Business context and reporting period
Coca-Cola Bottling Co. Consolidated (now known as Coca-Cola Consolidated, Inc.) filed this unaudited Form 10-Q for the quarter ended September 29, 2013. The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, in the southeastern United States. Results are seasonal, with higher unit sales typically in the second and third quarters. Dollar figures below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Net sales | $434.5 | $419.9 | $1,247.0 | $1,227.7 |
| Gross margin | $176.1 | $170.9 | $500.1 | $499.9 |
| Income from operations | $30.2 | $27.4 | $72.6 | $74.6 |
| Net income attributable to the company | $16.2 | $10.1 | $32.3 | $25.4 |
| Diluted EPS, Common Stock | $1.74 | $1.09 | $3.47 | $2.74 |
- Margins: Gross margin was 40.5% in Q3 and 40.1% year to date, down from 40.7% in both comparable 2012 periods. Operating margin was approximately 7.0% in Q3 and 5.8% year to date.
- Cash flow: Nine-month operating cash flow was $75.0, versus $64.4 in 2012. Investing cash use was $39.1, including $45.2 of cash capital expenditures; financing cash use was $20.9. Cash rose $14.9 to $25.3.
- Liquidity: Current assets were $280.9 and current liabilities $225.3 at September 29; working capital was $55.5. The reported current ratio was approximately 1.25.
- Debt: Debt totaled $413.5 and capital lease obligations $66.1, or $479.6 combined. Net debt and lease obligations, a company-defined non-GAAP measure, were $454.3. The $200 million revolving facility had $20.0 drawn and $180.0 available; a separate $20.0 uncommitted line was fully drawn. The company reported compliance with facility covenants.
- Dividends: Cash dividends were $0.25 per share in Q3 and $0.75 per share for the first nine months, unchanged from 2012.
Material changes versus the prior comparable period
- Q3 sales increased 3.5%, while nine-month sales rose 1.6%. Q3 bottle/can retail volume increased 0.6%; year-to-date retail volume fell 1.2%, mainly from lower sparkling beverage volume. Still beverage volume increased in both periods.
- Sales to other Coca-Cola bottlers rose 6.4% in Q3 and 15.3% year to date, partly because the company replaced production after another bottler closed a can facility. This business carried lower gross margins than retail bottle/can sales.
- Q3 operating income rose 10.1%; nine-month operating income declined 2.7%. Attributable net income increased 60.4% in Q3 and 27.1% year to date. Lower interest and income tax expense contributed to the net income increases; nine-month interest expense fell 18.5%, following repayment of $150 million of notes in November 2012.
- Year-to-date gross margin dollars were nearly flat despite higher sales; management cited product mix, higher raw material costs and increased finished-product purchases, partly offset by pricing and a $3.1 million cooperative marketing-fund refund.
Outlook, management commentary, risks and unusual items
- Outlook: Management expected 2013 capital additions of $60–$70 million, $2–$7 million of income tax cash requirements for the remainder of 2013, and $2–$3 million of remaining 2013 pension contributions. It estimated 2013 postretirement medical payments of approximately $3 million. The filing provides no specific earnings or revenue guidance.
- Potential territory expansion: The company was negotiating a proposed expansion into parts of Tennessee, Kentucky and Indiana, with possible closings during May–December 2014. Definitive agreements had not been reached, and the filing cautions there was no assurance the transaction would proceed.
- Pension charge: A limited-time lump-sum pension distribution was expected to produce an approximately $12 million non-cash charge in Q4 2013. The company said fewer participants and reduced plan assets should lower future plan-administration costs. Its credit facility amendment excludes a qualifying charge of up to $12 million from covenant calculations.
- Reported adjustments and tax items: Q3 included a $1.3 million out-of-period reimbursement adjustment, which management said was not material to the current or prior periods. A separate $3.1 million refund of 2012 cooperative marketing funds increased sales. State tax legislation reduced Q3 tax expense by approximately $2.3 million; other year-to-date tax benefits included $0.4 million from federal legislation and $0.9 million from a reduction in uncertain tax positions.
- Prior-period revision: The company corrected an immaterial deferred-tax balance-sheet error that had overstated retained earnings and equity in prior periods. The revision did not affect reported statements of operations or cash flows.
- Key risks: Approximately 88% of year-to-date retail bottle/can volume consisted of Coca-Cola products or products requiring Coca-Cola concentrate or syrup. The company cited exposure to commodity costs, including aluminum, corn, resin and fuel; it estimated a 10% increase in relevant commodity prices could raise costs by about $22 million over 12 months, assuming unchanged volume. Walmart represented 14% of year-to-date net sales. The company also guaranteed $33.5 million of cooperative debt and reported $23.1 million of standby letters of credit. It said pending claims and legal matters were not expected to have a material adverse effect and reported no material change to previously disclosed risk factors.
- Management identified revenue management, product innovation and portfolio expansion, distribution-cost management and productivity as priorities. It also noted that marketing support from beverage suppliers is not contractually assured and that price increases may not fully offset cost inflation.
Important facts for investors to verify
- Whether sales and retail volume trends recover after weather-related weakness and whether lower-margin bottler sales continue to affect gross margin.
- Whether the proposed territory expansion reaches definitive agreements, its financing and purchase economics, and the resulting impact on operations.
- The actual Q4 pension charge and its effects on earnings, cash requirements and facility covenant calculations.
- Commodity-cost and pricing trends, including the extent to which supplier marketing support continues.
- Availability and terms of committed and uncommitted borrowing, covenant headroom, and potential exposure under cooperative guarantees.