Business Context and Reporting Period
Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 2, 2011 (52 weeks)
Business Overview: The Company is the largest independent Coca-Cola bottler in the United States, producing, marketing, and distributing nonalcoholic beverages primarily in the Southeastern U.S. (North Carolina, South Carolina, West Virginia, and portions of surrounding states). Approximately 88% of its bottle/can volume consists of products from The Coca-Cola Company. The Company also distributes products from Dr Pepper Snapple Group, Monster Energy, and its own portfolio (e.g., Tum-E Yummies, Country Breeze tea).
Key Financial Metrics (Fiscal Year 2010)
| Metric | 2010 | 2009 | 2008 |
|---|---|---|---|
| Net Sales | $1,514.6 million | $1,443.0 million | $1,463.6 million |
| Gross Margin | $640.8 million (42.3%) | $620.0 million (43.0%) | $615.2 million (42.0%) |
| Income from Operations | $96.3 million | $94.5 million | $59.5 million |
| Net Income (Consolidated) | $39.5 million | $40.5 million | $11.5 million |
| Net Income Attributable to Company | $36.1 million | $38.1 million | $9.1 million |
| Diluted EPS (Common Stock) | $3.91 | $4.15 | $0.99 |
| Total Debt & Capital Leases | $582.3 million | $601.0 million | $669.1 million |
| Cash & Cash Equivalents | $45.9 million | $17.8 million | $45.4 million |
| Operating Cash Flow | $98.1 million | $79.5 million | $96.6 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 5.0% to $1.51 billion, driven by a 4.4% increase in bottle/can volume and an $18.8 million increase in sales of the Company's own brand portfolio (primarily Tum-E Yummies). This offset a 1.3% decrease in bottle/can sales price per unit.
- Profitability: Net income attributable to the Company decreased 5.5% to $36.1 million. This decline was primarily due to unfavorable mark-to-market adjustments on aluminum hedging ($3.8 million pre-tax) and fuel hedging ($1.4 million pre-tax), as well as $3.7 million in impairment/accelerated depreciation charges.
- Cost of Sales: Increased 6.2% due to higher volume and hedging costs, partially offset by a decrease in raw material costs (concentrate, aluminum, high fructose corn syrup) and a $0.9 million gain on flood-damaged equipment replacement.
- Debt Reduction: Total debt and capital lease obligations decreased to $582.3 million from $601.0 million in 2009. The Company had no outstanding borrowings on its $200 million revolving credit facility as of year-end.
- Seasonality Adjustment: The 2009 fiscal year included an additional selling week, which added approximately $18 million in net sales and $6 million in gross margin to that year's results, complicating direct year-over-year comparisons.
Guidance, Outlook, and Risks
- Outlook: Management anticipates raw material costs (packaging and fuel) to rise significantly in 2011. Capital expenditures are projected to be between $60 million and $70 million for 2011. Pension contributions are expected to range from $7 million to $10 million.
- Key Risks:
- Customer Concentration: Wal-Mart (17% of net sales) and Food Lion (10% of net sales) represent significant revenue sources; loss of either would be material.
- Commodity Prices: Exposure to price volatility in aluminum, plastic resin, and fuel. A 10% increase in commodity prices could increase costs by approximately $23 million.
- Marketing Funding: The Company relies on marketing funding support from The Coca-Cola Company and other beverage companies, which is not contractually guaranteed at historical levels.
- Regulatory/Health Trends: Potential legislation regarding soft drink taxes, school sales restrictions, and shifting consumer preferences toward healthier beverages.
- System Uncertainty: Recent acquisitions of bottlers by franchisors (e.g., The Coca-Cola Company's acquisition of Coca-Cola Enterprises) may create uncertainty within the bottling system.
- Unusual Items: In May 2010, a severe flood in Nashville damaged a production facility. The Company recorded a $0.2 million loss on uninsured equipment but received $7.1 million in insurance proceeds, resulting in a net gain of $0.9 million on the replacement of damaged equipment.
Investor Verification Checklist
- Hedging Impact: Verify the sensitivity of future earnings to aluminum and fuel price fluctuations, given the significant mark-to-market adjustments in 2010.
- Marketing Support: Confirm the stability of marketing funding support from The Coca-Cola Company, as this directly impacts gross margins.
- Customer Concentration: Monitor the relationship and pricing power with Wal-Mart and Food Lion, which collectively account for roughly 27% of net sales.
- Debt Maturities: Review the schedule for debt maturities, specifically the $150 million Senior Notes due in 2012 and the $200 million revolving credit facility maturing in March 2012.
- Pension Obligations: Assess the funded status of pension plans, which showed a net underfunded status of $61.7 million as of January 2, 2011.