Coca-Cola Bottling Co. Consolidated — Q1 2013 Form 10-Q
Business context and period. The filing covers the 13-week first quarter ended March 31, 2013; comparative figures are for the first quarter of 2012. The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, across 11 states, mainly in the Southeast. First-quarter results are typically not representative of the full year because sales are seasonally higher in the second and third quarters.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $383.6 million | $377.2 million | +1.7% |
| Gross margin | $153.7 million; 40.1% | $155.6 million; 41.3% | −1.2% dollars |
| Operating income | $15.5 million | $18.6 million | −16.9% |
| Net income attributable to company | $4.9 million | $4.6 million | +6.5% |
| Diluted EPS | $0.52 | $0.49 | +$0.03 |
| Net interest expense | $7.4 million | $9.1 million | −18.7% |
| Cash used in operating activities | $13.8 million | $18.4 million | $4.6 million less cash used |
Figures are rounded; financial statement amounts are in thousands unless otherwise stated. Revenue growth reflected higher sales to other Coca-Cola bottlers and higher bottle/can pricing, partly offset by a 2.0% decline in bottle/can volume to retail customers. Still-beverage volume grew 5.6%, while sparkling-beverage volume declined 3.3%. Gross margin was pressured by a higher mix of lower-margin bottler sales, raw-material costs and purchases of finished products. Net income attributable to the company rose despite lower operating income, principally alongside lower interest and tax expense.
At March 31, 2013, cash was $11.9 million, current assets $261.9 million, and current liabilities $196.5 million; net working capital was $65.5 million. Debt was $458.4 million and capital-lease obligations $68.3 million, for total debt and leases of $526.7 million and net debt and leases of $514.8 million. Total debt and leases were $493.0 million at year-end 2012 and $596.3 million a year earlier. The company reported $65 million drawn on its $200 million revolver, leaving $135 million available, and the $20 million uncommitted line was fully drawn. Management said it had adequate resources for at least the next 12 months and was in compliance with credit-facility covenants.
Cash used in investing was $16.1 million, including $20.4 million of cash additions to property, plant and equipment and $4.3 million of sale proceeds. Financing provided $31.4 million, including $35 million of net revolver borrowings; dividends paid were $2.3 million. Cash increased $1.5 million during the quarter. The filing separately states that Q1 property, plant and equipment additions were $9.2 million, including $3.2 million accrued but unpaid; see investor verification item below.
Material changes, outlook and risks
- Cost of sales rose 3.7%, faster than sales, and gross margin percentage fell 1.2 percentage points. Management expected commodity costs, particularly corn, to remain under upward pressure and gross margins across product categories to be lower for the remainder of 2013 than in 2012 unless price increases offset costs.
- Q1 included a $0.5 million pre-tax unfavorable commodity-hedging mark-to-market adjustment and a $1.2 million gain on sale of an unused distribution facility. The 2013 income-tax expense included a $0.4 million benefit from the American Taxpayer Relief Act. The 2012 comparison included a $0.7 million increase in the valuation allowance.
- Management forecast 2013 capital additions of $60–$70 million, remaining-year pension contributions of $1–$5 million, postretirement medical payments of about $3 million, and remaining-year income-tax cash payments of $15–$22 million. These are expectations, not guarantees.
- A 10% increase in relevant commodity prices was estimated to raise costs by about $22 million over the next 12 months, assuming unchanged volume. A 1% rise in interest rates was estimated to increase next-12-month interest expense by about $0.9 million. About $85 million of debt and lease obligations was exposed to short-term rate changes.
- Approximately 88% of Q1 retail bottle/can volume consisted of Coca-Cola products; the company depends on Coca-Cola for products or concentrate and also relies on a limited number of suppliers for packaging. Wal-Mart represented approximately 14% of net sales. Commodity prices, pricing power, customer concentration and marketing support are material exposures.
- The company guaranteed $38.3 million of debt of two bottler cooperatives; maximum exposure including equity interests was stated as $74.1 million if the cooperatives borrowed to capacity. It also reported $20.8 million of standby letters of credit and $34.9 million of future marketing-contract payments. Management did not expect material losses from legal proceedings or the cooperative guarantees.
- On April 16, 2013, the company announced a non-binding letter of intent to expand its franchise territory into parts of Tennessee and Kentucky. The proposed arrangement would involve distribution rights, assets and working capital; definitive agreements were targeted by year-end 2013, with a potential closing in the latter part of 2014. Completion was not assured.
- The company revised previously issued balance-sheet and equity figures for an immaterial deferred-tax error; the revision did not affect prior statements of operations or cash flows. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the filing’s $20.4 million cash-flow statement figure for property, plant and equipment additions with the MD&A statement that Q1 additions were $9.2 million, including $3.2 million accrued but unpaid.
- Track retail bottle/can volume, pricing and product mix, and whether price increases offset commodity and finished-product costs enough to stabilize gross margins.
- Monitor operating cash flow, seasonal borrowing needs, revolver availability, and compliance with the credit-facility covenants.
- Confirm progress and definitive terms, financing and closing conditions for the proposed Tennessee/Kentucky territory expansion.
- Assess the extent of Coca-Cola dependence, major-customer exposure, cooperative guarantees, and related-party leases and transactions.