Business Context and Reporting Period
Company: Coca-Cola Bottling Co. Consolidated (CCBCC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 3, 2010 (Third Quarter and First Nine Months)
Business Overview: CCBCC is the largest independent 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) | Q3 2010 | Q3 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Net Sales | $395,364 | $374,556 | $1,160,223 | $1,088,566 |
| Gross Margin | $173,117 | $157,320 | $487,828 | $464,576 |
| Gross Margin % | 43.8% | 42.0% | 42.0% | 42.7% |
| Income from Operations | $33,662 | $26,296 | $81,139 | $78,115 |
| Net Income (Total) | $17,211 | $16,387 | $35,750 | $38,128 |
| Net Income Attributable to CCBCC | $15,533 | $15,428 | $32,236 | $36,146 |
| Diluted EPS (Common Stock) | $1.68 | $1.68 | $3.50 | $3.93 |
| Cash and Cash Equivalents | $30,424 | $25,062 | $30,424 | $25,062 |
| Long-Term Debt | $523,025 | $552,882 | $523,025 | $552,882 |
| Net Debt & Capital Leases | $549,348 | $587,314 | $549,348 | $587,314 |
Note: All figures in thousands except per share data and percentages. Net Debt is a non-GAAP measure defined as total debt and capital lease obligations less cash and cash equivalents.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.6% in Q3 2010 and 6.6% YTD 2010 compared to the prior year. Growth was driven by a 2.1% increase in bottle/can sales price per unit in Q3 and a 6.8% increase in volume YTD. Sales of the company's own brand portfolio (primarily Tum-E Yummies) increased by $4.4 million in Q3 and $15.2 million YTD.
- Profitability: Operating income rose 28.0% in Q3 2010 due to improved gross margins and controlled selling, delivery, and administrative (S,D&A) expenses. However, YTD net income attributable to CCBCC decreased 10.8% primarily due to a higher effective tax rate and increased costs from aluminum hedging.
- Cost of Sales: YTD cost of sales increased 7.8%, driven by higher volume and increased costs from the aluminum hedging program, partially offset by lower raw material costs (concentrate, aluminum, high fructose corn syrup).
- Expenses: S,D&A expenses increased 6.4% in Q3 and 5.2% YTD. Increases were attributed to higher employee salaries, bonuses, and professional fees, partially offset by lower fuel costs and insurance expenses.
- Tax Rate: The effective tax rate for YTD 2010 was 34.6%, compared to 23.8% in YTD 2009. The increase was due to the elimination of the Medicare Part D subsidy tax deduction and smaller reductions in the reserve for uncertain tax positions compared to the prior year.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Flood Damage: A severe rainstorm in Nashville, Tennessee, in May 2010 caused flood damage. The company recorded a $0.2 million loss on uninsured equipment, offset by a $1.1 million gain on insured equipment. A receivable of $7.1 million was recorded for insured losses, with $1.5 million collected by Q3 end. Management does not expect significant further expenses related to this event.
- Hedging Impacts: Aluminum hedging resulted in a $3.0 million favorable mark-to-market adjustment in Q3 2010 but a $3.2 million unfavorable adjustment YTD 2010. Fuel hedging increased costs by $1.5 million YTD 2010.
- Outlook and Capital Spending: Management anticipates total additions to property, plant, and equipment for fiscal year 2010 to be in the range of $55 million to $60 million. The company expects to maintain sufficient resources to meet working capital and capital spending requirements.
- Risks and Contingencies:
- Commodity Prices: The company is exposed to price risks for aluminum, corn, resin, and crude oil. A 10% increase in commodity prices is estimated to increase costs by approximately $27 million over the next 12 months.
- Healthcare Reform: The Patient Protection and Affordable Care Act (PPACA) and Reconciliation Act may increase the cost of employer-sponsored medical plans and reduce tax benefits related to Medicare Part D subsidies.
- Cooperative Guarantees: The company guarantees $35.7 million of debt and lease obligations for two manufacturing cooperatives (South Atlantic Canners and Southeastern Container). Management believes the risk of material loss is mitigated by the cooperatives' assets and pricing power.
- Market Consolidation: The acquisition of Coca-Cola Enterprises Inc. (CCE) by The Coca-Cola Company may cause uncertainty within the bottler system, though the material impact is currently unknown.
Key Facts for Investor Verification
- Debt Covenants: Verify continued compliance with the $200 million revolving credit facility covenants (fixed charges coverage ratio of 1.5:1 and debt to operating cash flow ratio of 6.0:1).
- Commodity Hedging Effectiveness: Monitor the impact of aluminum and fuel hedging programs on future cost of sales and S,D&A expenses, as mark-to-market adjustments have caused volatility.
- Healthcare Legislation Impact: Assess the final financial impact of the PPACA on employee benefit costs and tax liabilities.
- Cooperative Financial Health: Review the financial stability of South Atlantic Canners and Southeastern Container, given the company's $35.7 million guarantee exposure.
- Capital Expenditures: Track actual capital spending against the $55-$60 million guidance for fiscal 2010.