Coca-Cola Bottling Co. Consolidated — Q2 2011 Form 10-Q
Reporting period: Quarter ended July 3, 2011; first half of fiscal 2011 compared with the corresponding 2010 periods. Amounts below are in millions of dollars unless stated otherwise. The filing identifies the registrant as Coca-Cola Bottling Co. Consolidated.
Business context
The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, across 11 states, chiefly in the Southeast. It described itself as the largest independent U.S. Coca-Cola bottler. Results are seasonal, with higher unit sales typically in the second and third quarters.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $422.9 | $417.4 | $782.5 | $764.9 |
| Gross margin | $165.6 | $168.0 | $314.7 | $314.7 |
| Gross margin percentage | 39.2% | 40.3% | 40.2% | 41.1% |
| Income from operations | $28.4 | $29.8 | $47.6 | $47.5 |
| Net income | $12.0 | $13.4 | $18.5 | $18.5 |
| Net income attributable to the company | $11.1 | $12.0 | $17.0 | $16.7 |
| Diluted EPS, Common Stock | $1.20 | $1.31 | $1.84 | $1.81 |
Q2 sales rose 1.3%, while company-attributable net income fell 7.8%. For the first half, sales increased 2.3% and attributable net income increased 1.9%. Higher bottle/can prices supported sales, but bottle/can volume declined 2.6% in Q2 and 1.3% for the half. Still-beverage volume increased while sparkling-beverage volume declined.
Higher raw-material costs, including plastic bottles, pressured gross margins; lower margins also reflected product mix. Q2 cost of sales rose 3.2%, faster than sales. Selling, delivery and administrative expense was down 0.8% in Q2 and essentially flat for the half. Net interest expense increased 2.7% in Q2, primarily because of new capital leases.
Cash flow, debt and liquidity
- First-half operating cash flow was $18.6 million, versus revised $23.9 million in first-half 2010. Capital expenditures were $32.2 million, resulting in operating cash flow less capital expenditures of approximately negative $13.6 million.
- Cash and cash equivalents were $26.2 million at July 3, 2011, down from $45.9 million at year-end 2010; restricted cash was an additional $3.0 million. The company reported net working capital of $99.2 million.
- Debt was $523.1 million and capital lease obligations were $76.0 million, totaling $599.1 million. The company’s reported net debt and capital lease obligations were $570.0 million. No borrowings were outstanding on its $200 million revolving facility or uncommitted line; all $200 million of the revolving facility was available.
- The revolving facility matures in March 2012. Management intended to negotiate a replacement facility during 2011. The company reported compliance with the facility’s financial covenants. Its overall weighted-average interest rate on debt and leases was 6.0% for the first half, versus 5.8% a year earlier.
- First-half capital spending was $32.2 million. The company expected full-year 2011 property, plant and equipment additions of $60–$70 million.
Outlook, risks and unusual items
- Management expected gross margins to be lower for the remainder of 2011 than in 2010 if rising commodity costs could not be offset by price increases. It estimated a 10% increase in relevant commodity prices would raise costs by approximately $26 million over the next 12 months, assuming unchanged volume.
- Commodity exposure includes packaging materials, sweeteners and fuel. The company was using derivatives to hedge substantially all projected diesel and gasoline purchases for the second through fourth quarters of 2011 and about 75% of projected aluminum requirements. First-half hedging activity increased costs by approximately $0.1 million for fuel and $0.9 million for aluminum.
- About 88% of first-half bottle/can volume to retail customers comprised Coca-Cola Company products. Wal-Mart accounted for 15% of net sales and 21% of bottle/can volume; Food Lion represented 9% of bottle/can volume. The filing notes that concentrate pricing and marketing support are not fully within the company’s control.
- The company guaranteed $41.1 million of debt and lease obligations of two manufacturing cooperatives. It reported maximum exposure of $75.1 million including its equity interests if the cooperatives borrowed to capacity; no guarantee liability was recorded. It also had $21.0 million in standby letters of credit.
- Two 15-year distribution-center capital leases entered into in Q1 added $18.6 million of lease assets and obligations. Pension and postretirement obligations, related-party leases, purchase commitments and legal and tax contingencies are additional items to monitor. Management said ordinary-course claims were not expected to have a material adverse effect.
- The company identified and corrected an immaterial error in prior-period cash-flow statements concerning accrued property and equipment additions. The correction increased reported operating cash flow and investing cash outflow for affected periods; it did not affect prior-period statements of operations or balance sheets. First-half 2010 operating cash flow presented here was revised to $23.9 million.
- Disclosure controls were assessed as effective at period-end, with no material change in internal control over financial reporting reported during the quarter.
Most important facts for investors to verify
- Whether pricing and product mix can offset ongoing input-cost inflation, given declining bottle/can volume and lower gross-margin percentages.
- Progress and terms of refinancing the $200 million revolving facility before its March 2012 maturity, including ongoing covenant compliance and credit access.
- Cash conversion and planned capital spending, particularly the gap between first-half operating cash flow and capital expenditures.
- Commodity-price assumptions and hedge effectiveness, including the potential stated $26 million cost sensitivity.
- Exposure to Coca-Cola Company supply and support, major retail customers, cooperative guarantees and related-party leases.
- Consistency of revised historical cash-flow figures with previously filed statements and the company’s subsequent reporting.