2 2016 Form 10-Q
Reporting period: Quarter and first half ended July 3, 2016. Financial amounts below are in U.S. dollars; figures are in millions unless otherwise noted.
Business context and reporting period
The company bottles, markets and distributes Coca-Cola and other nonalcoholic beverages, principally in the Southeast. Results reflect continued expansion of distribution territories and manufacturing operations acquired from Coca-Cola Refreshments (CCR). The final closings for the Next Phase Territories and related Maryland manufacturing facilities occurred April 29, 2016. Comparisons with 2015 are substantially affected by acquisitions, the exchange of territories and the 2015 sale of BYB Brands.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $840.4 | $614.7 | $1,465.8 | $1,067.9 |
| Gross margin | $319.7 | $237.3 | $563.6 | $421.7 |
| Income from operations | $54.7 | $38.3 | $67.1 | $55.2 |
| Net income attributable to company | $15.7 | $26.9 | $5.6 | $29.2 |
| Basic earnings per share | $1.68 | $2.90 | $0.60 | $3.14 |
- Q2 sales rose 36.7%; operating income rose 42.9%. Gross margin was approximately 38.0% of sales versus 38.6% a year earlier; operating margin was approximately 6.5% versus 6.2%.
- First-half sales increased 37.3%, while operating income increased 21.6%. First-half gross and operating margins were approximately 38.4% and 4.6%, versus 39.5% and 5.2% in 2015.
- Acquired territories contributed $287.1 million of Q2 sales and $16.0 million of operating income; first-half contribution was $429.6 million and $17.3 million, respectively. Excluding expansion territories, retail bottle/can volume increased 4.5% in Q2 and 5.8% in the first half. Still-beverage volume grew faster than sparkling beverages.
- Management’s non-GAAP comparable results showed Q2 net income of $18.9 million and basic EPS of $2.03, versus $17.8 million and $1.91 in 2015. First-half comparable net income was $24.3 million and EPS $2.62, versus $22.8 million and $2.46. These adjustments exclude selected acquisition, territory, hedge and fair-value items and are not GAAP results.
- First-half operating cash flow was $61.2 million, versus $33.0 million. Investing used $260.7 million, including $174.7 million for expansion transactions and $79.6 million of property and equipment additions. Financing provided $193.3 million. Cash declined $6.2 million to $49.3 million.
- At July 3, current assets were $590.5 million and current liabilities $432.8 million; working capital was $157.7 million. Debt was $829.8 million and capital lease obligations $52.3 million; net debt plus leases was $832.8 million. The company had $75 million drawn on its $450 million revolving facility, leaving $375 million available, and reported compliance with facility covenants.
- Dividends were $0.25 per share in Q2, unchanged from 2015. The effective tax rate for the first half was 40.1%, versus 37.4%.
Material changes, outlook and risks
- Growth primarily reflects acquisitions rather than like-for-like expansion: Q2 acquired-territory sales were $287.1 million, while the prior-year comparison included $72.5 million from acquired territories. Pro forma sales, which are not predictive, were $859.9 million for Q2 2016 versus $813.5 million for Q2 2015.
- GAAP earnings fell despite higher sales and operating income, principally reflecting a $16.3 million noncash unfavorable fair-value adjustment to acquisition-related contingent consideration in Q2 and $33.4 million for the first half. That liability was $228.8 million at July 3. The prior-year periods included favorable adjustments and an $8.8 million territory-exchange gain; first-half 2016 also included a $4.0 million charitable contribution.
- Interest expense increased with expansion-related borrowing. In June, the company entered a $300 million variable-rate term loan due 2021 and used proceeds, along with revolving borrowings, to repay $164.8 million of notes that matured in June.
- No formal earnings guidance is provided. Management expects 2016 capital additions of $175 million to $225 million, excluding additional expansion transactions, and pension contributions of $10 million to $12 million in the remainder of 2016. It estimates annual contingent sub-bottling payments of $10 million to $18 million for the acquired territories.
- Nonbinding proposals and ongoing negotiations contemplated further territory and manufacturing acquisitions, as well as territory exchanges. Completion, terms and financial effects were not assured. Management stated it had adequate capital sources for at least 12 months.
- Risk exposures include variable interest rates and commodity costs. A 1% increase in market rates was estimated to add about $3.8 million to next-12-month interest expense; a 10% increase in specified commodity prices could add about $38 million to costs, assuming unchanged volume. Commodity derivatives are used as economic hedges, not for speculation.
- The company guaranteed $32.5 million of cooperative debt and had $29.7 million of standby letters of credit. It also disclosed $72.6 million of future marketing-contract payments. Management did not expect ordinary-course legal proceedings to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying volume, pricing and margins; assess the acquired territories’ ongoing operating contribution and integration costs.
- Review the assumptions and sensitivity behind the $228.8 million contingent-consideration liability and its noncash quarterly fair-value charges.
- Track debt, variable-rate exposure, covenant headroom, available revolver capacity and funding needs for planned capital spending and potential transactions.
- Confirm progress and final terms for proposed transactions, and assess the long-term obligations and performance requirements in bottling and manufacturing agreements.
- Evaluate commodity-cost exposure, cooperative guarantees, customer concentration and the company’s reliance on Coca-Cola-related agreements and counterparties.