Coca-Cola Bottling Co. Consolidated — Q2 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the second quarter and first half ended July 1, 2012, compared with corresponding 2011 periods. The company produces, markets and distributes nonalcoholic beverages, primarily Coca-Cola products, across 11 states. It is seasonally stronger in the second and third quarters. Unless otherwise noted, financial amounts below are in millions.
Financial performance and position
- Revenue: Q2 net sales were $430.7 million, up 1.8%; first-half sales were $807.9 million, up 3.2%. Higher bottle/can pricing supported growth, while Q2 retail bottle/can volume fell 2.6%; first-half volume rose 0.7%.
- Profit and margins: Q2 gross profit increased 4.7% to $173.4 million and gross margin rose to 40.3% from 39.2%. Operating income was $28.5 million, nearly flat year over year. Net income attributable to the company was $10.7 million, down 3.2%; diluted EPS was $1.16 versus $1.20. First-half operating income declined 0.9% to $47.2 million; attributable net income declined 10.0% to $15.3 million and diluted EPS was $1.65 versus $1.84. First-half gross margin was 40.7% versus 40.2%.
- Costs and taxes: First-half selling, delivery and administrative costs rose 5.5% to $281.8 million, faster than sales. The effective tax rate was 41.5%, up from 38.1%, principally reflecting a $0.8 million increase in the valuation allowance for certain deferred tax assets.
- Cash flow: First-half operating cash flow was $16.8 million, down from $18.6 million. Capital expenditures were $25.5 million, implying negative operating cash flow after capital expenditures of about $8.7 million. Cash declined $12.4 million to $78.3 million.
- Debt and liquidity: Debt and capital lease obligations totaled $595.3 million; net debt and leases were $517.0 million. The company had $120 million of current debt and $403.3 million of long-term debt. Working capital was approximately $12.0 million. No borrowings were outstanding on the $200 million revolving facility or the $20 million uncommitted line; the revolver was fully available and covenant requirements were met.
- Other: Total assets were $1.375 billion and total equity was $206.2 million at July 1. First-half dividends were $0.50 per share for both common classes.
Material changes versus the prior comparable period
- Higher pricing and improved gross margin percentage lifted gross profit, but increased raw-material costs and purchases of finished goods offset much of the benefit.
- Q2 bottle/can retail volume declined, mainly in sparkling beverages; first-half volume was modestly higher, with still beverages offsetting weakness in sparkling products.
- Higher payroll, benefits, marketing and fuel costs drove higher selling, delivery and administrative expenses. First-half pension contributions also increased substantially, to $15.7 million from $2.5 million.
- First-half sales of still beverages and the company’s own-brand portfolio grew; sales to other Coca-Cola bottlers declined.
Outlook, commentary, risks and contingencies
- Management expected commodity costs, particularly corn-related costs, to remain under pressure and gross margins across product categories to be lower for the rest of 2012 than in 2011 unless price increases offset costs. A 10% increase in specified commodity prices was estimated to raise costs by about $23 million over the next 12 months, assuming unchanged volume.
- Management forecast 2012 capital expenditures of $60–$70 million, remaining pension contributions of about $4–$5 million, postretirement medical payments of about $3 million, and income-tax cash requirements of $12–$15 million. The filing provides no specific revenue or earnings guidance.
- $150 million of senior notes mature in November 2012. Management planned to repay them using cash and borrowings under the uncommitted line and revolving facility. The filing classified $30 million as long-term because it expected that portion to be funded by the revolver.
- The company guaranteed $37.8 million of cooperative debt; its stated maximum exposure including equity interests was $72.8 million if the cooperatives borrowed to capacity. It also had $20.8 million of standby letters of credit and $23.3 million of future long-term marketing commitments. Management did not expect ordinary-course legal matters to materially affect results.
- Business risks include dependence on Coca-Cola products or concentrates (about 88% of first-half bottle/can volume), major-customer concentration (Walmart accounted for about 15% of net sales), commodity and fuel costs, and the possibility of losing distribution rights if beverage-agreement requirements are unmet. The company had suspended its own fuel and aluminum derivative hedging after 2011.
- Management reported no impairment indicators for franchise rights or goodwill in the first half. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether the November 2012 $150 million note maturity was refinanced or repaid as planned, and the resulting borrowing costs and liquidity.
- Whether pricing can offset commodity inflation without further weakening sparkling-beverage volumes or margins.
- Whether operating cash generation improves enough to fund planned capital spending, dividends and pension obligations.
- The scale and terms of cooperative guarantees, purchase commitments and related-party leases, and any change in the cooperatives’ financial condition.
- Whether the higher tax rate and deferred-tax valuation allowance persist, and how pension funding needs develop.