Business Context and Reporting Period
Company: Coca-Cola Bottling Co. Consolidated (CCBCC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: July 4, 2010 (Second Quarter and First Half)
Business Overview: CCBCC is the second-largest 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 are seasonal, with higher unit sales typically occurring in the second and third quarters.
Key Financial Metrics
| Metric (in thousands) | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net Sales | $417,361 | $377,749 | $764,859 | $714,010 |
| Gross Margin | $168,008 | $160,127 | $314,711 | $307,256 |
| Gross Margin % | 40.3% | 42.4% | 41.1% | 43.0% |
| Income from Operations | $29,818 | $30,678 | $47,477 | $51,819 |
| Net Income (Total) | $13,404 | $12,918 | $18,539 | $21,741 |
| Net Income Attributable to CCBCC | $12,043 | $12,187 | $16,703 | $20,718 |
| Diluted EPS (Common Stock) | $1.31 | $1.32 | $1.81 | $2.25 |
| Cash Provided by Operating Activities (YTD) | $12,280 (2010) vs $28,119 (2009) | |||
| Total Debt & Capital Leases | $604.2 million (as of July 4, 2010) | |||
| Cash and Cash Equivalents | $14.3 million (as of July 4, 2010) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 10.5% in Q2 2010 and 7.1% YTD 2010 compared to the prior year. This was driven by a 14% increase in bottle/can volume (Q2) and growth in the company's own brand portfolio (e.g., Tum-E Yummies), partially offset by a 3.8% decrease in average sales price per unit.
- Margin Compression: Gross margin percentage declined to 40.3% in Q2 2010 from 42.4% in Q2 2009. The decrease was primarily due to lower sales prices per unit and increased costs associated with aluminum hedging programs.
- Operating Expenses: Selling, delivery, and administrative (S,D&A) expenses increased 6.8% in Q2 2010. Drivers included higher employee salaries, fuel costs, and auto allowance program payments, partially offset by lower depreciation and benefit costs.
- Profitability: While Q2 net income attributable to CCBCC was relatively flat (-1.2%), YTD net income attributable to CCBCC decreased 19.4% to $16.7 million. This decline was influenced by higher effective tax rates and unfavorable commodity hedging adjustments.
- Cash Flow: Net cash provided by operating activities decreased significantly YTD 2010 ($12.3 million) compared to YTD 2009 ($28.1 million), largely due to a $30.6 million increase in current assets less current liabilities (working capital build-up for inventory and receivables).
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items (Flood Damage): In May 2010, a severe flood in Nashville, Tennessee, damaged a production facility. The company recorded a $0.2 million loss on uninsured equipment, offset by a $0.8 million gain on insured equipment (excess of proceeds over book value). A receivable of $6.2 million for insured losses was recorded, with $1.5 million received by Q2 2010.
- Commodity Hedging: The company experienced unfavorable mark-to-market adjustments on aluminum hedges ($6.7 million in Q2 2010) and fuel hedges ($1.1 million in Q2 2010), which negatively impacted operating results.
- Tax Rate Impact: The effective tax rate for YTD 2010 increased to 37.9% (from 33.4% in YTD 2009) due to the elimination of the Medicare Part D subsidy deduction under the Patient Protection and Affordable Care Act (PPACA) and adjustments to uncertain tax positions.
- Capital Expenditures: Management anticipates total additions to property, plant, and equipment for fiscal year 2010 to be in the range of $50 million to $60 million.
- Risks: Key risks include dependence on The Coca-Cola Company (88% of volume), commodity price volatility (aluminum, fuel), and potential impacts from the acquisition of Coca-Cola Enterprises (CCE) by The Coca-Cola Company. The company also faces potential increased costs from healthcare reform legislation.
Investor Verification Checklist
- Working Capital Build-up: Verify the sustainability of the $30.6 million increase in working capital (receivables and inventory) and its impact on future cash flows.
- Hedging Exposure: Assess the ongoing impact of aluminum and fuel hedging mark-to-market adjustments on future margins, given the volatility in commodity prices.
- Debt Covenants: Confirm continued compliance with the $200 million revolving credit facility covenants (fixed charge coverage ratio of 1.5:1 and debt-to-cash flow ratio of 6.0:1).
- Healthcare Reform Impact: Monitor the quantified impact of the PPACA on future tax liabilities and employee benefit costs.
- Brand Portfolio Growth: Evaluate the contribution and profitability of the company's own brand portfolio (e.g., Tum-E Yummies) as a counterbalance to declining sparkling beverage volumes.