Coca-Cola Consolidated, Inc. quarterly report, Q2 FY2013

Business context and reporting period

Coca-Cola Bottling Co. Consolidated (now Coca-Cola Consolidated, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. It produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, across territories in the southeastern United States. The filing compares the second quarter and first half of 2013 with the corresponding 2012 periods. Amounts below are in millions of dollars unless otherwise stated.

Financial results and position

For the first half, cash provided by operating activities was $25.0 million, versus $16.2 million a year earlier. Investing activities used $27.5 million; financing activities provided $17.7 million. Cash ended the period at $25.7 million, compared with $10.4 million at year-end 2012. Cash capital expenditures were $33.1 million.

At June 30, 2013, total debt was $448.5 million and capital lease obligations were $67.5 million. Cash-adjusted debt and lease obligations, the company’s non-GAAP measure, were $490.2 million. The company had $55 million drawn on its $200 million revolving facility, leaving $145 million available, and $20 million outstanding on an uncommitted line. Current assets were $291.0 million and current liabilities were $219.5 million; working capital was $71.4 million. The revolving-credit covenants were in compliance. The weighted-average rate on debt and capital leases was 5.7%.

Changes versus the prior comparable period

• Q2 sales declined 0.4%, while first-half sales rose 0.6%. Retail bottle-and-can volume fell 2.1% in both comparisons; cooler and wetter-than-normal weather was cited as a factor.
• Sales to other Coca-Cola bottlers rose 18.0% in Q2 and 20.2% year to date, partly because the company took on production after another bottler closed a can facility. This lower-margin mix contributed to gross-margin percentage declines.
• Q2 operating income fell 5.8%; first-half operating income fell 10.2%. First-half company-attributable net income nevertheless rose 5.1%, helped by lower interest and income-tax expense.
• Net interest expense declined 18.5% in the first half, principally following repayment at maturity of $150 million of senior notes in November 2012. The effective tax rate was 35.5% versus 41.5% in the first half of 2012, partly reflecting tax-law changes and a smaller valuation-allowance increase.
• Net debt and lease obligations increased from $482.6 million at year-end 2012, but were below $517.0 million at the prior-year quarter-end.

Outlook, management commentary, risks and unusual items

• Management expected 2013 property, plant and equipment additions of $60–$70 million. It estimated remaining-2013 cash income-tax payments of $7–$14 million, pension contributions of $2–$4 million, and postretirement medical payments of about $3 million.
• Management said it had resources to fund operations and capital spending for at least 12 months. It expected some underlying commodity costs to rise in 2013; a 10% commodity-price increase was estimated to add about $22 million to costs over the next 12 months, assuming unchanged volume.
• A non-binding letter of intent with The Coca-Cola Company contemplated expanded distribution rights in parts of Tennessee and Kentucky, including Knoxville, Lexington and Louisville. Definitive agreements were targeted by year-end 2013, with a potential closing in the latter part of 2014; completion was not assured.
• Unusual items included a $1.2 million gain on sale of an unused distribution facility, a $0.4 million tax benefit from the American Taxpayer Relief Act, and a $0.5 million unfavorable commodity-hedge mark-to-market adjustment year to date. Management also reported a $0.9 million net increase in cost of sales from the commodity hedging program. A change in estimated useful lives of certain dispensing equipment reduced first-half depreciation by $0.9 million.
• Key exposures include reliance on Coca-Cola products (about 88% of first-half bottle-and-can retail volume), commodity and fuel prices, customer concentration, and dependence on marketing support that suppliers are not contractually required to continue. Wal-Mart represented about 14% of first-half net sales.
• The company guaranteed $37.6 million of debt of two bottler cooperatives; it reported maximum exposure including equity interests of $74.1 million if the cooperatives borrowed to capacity. It also had $23.1 million of standby letters of credit and $36.9 million of future marketing-contract payments. Management did not expect material losses from legal proceedings or the guarantees.
• A prior-period deferred-tax balance-sheet error was corrected as an immaterial revision; it did not affect reported income statements or cash flows. Subsequent to quarter-end, the company announced a limited pension lump-sum election window that could result in a non-cash charge, depending on participant elections.

Important facts for investors to verify

• Whether retail beverage volumes recover and whether the expanded lower-margin bottler sales continue to pressure gross margins.
• Progress, definitive terms, funding needs and timing for the proposed Tennessee and Kentucky territory expansion.
• Actual capital spending, commodity costs, cash generation and borrowing needs relative to management’s estimates.
• Revolving-facility availability and covenant compliance, and the company’s exposure to floating rates and refinancing needs.
• Potential outcomes of pension lump-sum elections, tax audits and uncertain tax positions, and the financial capacity of cooperatives whose debt the company guarantees.