Coca-Cola Bottling Co. Consolidated — Q3 2011 Form 10-Q
Business context and period. The filing covers the quarter ended October 2, 2011 and the first nine months of fiscal 2011; financial statements are unaudited. The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, in eleven states, mainly in the Southeast. Unless noted, dollar figures below are in millions.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Net sales | $405.9 | $395.4 | $1,188.4 | $1,160.2 |
| Gross margin | $162.7 | $173.1 | $477.5 | $487.8 |
| Gross margin percentage | 40.1% | 43.8% | 40.2% | 42.0% |
| Income from operations | $25.0 | $33.7 | $72.6 | $81.1 |
| Net income attributable to company | $9.8 | $15.5 | $26.8 | $32.2 |
| Diluted EPS, Common Stock | $1.06 | $1.68 | $2.90 | $3.50 |
- Revenue and margins: Sales rose 2.7% in Q3 and 2.4% year to date. Higher bottle/can pricing and sales of still beverages supported revenue; bottle/can volume was flat in Q3 and down 0.9% year to date. Cost of sales rose faster than revenue, principally due to higher raw-material costs and a greater share of higher-cost purchased products.
- Profitability: Q3 operating income fell 25.8% and company-attributable net income fell 37.1%; year-to-date operating income declined 10.6% and attributable net income declined 16.9%. Lower gross margin was partly offset by lower selling, delivery and administrative expenses. Q3 aluminum hedging added cost pressure.
- Cash flow: Nine-month operating cash flow was $73.6 versus $75.8 in 2010. Investing used $40.3, mainly for $41.4 of property and equipment additions; financing used $10.6. Cash increased $22.7 to $68.5. Capital expenditures were $41.4; a simple operating-cash-flow less capital-expenditure measure was approximately $32.2.
- Liquidity: Current assets were $304.2 and current liabilities $194.3, giving working capital of $109.9. The company had $68.5 cash and $3.0 restricted cash. Its new $200 million revolving facility was undrawn, as was its separate $20 million uncommitted line.
- Debt: Long-term debt was $523.2; capital-lease obligations were $75.0. Total debt and lease obligations were $598.2, or $526.6 net of cash and restricted cash. Debt and lease obligations were $15.9 higher than at year-end 2010, primarily due to two new distribution-center leases. Weighted-average interest rate on debt and leases was 6.0% year to date.
- Dividends: Common and Class B dividends were $0.25 per share for Q3 and $0.75 per share year to date, unchanged from 2010.
Material changes versus comparable periods
- Q3 gross margin percentage declined 3.7 percentage points; the year-to-date decline was 1.8 points. Management attributed the pressure primarily to raw-material costs, partly offset by pricing and product mix.
- Still-beverage bottle/can volume grew 2.1% in Q3 and 6.9% year to date, while sparkling-beverage volume declined 0.4% and 2.3%, respectively. Management noted that a large customer promotion in 2010 affected comparisons.
- Q3 and year-to-date S,D&A expenses decreased 1.2% and 0.4%, respectively, mainly reflecting lower bonus and pension costs, partly offset by salaries, marketing and fuel expense.
- Capital-lease obligations increased after the company leased two distribution centers for 15 years, adding $18.6 of lease obligations at inception.
Outlook, risks and unusual items
- Management expected gross margins to remain lower for the rest of 2011 than in 2010 if rising commodity costs could not be offset by price increases. It estimated that a 10% rise in certain commodity prices could increase costs by approximately $26 over the next 12 months, assuming unchanged volume.
- Management forecast fiscal 2011 property and equipment additions of $60–$70, pension contributions of approximately $9.5 for the year, and postretirement medical payments of approximately $3. These are management estimates, not formal earnings guidance.
- Key exposures include dependence on Coca-Cola products and concentrate (about 88% of year-to-date retail bottle/can volume), commodity and packaging costs, and customer concentration: Walmart represented 15% of year-to-date net sales. The Coca-Cola Company’s acquisition of CCE/formation of CCR could affect the bottling system; the ultimate impact was uncertain.
- The company guaranteed $35.2 of cooperative debt and lease obligations; management reported maximum potential exposure of $75.2 including equity interests if the cooperatives borrowed to capacity. Other commitments included $20.8 of standby letters of credit, $23.2 of long-term marketing contracts, and substantial purchase obligations. Management did not expect material losses from guarantees or ordinary-course legal proceedings.
- The company disclosed an immaterial prior-period cash-flow classification error involving accrued capital additions. It revised comparative cash-flow figures; the error did not affect previously reported statements of operations or balance sheets. Management also reported a $0.9 Q3 tax benefit from reducing uncertain-tax-position liabilities, primarily due to statute expirations.
- Commodity hedges generated a $0.9 net loss in Q3 and a $1.9 net loss year to date. No interest-rate swaps were outstanding; management stated that none of the $598.2 of debt and lease obligations was subject to short-term rate changes at quarter-end. The new revolving facility’s covenants were satisfied.
- Operating results are seasonal: Q2 and Q3 typically have higher unit sales than Q1 and Q4. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pricing, mix and volume can offset continuing commodity-cost pressure and the resulting margin decline.
- The actual 2011 capital-spending and pension-contribution totals versus management estimates, and the cash-flow effect of working-capital movements.
- Debt and lease maturities, covenant headroom, and the terms and availability of the new $200 million facility.
- Exposure to Coca-Cola/CCR, Walmart and other major customers, as well as cooperative guarantees and purchase commitments.
- That comparisons use the revised 2010 cash-flow statements and that the prior-period revision affected cash flows, not operations or balance sheets.