Business Context and Reporting Period
Company: Coca-Cola Bottling Co. Consolidated (CCBCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: April 4, 2010 (First Quarter 2010)
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 first quarter is historically a low-volume season compared to the second and third quarters.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Sales | $347,498 | $336,261 |
| Gross Margin | $146,703 | $147,129 |
| Gross Margin % | 42.2% | 43.8% |
| Income from Operations | $17,659 | $21,141 |
| Net Income | $5,135 | $8,823 |
| Net Income Attributable to CCBCC | $4,660 | $8,531 |
| Diluted EPS (Common Stock) | $0.51 | $0.93 |
| Cash Provided by Operating Activities | $5,718 | $1,723 |
| Total Debt & Capital Lease Obligations | $635,122 | $657,131 |
| Cash and Cash Equivalents | $48,325 | $37,996 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 3.3% ($11.2 million) driven by a 5.0% increase in bottle/can volume and a $4.7 million increase in sales of the company's own brand portfolio (primarily Tum-E Yummies). This was partially offset by a 3.7% decrease in average sales price per unit.
- Profitability Decline: Net income attributable to CCBCC decreased 45.4% ($3.9 million). Operating income fell 16.5% due to a decrease in gross margin percentage and a 2.4% increase in Selling, Delivery, and Administrative (S,D&A) expenses.
- Margin Compression: Gross margin percentage dropped to 42.2% from 43.8%, primarily due to lower sales prices per unit and a shift in product mix toward lower-priced future consumption 12-ounce cans.
- Expense Increases: S,D&A expenses rose $3.1 million, driven by increased employee auto allowance costs, higher fuel costs (due to mark-to-market adjustments on hedging), and professional fees. These were partially offset by lower bad debt expense and depreciation.
- Tax Rate Impact: The effective income tax rate increased significantly to 44.4% from 26.4%. This was primarily due to the elimination of the Medicare Part D subsidy tax deduction following the enactment of the Patient Protection and Affordable Care Act (PPACA).
- Liquidity: Cash and cash equivalents increased by $30.6 million, supported by strong operating cash flow and new borrowings ($35 million total) on credit facilities to anticipate second-quarter payments.
Guidance, Outlook, Risks, and Unusual Items
- 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.
- Pension Contributions: The company expects to contribute approximately $6.5 million to its company-sponsored pension plans in 2010.
- Unusual Items:
- Legislative Impact: A $0.5 million unfavorable tax adjustment was recorded due to the PPACA eliminating the Medicare Part D subsidy deduction.
- Hedging Results: Fuel hedging resulted in a $0.4 million increase to costs in Q1 2010 (compared to a $1.5 million decrease in Q1 2009). Aluminum hedging provided a $0.5 million benefit to cost of sales.
- Subsequent Event: Severe flooding in Nashville, Tennessee, in early May 2010 damaged a production/sales distribution facility. The company is evaluating the impact on financial statements.
- Risks:
- Commodity Prices: Exposure to price fluctuations in aluminum, corn, resin, and diesel fuel. A 10% increase in commodity prices could increase costs by approximately $24 million over the next 12 months.
- Industry Consolidation: Uncertainty regarding the impact of The Coca-Cola Company's acquisition of Coca-Cola Enterprises (CCE) and competitor acquisitions.
- Customer Concentration: Wal-Mart Stores, Inc. and Food Lion, LLC accounted for approximately 19% and 12% of total bottle/can volume, respectively.
Investor Verification Checklist
- Impact of Nashville Flood: Verify the final assessment of damages and insurance recoveries related to the May 2010 flood at the Nashville facility.
- Healthcare Reform Costs: Monitor the long-term financial impact of the PPACA on employee benefit costs and tax liabilities beyond the initial Q1 adjustment.
- Commodity Hedging Effectiveness: Review the performance of fuel and aluminum hedging programs in subsequent quarters to ensure cost mitigation strategies remain effective.
- 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) under the $200 million revolving credit facility.
- Brand Portfolio Growth: Assess the sustainability of the revenue growth from the company's own brand portfolio (e.g., Tum-E Yummies) and the associated marketing costs.