Coca-Cola Bottling Co. Consolidated — Q3 2012 Form 10-Q
Reporting period: Quarter and first nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. The unaudited filing was signed November 9, 2012. The company produces, markets and distributes Coca-Cola and other nonalcoholic beverages, primarily across eleven Southeastern states.
Financial performance
- Q3 revenue: Net sales were $419.9 million, up 3.4%. Bottle/can volume to retail customers increased 2.6%; bottle/can price per unit rose 0.6%.
- Q3 earnings: Gross margin was $170.9 million (40.7% of sales, versus 40.1%); operating income was $27.4 million; net income attributable to the company was $10.1 million, up 3.2%. Basic EPS was $1.09 for both common share classes.
- First nine months: Net sales were $1,227.7 million, up 3.3%; gross margin was $499.9 million (40.7% versus 40.2%); operating income was $74.6 million, up 2.8%. Net income attributable to the company declined 5.2% to $25.4 million; basic EPS was $2.75 versus $2.91.
- Costs and taxes: Nine-month selling, delivery and administrative expenses rose 5.0% to $425.3 million, faster than sales. Income tax expense increased 18.5% to $19.2 million; the reported effective tax rate rose to 40.5% from 35.5%, principally reflecting increased valuation allowance for certain deferred tax assets.
- Cash flow: Nine-month operating cash flow was $65.4 million, versus $73.6 million. Investing activities used $33.0 million, including $36.5 million of cash additions to property, plant and equipment; financing activities used $10.5 million, including $6.9 million of dividends. Cash increased $21.9 million to $112.7 million.
- Liquidity and debt: Current assets were $352.2 million and current liabilities $326.4 million, or $25.7 million of working capital. Debt was $523.3 million and capital lease obligations $70.8 million; net debt and leases were $481.5 million after cash. A $200 million revolving facility and $20 million uncommitted line had no borrowings outstanding. The company reported compliance with facility covenants.
- Margins and dividend: Gross margin improved year over year in Q3 and year to date. Quarterly dividends were $0.25 per share; nine-month dividends were $0.75 per share for each common share class.
Changes and operating drivers
- Q3 sales growth reflected higher retail bottle/can volume, including an 8.2% increase in still beverages and 1.3% in sparkling beverages. Nine-month bottle/can volume rose 1.4%, with still beverages up 7.1%; sales to other Coca-Cola bottlers fell 8.9% by volume.
- Higher bottle/can pricing and lower aluminum hedging costs supported gross margin. These benefits were partly offset by higher raw-material and full-goods costs and lower marketing support. Nine-month marketing funding support from beverage companies was $40.4 million, down from $44.0 million.
- Management attributed higher S,D&A costs to payroll and benefits, marketing, insurance, professional fees, software amortization and depreciation. Interest expense was nearly flat in Q3 and up 1.1% year to date.
- Q3 2012 included a $1.0 million favorable aluminum-hedge mark-to-market adjustment to cost of sales and a $0.4 million tax expense increase from valuation allowance changes; the filing also reports a $0.2 million tax benefit from reducing uncertain tax positions. Comparisons with 2011 were affected by 2011 fuel and aluminum hedge adjustments.
Outlook, risks and contingencies
- No specific full-year earnings or revenue guidance was provided. Management expected 2012 capital additions of $60–$70 million, no further company-sponsored pension contributions in 2012, and approximately $3 million of postretirement medical payments.
- Management warned that commodity costs, particularly corn, could remain under upward pressure and that gross margins could be lower for the remainder of 2012 than in 2011 unless price increases offset costs. A 10% increase in relevant commodity prices was estimated to raise costs by approximately $23 million over the next 12 months, assuming unchanged volume. The company had entered aluminum hedges for part of its 2013 purchases; 2012 aluminum, diesel and gasoline purchases were not hedged.
- $150 million of senior notes mature in November 2012. Management expected repayment using cash, the $20 million line and borrowings under the $200 million revolver; $30 million of the notes was classified as long-term based on anticipated revolver borrowing. Management said it had adequate resources for at least the next 12 months.
- The company guaranteed $36.6 million of debt of two bottler cooperatives and reported potential maximum exposure, including equity interests, of $72.8 million if those entities borrowed to their capacities. Other commitments include $25.1 million of long-term marketing arrangements, $20.8 million of standby letters of credit, and cooperative purchase obligations. Management did not expect material losses from guarantees, litigation or tax audits.
- Business risks include reliance on Coca-Cola products and concentrate, commodity and fuel costs, competition, customer concentration (Walmart represented about 15% of sales), and dependence on two domestic suppliers for aluminum cans and plastic bottles. Management noted seasonality: second and third quarter sales are historically higher.
Important facts for investors to verify
- Whether the November 2012 $150 million note maturity was refinanced or repaid as planned, and the resulting debt and liquidity position.
- Whether higher input costs and reduced marketing support pressured subsequent gross margins, and how effective pricing and 2013 aluminum hedges proved to be.
- Whether sales growth, especially still beverages, continued and whether volume declines in sales to other Coca-Cola bottlers persisted.
- How the higher tax rate and valuation allowance affected subsequent earnings and realization of deferred tax assets.
- Whether operating cash flow, capital spending within the stated range, cooperative guarantees and other contractual obligations remained manageable.