Coca-Cola Bottling Co. Consolidated — FY 2011 Form 10-K
Business context and period. The filing covers the 52-week fiscal year ended January 1, 2012, rather than a standalone fourth-quarter filing. The company is a U.S. beverage bottler and distributor, operating mainly in the Southeast; Coca-Cola Company products represented approximately 88% of 2011 bottle/can volume. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | FY 2011 | FY 2010 | Change / comment |
|---|---|---|---|
| Net sales | $1,561.2 million | $1,514.6 million | +3.1% |
| Gross margin | $629.2 million; 40.3% | $640.8 million; 42.3% | Margin down 2.0 percentage points |
| Operating income | $87.5 million; 5.6% | $96.3 million; 6.4% | Down 9.1% |
| Net income attributable to company | $28.6 million | $36.1 million | Down 20.7%; diluted EPS $3.09 vs. $3.91 |
| Operating cash flow | $109.7 million | $109.8 million | Nearly unchanged |
| Capital expenditures | $53.2 million | $57.8 million | Cash flow less capex was approximately $56.5 million |
| Cash and restricted cash | $93.8 million | $49.4 million | Increase of $44.4 million |
| Debt and capital leases | $597.3 million | $582.3 million | Net debt and leases, after cash, $503.5 million vs. $533.0 million |
| Current assets / liabilities | $311.8 million / $302.5 million | $264.7 million / $176.7 million | Working capital fell to $9.3 million from $88.0 million; current ratio approximately 1.03 vs. 1.50 |
Sales growth reflected higher bottle/can pricing, freight revenue, still-beverage volumes and company-owned brands; total bottle/can volume rose 0.3%. Raw-material costs, including packaging, increased materially. Selling, delivery and administrative expenses were $541.7 million, down 0.5%, but did not offset the gross-margin decline. The annual dividend remained $1.00 per share.
In the fourth quarter of 2011, net sales were $372.9 million and company-attributable net income was $1.8 million, or $0.20 per share, compared with $354.4 million and $3.8 million, or $0.42 per share, in the fourth quarter of 2010. The filing identifies aluminum-hedge mark-to-market charges as affecting quarterly results.
Material changes, liquidity and outlook
- Management expects 2012 gross margins across product categories to be lower than 2011 because of rising commodity costs, unless offset by pricing. A 10% increase in relevant commodity prices was estimated to raise costs by approximately $24 million over the next 12 months, assuming unchanged volume.
- Planned 2012 capital expenditures are $60–$70 million. Expected 2012 pension contributions are $18–$21 million; expected income-tax cash payments are $15–$20 million; pension expense is estimated at approximately $3.5 million.
- $150 million of 5.00% Senior Notes mature in November 2012. The company expected to repay them using available cash, its uncommitted credit line and its $200 million revolving facility. At year-end, the facility was undrawn and fully available, with maturity in September 2016; the company reported compliance with its covenants.
- The $200 million facility requires a fixed-charges coverage ratio of at least 1.5:1 and a debt-to-operating-cash-flow ratio no greater than 6.0:1. The company’s ratings were BBB at S&P and Baa2 at Moody’s, both described as stable.
- Management’s priorities include revenue management, product and package innovation, portfolio expansion, distribution-cost management and productivity. It cautioned that marketing support from beverage suppliers is not assured, and that development and promotion of company-owned brands may require significant investment.
Risks, contingencies and unusual items
- Customer concentration is significant: Wal-Mart represented approximately 15% of net sales and Food Lion 7% in 2011. The two largest customers together accounted for approximately 22% of net sales; management warns that loss of either could materially harm results.
- Dependence on Coca-Cola products and franchise agreements exposes the company to concentrate pricing, marketing-support levels and the risk of losing distribution rights if agreement requirements are not met. Coca-Cola Company held 34.8% of common stock; the Harrison family controlled approximately 85% of total voting power.
- Commodity and fuel inflation, supplier concentration for cans and bottles, competition, consumer shifts away from sugary drinks, adverse weather, regulation and the ability to pass costs through to customers are principal operating risks.
- The company guaranteed $38.3 million of cooperative debt and lease obligations. Its disclosed maximum exposure, including equity interests if both cooperatives borrowed to capacity, was $71.2 million. It also had $22.2 million of long-term marketing commitments and $20.8 million of standby letters of credit.
- Legal proceedings arose in the ordinary course; management did not expect their resolution to materially affect financial condition or results. Tax audits could produce assessments differing from recorded amounts. A 2010 Nashville flood generated $7.1 million in insurance proceeds; the related equipment gain and uninsured loss were reported in 2010.
- During 2011, the company corrected an immaterial prior-period cash-flow presentation error: operating cash flow and investing cash outflows had been understated in affected 2010 and first-quarter 2011 presentations. The correction did not affect statements of operations or balance sheets. The auditor issued unqualified opinions on the financial statements and internal controls; management reported controls effective.
Important facts for investors to verify
- How the November 2012 notes were ultimately repaid and the effect on cash, borrowing costs and liquidity.
- Whether 2012 pricing and cost controls offset the forecast commodity inflation and protect gross margin.
- Trends in bottle/can volumes, still-beverage mix and sales to major customers, particularly Wal-Mart and Food Lion.
- Actual performance of company-owned brands and the level and terms of Coca-Cola Company marketing support.
- Updates to pension funding needs, cooperative guarantees, tax contingencies and any material legal matters.