Business Context and Reporting Period
Company: Coca-Cola Bottling Co. Consolidated (CCBCC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Third quarter and first nine months ended September 27, 2009.
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 nonalcoholic beverages, including sparkling and still beverages. The reporting period reflects the adoption of new FASB guidance regarding noncontrolling interests, effective Q1 2009.
Key Financial Metrics
| Metric (in thousands) | Q3 2009 | Q3 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Sales | $374,556 | $381,563 | $1,088,566 | $1,115,240 |
| Gross Margin | $157,320 | $155,827 | $464,576 | $467,625 |
| Gross Margin % | 42.0% | 40.8% | 42.7% | 41.9% |
| Income from Operations | $26,296 | $6,443 | $78,115 | $46,325 |
| Net Income (Total) | $16,387 | $(2,440) | $38,128 | $9,401 |
| Net Income Attributable to CCBCC | $15,428 | $(3,145) | $36,146 | $7,675 |
| Basic EPS (Common) | $1.68 | $(0.34) | $3.94 | $0.84 |
| Cash and Cash Equivalents | $25,062 | $20,583 | $25,062 | $20,583 |
| Total Debt & Capital Leases | $616,888 | $669,730 | $616,888 | $669,730 |
| Net Debt (Debt + Leases - Cash) | $591,826 | $649,147 | $591,826 | $649,147 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 1.8% in Q3 2009 and 2.4% YTD 2009 compared to the prior year. This was driven by a decrease in bottle/can volume (down 1.2% in Q3, 6.0% YTD), primarily due to lower bottled water sales, partially offset by price increases in energy products and other categories.
- Profitability Surge: Despite lower sales, Net Income attributable to CCBCC turned from a loss of $3.1 million in Q3 2008 to a profit of $15.4 million in Q3 2009. YTD Net Income increased from $7.7 million to $36.1 million. This improvement is largely due to significant one-time charges in 2008 (pension exit and restructuring) that did not recur in 2009.
- Expense Reduction: Selling, Delivery, and Administrative (S,D&A) expenses decreased 12.3% in Q3 and 8.3% YTD. Key drivers included the absence of the $13.8 million multi-employer pension exit charge and $4.0 million restructuring charge recorded in 2008, as well as lower fuel costs and reduced salaries following workforce reductions.
- Debt Management: Total debt and capital lease obligations decreased by approximately $53 million YTD. The company repaid $176.7 million in current debt maturities (debentures) using proceeds from a new $110 million Senior Note issuance and borrowings from its revolving credit facility.
- Tax Rate Improvement: The effective income tax rate for YTD 2009 was 24.8%, significantly lower than 48.2% in YTD 2008, primarily due to a $7.1 million reduction in the liability for uncertain tax positions.
Guidance, Outlook, and Risks
- Capital Spending: Management anticipates total additions to property, plant, and equipment for fiscal year 2009 to be in the range of $50 million to $60 million.
- Liquidity: The company maintains a $200 million revolving credit facility with $170 million available as of September 27, 2009. It is in compliance with all financial covenants (fixed charge coverage and debt-to-operating cash flow ratios).
- Commodity Hedging: The company utilizes derivative instruments to hedge diesel fuel (100% for 2009/2010) and aluminum (75% for 2010/2011). These hedges provided a favorable impact of $5.3 million to cost of sales YTD 2009.
- Risk Factors:
- Legislative/Tax Risk: Potential federal or state taxes on "sugar" beverages could materially affect demand and costs.
- Competitive Landscape: Uncertainty regarding the impact of mergers between primary competitors and their franchisors.
- Concentration Risk: Approximately 88% of bottle/can volume consists of The Coca-Cola Company products; Wal-Mart and Food Lion account for 30% of total bottle/can volume.
- Guarantees: The company guarantees $38.4 million of debt and lease obligations for two manufacturing cooperatives (SAC and Southeastern).
Investor Verification Checklist
- Recurring vs. Non-Recurring Items: Verify the sustainability of the profit margin expansion by isolating the impact of the 2008 pension exit charge ($13.8M) and restructuring costs ($4.0M) which are absent in 2009.
- Volume Trends: Monitor the continued decline in bottled water and sparkling beverage volumes (excluding energy drinks) to assess long-term revenue stability.
- Debt Maturities: Confirm the company's ability to service its debt load, noting the recent refinancing of $176.7M in debentures and the current $30M draw on the revolving credit facility.
- Tax Position: Review the $3.0 million in unrecognized tax benefits and the potential for future adjustments as statutes of limitations lapse.
- Cooperative Exposure: Assess the financial health of the South Atlantic Canners (SAC) and Southeastern Container cooperatives, given the company's $38.4 million guarantee exposure.