Coca-Cola Bottling Co. Consolidated — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the quarter ended April 3, 2016, compared with the quarter ended March 29, 2015. The company bottles and distributes primarily Coca-Cola products across U.S. territories. Its reported growth reflects substantial territory expansion, including acquisitions from Coca-Cola Refreshments (CCR); acquired territories contributed $142.5 million of Q1 2016 sales.
Key financial metrics
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $625.5 | $453.3 |
| Gross profit / margin | $243.9 / 39.0% | $184.4 / 40.7% |
| Operating income / margin | $12.4 / 2.0% | $16.9 / 3.7% |
| Net income (loss) attributable to company | $(10.0) | $2.2 |
| Basic EPS | $(1.08) | $0.24 |
| Cash used in operating activities | $(15.2) | $(1.8) |
| Cash used in investing activities | $(138.8) | $(64.1) |
| Cash provided by financing activities | $131.1 | $78.0 |
- Gross margin fell 1.7 percentage points; selling, delivery and administrative expenses were $231.5 million, or 37.0% of sales, versus 36.9%.
- At April 3, cash was $32.6 million and working capital was $133.7 million (current assets $478.7 million; current liabilities $345.0 million). The company had $310 million available under its $450 million revolving facility.
- Debt was $760.0 million and capital lease obligations were $54.1 million; total debt and leases less cash were $781.5 million. Total debt and leases increased from $675.4 million at January 3, 2016.
- Quarterly dividends were $0.25 per share for both common classes.
Material changes and notable items
- Sales rose 38.0%, mainly from acquired territories. In legacy and 2014 expansion territories, bottle/can sales price per unit rose 6.5% and volume rose 6.7%; overall bottle/can volume increased 32.5%, including acquired territories.
- Operating income declined 26.6% despite higher sales. Cost of sales grew 41.9%, faster than revenue, contributing to lower gross margin.
- Other expense included a $17.2 million noncash unfavorable fair-value adjustment to acquisition-related contingent consideration, versus $5.1 million a year earlier. This drove much of the swing to a reported loss; the liability was $177.9 million at quarter-end.
- Management’s non-GAAP comparable net income was $6.2 million, or $0.67 per basic share, versus $5.1 million, or $0.55, a year earlier. Adjustments included the contingent-consideration valuation, territory-expansion costs, and a $4.0 million one-time charitable contribution. These figures are not GAAP results.
- Operating cash use increased, principally reflecting working-capital movements, including receivables from Coca-Cola and accrued compensation. Investing cash use included $100.9 million for expansion acquisitions and $36.8 million of property and equipment additions.
Outlook, risks and contingencies
- Management expects 2016 capital expenditures of $175–$225 million, excluding additional expansion transactions, and pension contributions of $10–$12 million for the remainder of 2016. No full-year revenue or earnings guidance is provided in the filing.
- The company expected to refinance $164.8 million of senior notes due June 2016. Management stated it believed capital resources were sufficient for at least the next 12 months; the revolving-credit covenants were met at quarter-end.
- Annual payments under acquisition-related contingent-consideration arrangements were estimated at $7–$14 million. The fair-value liability depends on long-term forecasts and discount-rate assumptions and may cause material noncash earnings volatility.
- The company estimated that a 10% rise in relevant commodity prices could increase costs by about $31 million over the next 12 months, assuming unchanged volume. A 1% rise in market interest rates was estimated to increase next-12-month interest expense by about $1.4 million.
- Other exposures include $25.3 million of guarantees for manufacturing cooperatives, $26.9 million of standby letters of credit, and $32.9 million of future marketing-contract payments. Management did not expect ordinary-course legal claims to have a material adverse effect.
- Further territory and manufacturing expansion remained under consideration. The filing describes continuing dependence on Coca-Cola agreements and related sub-bottling payments. Additional Maryland territory and manufacturing-facility transactions closed April 29, 2016, after the reporting date.
Important facts for investors to verify
- How much of reported sales growth and future profitability is attributable to acquired territories versus existing operations, and whether acquired-territory margins improve.
- The cash-flow and financing impact of planned capital spending, additional acquisitions, and the June 2016 debt refinancing.
- Assumptions underlying the $177.9 million contingent-consideration liability and its sensitivity to sales forecasts and discount rates.
- Whether pricing and productivity can offset input-cost inflation while maintaining volume and gross margins.
- The terms and economics of subsequent territory and manufacturing agreements, including ongoing payments, operating requirements, and potential termination or sale restrictions.