Coca-Cola Bottling Co. Consolidated — Q1 2012 Form 10-Q
Reporting period: Quarter ended April 1, 2012; comparisons are with the quarter ended April 3, 2011. Amounts below are in millions of dollars except per-share data. The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, in 11 states, mainly in the Southeast. First-quarter results are seasonally weaker and are not necessarily representative of the full year.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $377.2 | $359.6 | +4.9% |
| Gross profit | $155.6 | $149.2 | +4.3% |
| Gross margin | 41.3% | 41.5% | -0.2 percentage points |
| Selling, delivery and administrative expenses | $137.0 | $130.0 | +5.4% |
| Operating income | $18.6 | $19.2 | -2.8% |
| Net income | $5.1 | $6.5 | -21.2% |
| Net income attributable to the company | $4.6 | $5.9 | -22.8% |
| Diluted EPS, both common classes | $0.49 | $0.64 | -23.4% |
| Net cash from operating activities | $(17.9) | $7.4 | Declined |
- Retail bottle/can volume grew 4.8%; bottle/can price per unit increased 0.8%. Sparkling volume rose 4.4% and still-beverage volume rose 7.0%. Total sales growth also reflected higher own-brand and post-mix sales, partly offset by lower sales to other Coca-Cola bottlers.
- Cost of sales increased 5.3%, faster than sales, principally due to higher raw-material costs, including plastic bottles. S,D&A rose with payroll and benefits, marketing, fuel and depreciation. Its share of sales increased to 36.3% from 36.1%.
- The effective income tax rate was 46.7%, versus 37.9%. A $0.7 million increase in the valuation allowance for certain deferred tax assets contributed to higher tax expense.
- Operating cash flow was affected by working-capital needs and a $13.7 million pension contribution. Investing cash use was $11.8 million, including $14.9 million of cash additions to property, plant and equipment; financing cash use was $3.4 million, including $2.3 million of dividends. Cash fell $33.1 million to $57.6 million.
Financial position and liquidity
- At April 1, 2012, total assets were $1.36 billion, total liabilities $1.16 billion, and total equity $196.0 million. Current assets of $311.5 million slightly exceeded current liabilities of $310.4 million.
- Debt was $523.3 million and capital-lease obligations were $73.0 million, for total debt and leases of $596.3 million. Net debt and lease obligations, after cash, were $538.6 million, up from $503.5 million at January 1, 2012.
- The $150 million of senior notes due November 2012 are expected to be repaid using cash, borrowings under the $20 million uncommitted line and the $200 million revolving facility. The company had no borrowings under either credit line at quarter-end and reported all $200 million of revolving capacity available. It stated that it was in compliance with the facility’s financial covenants.
- The revolving facility matures in September 2016. The company reported long-term debt ratings of BBB from S&P and Baa2 from Moody’s, both stable. Its debt and lease obligations were not subject to short-term interest-rate changes at quarter-end.
Outlook, risks and notable items
- Management expected underlying commodity costs to face continued upward pressure and gross margins across product categories to be lower for the rest of 2012 than in 2011 unless price increases offset the costs. A 10% rise in relevant commodity prices was estimated to increase costs over the next 12 months by approximately $23 million, assuming unchanged volume.
- 2012 property, plant and equipment additions were forecast at $60 million to $70 million. Remaining 2012 pension contributions were estimated at $4 million to $7 million; postretirement medical payments at approximately $3 million; and income-tax cash requirements at $12 million to $17 million. These are management estimates, not sales or earnings guidance.
- Key stated priorities were revenue management, product innovation and portfolio expansion, distribution-cost management, and productivity. The filing provides no specific full-year sales or EPS forecast.
- Concentration and input risks include dependence on Coca-Cola products (approximately 87% of Q1 bottle/can volume to retail customers), large retail customers (Walmart represented approximately 15% of net sales), and exposure to packaging, sweetener and fuel costs. The company had no fuel or aluminum commodity hedges outstanding at quarter-end.
- The company guaranteed $36.1 million of debt and lease obligations of two bottler cooperatives; its stated maximum exposure, including its equity interests, if the cooperatives borrowed to capacity was $72.8 million. It also had $20.8 million of standby letters of credit. Management did not expect material losses from these guarantees, ordinary-course legal matters or tax audits.
- Other notable items: a prior-period cash-flow classification error was corrected and deemed immaterial; the revision increased Q1 2011 operating cash flow to $7.4 million from the previously reported negative $3.1 million, with no effect on prior-period earnings or balance sheets. Adoption of revised comprehensive-income presentation had no effect on results, financial position or liquidity. No goodwill or franchise-right impairment was identified.
- Management reported disclosure controls were effective as of April 1, 2012 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How the November 2012 $150 million note maturity is funded, and whether the revolving facility remains available on acceptable terms.
- Whether pricing and sales mix can offset commodity inflation without weakening volume or customer demand; monitor gross margin and the estimated $23 million sensitivity.
- Whether operating cash flow recovers after the quarter’s working-capital use and significant pension contribution.
- Progress against the $60 million to $70 million capital-spending outlook and the remaining pension-contribution estimate.
- Developments in cooperative guarantees, customer and supplier concentration, tax positions, and the company’s ability to use deferred tax assets.