COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (CCBCC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: First Quarter ended April 3, 2011
Business Overview: CCBCC is the largest independent bottler of The Coca-Cola Company products in the United States, operating primarily in the Southeast. The company produces, markets, and distributes sparkling and still nonalcoholic beverages. Results for the first quarter are historically not representative of the full fiscal year due to seasonality, with higher unit sales typically occurring in the second and third quarters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.5% to $359.6 million, driven primarily by a 2.2% increase in bottle/can sales price per unit and a shift in product mix toward higher-priced still beverages.
• Margin Compression: Gross margin percentage declined to 41.5% from 42.2%. This was caused by rising raw material costs (specifically plastic bottles and aluminum) and a product mix shift toward still beverages, which carry lower margins than sparkling beverages.
• Profitability: Net income attributable to CCBCC rose 26.9% to $5.9 million, and diluted EPS increased 25.5% to $0.64. Operating income grew 8.6% despite margin pressure.
• Operating Cash Flow: Operating cash flow turned negative at $(3.1) million compared to $5.7 million in the prior year. This was primarily due to a $23.4 million increase in current assets (receivables and inventory) relative to current liabilities, driven by seasonal sales increases and timing of payments.
• Debt Structure: Total debt and capital lease obligations decreased to $600.0 million from $635.1 million in Q1 2010. The company had no outstanding borrowings on its $200 million revolving credit facility as of April 3, 2011.

Guidance, Outlook, and Risks

• Outlook: Management expects gross margins to remain lower throughout the remainder of 2011 compared to 2010 due to continued upward pressure on commodity costs (sweeteners, packing materials, fuel).
• Capital Expenditures: The company anticipates total additions to property, plant, and equipment for fiscal year 2011 to be in the range of $60 million to $70 million.
• Pension Contributions: The company expects to contribute approximately $10 million to its company-sponsored pension plans in 2011.
• Key Risks:
  • Commodity Price Volatility: Exposure to price fluctuations in aluminum, corn, resin, and crude oil. A 10% increase in these commodity prices could increase costs by approximately $23 million over the next 12 months.
  • Concentration Risk: Approximately 88% of bottle/can volume consists of The Coca-Cola Company products. Wal-Mart Stores, Inc. accounted for 14% of total net sales.
  • Regulatory Changes: Ongoing assessment of the impact of the Patient Protection and Affordable Care Act (PPACA) on employer-sponsored medical plans.
  • Market Uncertainty: Recent acquisitions of competitors by their franchisors may create uncertainty within the bottling system.

Investor Verification Checklist

• Commodity Hedging Effectiveness: Verify the impact of fuel and aluminum hedging programs on cost of sales and S,D&A expenses, noting the $0.5 million unfavorable mark-to-market adjustment on aluminum hedges in Q1 2011.
• Working Capital Trends: Monitor the significant increase in accounts receivable ($14.0 million) and inventory ($7.7 million) to ensure collection and turnover rates remain healthy.
• Debt Covenants: Confirm continued compliance with the fixed charges coverage ratio (1.5 to 1) and debt to operating cash flow ratio (6.0 to 1) on the $200 million revolving credit facility.
• Cooperative Guarantees: Review the financial health of South Atlantic Canners (SAC) and Southeastern Container, for which CCBCC guarantees approximately $34.5 million in debt and lease obligations.
• Product Mix Shift: Assess the long-term sustainability of the shift toward still beverages, which have lower margins, versus sparkling beverages.