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| COT > SEC Filings for COT > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
Quarterly Report
This discussion is intended to further the reader's understanding of the consolidated financial condition and results of operations of our Company. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our annual report on Form 10-K and the Form 8-K (filed on May 29, 2009) for the year ended December 27, 2008 (together, the "2008 Annual Report"). These historical financial statements may not be indicative of our future performance. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A. "Risk Factors" in our 2008 Annual Report.
Overview
We are one of the world's largest non-alcoholic beverage companies and the world's largest retailer brand soft drink company. Our objective of creating sustainable long-term growth in revenue and profitability is predicated on working closely with our retailer partners to provide proven profitable products. As a fast follower of innovative products, our goal is to identify which new products are succeeding in the marketplace and develop similar private label products to provide our retail partners and their consumers with high quality products at a better value. This objective is increasingly relevant in more difficult economic times.
Sales of our products tend to be seasonal, with the second and third quarters accounting for higher unit sales of our products than the first and fourth quarters. The seasonality of our sales volume, combined with the accounting for fixed costs such as depreciation, amortization, rent and interest expense, impacts our results on a quarterly basis. Accordingly, our results for the six months ended June 27, 2009 may not necessarily be indicative of the results that may be expected for the full year.
Retailer brand suppliers, such as us, typically operate at low margins and therefore relatively small changes in cost structures can materially impact results. In 2008 and during the first six months of 2009, industry-wide carbonated soft drink ("CSD") sales continued to decline, and ingredient and packaging costs remained volatile.
During the six months ended June 27, 2009, consumers seeking better value in private label products during difficult economic times, coupled with the impact of our plan to refocus on private label, resulted in increased CSD sales volume and market share gains in North America. However, we cannot predict whether the consumer shift to private label products will continue after the economy improves. Our improved net selling prices and product mix in North America, increased sales volume and market share, along with lower operating costs and plant efficiencies resulted in improved gross profit margins during the six months ended June 27, 2009 as compared to the six months ended June 28, 2008. Some of the factors that improved gross profit margins during the six months ended June 27, 2009 are not expected to recur later this year.
Ingredient and packaging costs represent a significant portion of our cost of sales. These costs are subject to global and regional commodity price trends. Our three largest commodities are aluminum, PET resin, and corn (which is used to produce high fructose corn syrup ("HFCS"). We attempt to manage our exposure to fluctuations in ingredient and packaging costs of our products by implementing price increases as needed and entering into fixed price commitments for a portion of our ingredient and packaging requirements. In 2008 and 2009, we entered into fixed price commitments for a majority of our 2009 HFCS and aluminum requirements, with the remaining requirements to be purchased at the prevailing 2009 market prices. We have also entered into fixed price commitments for approximately half of our estimated aluminum requirements for 2010.
In the U.S., we have been supplying Wal-Mart with private label CSDs under an exclusive supply agreement dated December 21, 1998, between Cott Beverages Inc., a wholly-owned subsidiary of the Company, and Wal-Mart Stores, Inc. (the "Exclusive U.S. Supply Contract"). We also supply Wal-Mart in the U.S. with certain other products on a non-exclusive basis and its affiliated companies with a variety of products on a non-exclusive basis in Canada, the U.K. and Mexico, including CSDs, clear, still and sparkling flavored waters, juice-based products, bottled water, energy drinks and ready-to-drink teas. On January 27, 2009, we received written notice from Wal-Mart stating that Wal-Mart was exercising its right to terminate, without cause, the Exclusive U.S. Supply Contract. The termination is effective on January 28, 2012. This has the effect of returning our relationship to more typical market terms over time, and allows Wal-Mart to introduce other suppliers in the future, if they so desire. The termination provision of the Exclusive U.S. Supply Contract provides for our exclusive right to supply CSDs to Wal-Mart in the U.S. to be phased out over a period of three years following notice of termination (the "Notice Period"). Accordingly, we have the exclusive right to supply at least two-thirds of Wal-Mart's total CSD volumes in the U.S., on an exclusive basis, during the first 12 months of the Notice Period, and we have the exclusive right to supply at least one-third of Wal-Mart's total CSD volumes in the U.S. during the second 12 months of the Notice Period. Notwithstanding the notice of termination of the Exclusive U.S. Supply Contract, we continue to supply Wal-Mart with all of its private label CSDs in the U.S. However, should Wal-Mart choose to introduce an additional supplier to fulfill a portion of its requirements for its private label CSDs, our operating results could be materially adversely affected.
Summary financial results
Our net income for the three months ended June 27, 2009 (the "second quarter") and the six months ended June 27, 2009 ("first half of 2009" or "year-to-date") was $33.7 million or $0.48 per diluted share and $53.6 million or $0.76 per diluted share, respectively, compared with a net loss of $1.8 million or $0.03 per diluted share and a net loss of $23.1 million or $0.32 per diluted share for the three and six months ended June 28, 2008, respectively.
The following items of significance impacted our financial results for the first half of 2009:
• the consumer trend toward retailer brand products;
• overall decrease of 1.3% beverage case volume reflecting a slight increase in our North America operating segment offset by decreases in our U.K. and Mexico operating segments;
• improved gross margins in the first half of 2009 to 16.3% from 11.4% for the six months ended June 28, 2008 ("first half of 2008"), reflecting the benefit of price increases announced in the second half of 2008, lower ingredient and packaging costs and increased efficiencies from the utilization of plants;
• decrease in the foreign exchange rate for the Canadian dollar, pound sterling and Mexican peso as compared to the U.S. dollar resulted in a $75.2 million adverse impact on revenues and a $10.0 million adverse impact on gross profit;
• additional selling, general and administrative cost savings;
• restructuring, severance and lease termination costs of $1.6 million in connection with the 2009 Restructuring Plan and asset impairment costs of $3.5 million relating primarily to the loss of a customer; and
• a tax benefit resulting from the reversal of accruals related to uncertain tax positions that generated a $14.1 million tax benefit and a benefit of $2.4 million on the reversal of interest and penalties, a lower effective income tax rate resulting from intercompany debt structures and the partial reversal of the previously recorded valuation allowance in the U.S. offset by a valuation allowance in Mexico, and reduced tax rates in Canada.
The following items of significance impacted our financial results for the first half of 2008:
• the highly competitive environment and continued decline in the North America CSD industry, particularly in the U.S.;
• executive transition costs of $6.8 million (including $1.9 million of non-cash stock compensation expense);
• restructuring severance costs of $6.4 million related to the Refocus Plan;
• increased selling, general and administrative costs associated with increased expenses for expiring trademarks, amortization of software costs, additional sales and marketing costs and bad debt expense;
• accelerated depreciation of $1.6 million resulting from Wal-Mart's decision to remove certain of our vending machines from Wal-Mart stores; and
• a higher effective tax rate resulting from the U.S. valuation allowance.
Non-GAAP Measures
In this report, we present certain information regarding changes in our revenue excluding the impact of foreign exchange. We believe that this is a useful financial measure for investors in evaluating our operating performance for the periods presented, as when read in conjunction with our changes in revenue on a U.S. GAAP basis, it presents a useful tool to evaluate our ongoing operations. In addition, these adjusted amounts are one of the factors we use in internal evaluations of the overall performance of our business. This information, however, is not a measure of financial performance under U.S. GAAP and should not be considered a substitute for changes in revenue as determined in accordance with U.S. GAAP.
Results of Operations
For the Three Months Ended For the Six Months Ended
June 27, 2009 June 28, 2008 June 27, 2009 June 28, 2008
Percent of Percent of Percent of Percent of
Revenue Revenue Revenue Revenue
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 83.3 % 87.8 % 83.7 % 88.6 %
Gross profit 16.7 % 12.2 % 16.3 % 11.4 %
Selling, general, and
administrative expenses 8.0 % 9.5 % 8.7 % 11.4 %
Loss on disposal of property,
plant and equipment 0.0 % 0.1 % 0.0 % 0.0 %
Restructuring 0.1 % 1.5 % 0.2 % 0.8 %
Asset impairment 0.8 % 0.0 % 0.4 % 0.0 %
Operating income (loss) 7.8 % 1.1 % 7.0 % -0.8 %
Other income, net -0.6 % -1.0 % -0.3 % -0.7 %
Interest expense, net 1.7 % 1.7 % 1.8 % 1.8 %
Income (loss) before income
taxes 6.7 % 0.4 % 5.5 % -1.9 %
Income tax (benefit) expense -1.3 % 0.7 % -1.4 % 0.7 %
Net income (loss) 8.0 % -0.3 % 6.9 % -2.6 %
Less: Non-controlling
interests 0.3 % 0.1 % 0.3 % 0.1 %
Net income (loss) attributed
to Cott Corporation 7.7 % -0.4 % 6.6 % -2.7 %
Depreciation & amortization 3.7 % 4.3 % 4.1 % 4.8 %
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Analysis of Revenue, Operating (Loss) Income and Case Volume by Geographic
Region:
For the Three Months Ended For the Six Months Ended
(in millions of U.S. Dollars) June 27, 2009 June 28, 2008 June 27, 2009 June 28, 2008
Revenue
North America $ 323.5 $ 328.1 $ 612.5 $ 602.7
United Kingdom 99.0 115.1 163.0 208.0
Mexico 10.6 18.0 20.4 34.1
RCI 5.7 5.2 9.9 11.0
All Other - 0.1 - 0.4
Total $ 438.8 $ 466.5 $ 805.8 $ 856.2
Operating (loss) income
North America $ 26.6 $ (1.5 ) $ 52.9 $ (15.5 )
United Kingdom 8.3 6.7 5.7 8.9
Mexico (1.2 ) (1.2 ) (3.5 ) (3.6 )
RCI 0.6 1.5 1.5 3.6
All Other - (0.2 ) - (0.3 )
Total $ 34.3 $ 5.3 $ 56.6 $ (6.9 )
For the Three Months Ended For the Six Months Ended
(in millions of cases) June 27, 2009 June 28, 2008 June 27, 2009 June 28, 2008
Volume 8oz. equivalent cases - Total
Beverage (including concentrate)
North America 175.7 183.8 336.5 340.7
United Kingdom 52.7 53.8 92.3 98.2
Mexico 5.6 8.3 11.2 15.9
RCI 57.3 56.6 106.4 119.2
All Other - - - 0.2
Total 291.3 302.5 546.4 574.2
Volume 8oz. equivalent cases - Filled
Beverage
North America 157.2 158.6 299.0 294.2
United Kingdom 47.1 48.3 82.8 87.9
Mexico 5.6 8.3 11.2 15.9
RCI 0.1 - 0.1 -
All Other - 0.1 - 0.3
Total 210.0 215.3 393.1 398.3
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Analysis of Revenue by Geographic Region:
Three Months Ended June 27, 2009
North United
(in millions of U.S. dollars) Cott 1 America Kingdom Mexico RCI All Other
Change in revenue $ (27.7 ) $ (4.6 ) $ (16.1 ) $ (7.4 ) $ 0.5 $ (0.1 )
Impact of foreign exchange 37.5 8.7 24.9 3.9 - -
Change excluding foreign exchange $ 9.8 $ 4.1 $ 8.8 $ (3.5 ) $ 0.5 $ (0.1 )
Percentage change in revenue -5.9 % -1.4 % -14.0 % -41.1 % 9.6 % -100.0 %
Percentage change in revenue
excluding foreign exchange 2.3 % 1.3 % 9.8 % -24.8 % 9.6 % -100.0 %
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1 Cott includes the following operating segments: North America, United Kingdom, Mexico, RCI and All Other.
Six Months Ended June 27, 2009
North United
(in millions of U.S. dollars) Cott 1 America Kingdom Mexico RCI All Other
Change in revenue $ (50.4 ) $ 9.8 $ (45.0 ) $ (13.7 ) $ (1.1 ) $ (0.4 )
Impact of foreign exchange 75.2 17.1 50.4 7.8 - (0.1 )
Change excluding foreign exchange $ 24.8 $ 26.9 $ 5.4 $ (5.9 ) $ (1.1 ) $ (0.5 )
Percentage change in revenue -5.9 % 1.6 % -21.6 % -40.2 % -10.0 % -100.0 %
Percentage change in revenue
excluding foreign exchange 3.2 % 4.6 % 3.4 % -22.4 % -10.0 % -100.0 %
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1 Cott includes the following operating segments: North America, United Kingdom, Mexico, RCI and All Other.
Analysis of Revenue by Product:
For the Three Months Ended June 27, 2009
North United
(in millions of U.S. dollars) America Kingdom Mexico RCI All Other Total
Revenue
Carbonated soft drinks $ 207.0 $ 45.9 $ 9.5 $ - $ - $ 262.4
Concentrate 1.6 1.5 - 5.1 - 8.2
All other products 114.9 51.6 1.1 0.6 - 168.2
Total $ 323.5 $ 99.0 $ 10.6 $ 5.7 $ - $ 438.8
For the Three Months Ended June 27, 2009
North United
(in millions of physical cases) America Kingdom Mexico RCI All Other Total
8oz. volume
Carbonated soft drinks 97.4 23.5 5.1 - - 126.0
Concentrate 18.5 5.6 - 57.2 - 81.3
All other products 59.8 23.6 0.5 0.1 - 84.0
Total 175.7 52.7 5.6 57.3 - 291.3
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For the Six Months Ended June 27, 2009
North United
(in millions of U.S. dollars) America Kingdom Mexico RCI All Other Total
Revenue
Carbonated soft drinks $ 400.9 $ 74.2 $ 18.9 $ - $ - $ 494.0
Concentrate 3.1 2.4 - 9.3 - 14.8
All other products 208.5 86.4 1.5 0.6 - 297.0
Total $ 612.5 $ 163.0 $ 20.4 $ 9.9 $ - $ 805.8
For the Six Months Ended June 27, 2009
North United
(in millions of physical cases) America Kingdom Mexico RCI All Other Total
8oz. volume
Carbonated soft drinks 190.4 41.1 10.5 - - 242.0
Concentrate 37.5 9.5 - 106.3 - 153.3
All other products 108.6 41.7 0.7 0.1 - 151.1
Total 336.5 92.3 11.2 106.4 - 546.4
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For the Three Months Ended June 28, 2008
North United
(in millions of U.S. dollars) America Kingdom Mexico RCI All Other Total
Revenue
Carbonated soft drinks $ 202.9 $ 50.6 $ 16.9 $ - $ 0.1 $ 270.5
Concentrate 1.6 1.7 - 5.2 - 8.5
All other products 123.6 62.8 1.1 - - 187.5
Total $ 328.1 $ 115.1 $ 18.0 $ 5.2 $ 0.1 $ 466.5
For the Three Months Ended June 28, 2008
North United
(in millions of physical cases) America Kingdom Mexico RCI All Other Total
8oz. volume
Carbonated soft drinks 94.7 24.0 7.8 - - 126.5
Concentrate 25.2 6.3 - 56.6 - 88.1
All other products 63.9 23.5 0.5 - - 87.9
Total 183.8 53.8 8.3 56.6 - 302.5
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For the Six Months Ended June 28, 2008
North United
(in millions of U.S. dollars) America Kingdom Mexico RCI All Other Total
Revenue
Carbonated soft drinks $ 370.5 $ 90.8 $ 32.2 $ - $ 0.4 $ 493.9
Concentrate 3.0 3.6 - 11.0 - 17.6
All other products 229.2 113.6 1.9 - - 344.7
Total $ 602.7 $ 208.0 $ 34.1 $ 11.0 $ 0.4 $ 856.2
For the Six Months Ended June 28, 2008
North United
(in millions of physical cases) America Kingdom Mexico RCI All Other Total
8oz. volume
Carbonated soft drinks 175.2 44.0 15.0 - 0.2 234.4
Concentrate 46.3 11.1 - 119.2 - 176.6
All other products 119.2 43.1 0.9 - - 163.2
Total 340.7 98.2 15.9 119.2 0.2 574.2
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Revenue - Revenue decreased 5.9% in both the second quarter and year-to-date from the comparable prior year periods. This change was primarily due to a decrease in filled beverage 8-ounce equivalents ("beverage case volume") in our U.K. and Mexico operating segments and adverse foreign exchange rates offset in part by a year-to-date increase in North America beverage case volume. The 9.6% decrease in the Canadian dollar, the 17.4% decrease in the pound sterling and the 22.3% decrease in the Mexican peso relative to the U.S. dollar since June 28, 2008 collectively had a year-to-date $75.2 million negative impact on our revenue and a $10.0 million negative impact on our gross margin from the comparable prior year period. Our overall average net selling price per beverage case (which is net revenue divided by beverage case volume) year-to-date decreased 1.3% as compared to the comparable prior year period primarily due to adverse foreign exchange impact.
Our North America operating segment revenue decreased 1.4% and increased 1.6% in the second quarter and year-to-date, respectively, from the comparable prior year periods, primarily due to a 0.9% decrease and a 1.6% increase, respectively, in beverage case volume. The North America beverage case volume increase year-to-date was primarily due to the change in consumer trends toward private label CSDs offset in part by a volume decline in water and energy drink products. Average net selling price per beverage case decreased by 0.5% for the second quarter and was essentially flat year-to-date from the comparable prior year periods. Absent foreign exchange impact, overall North America net revenue increased 1.3% and 4.6% for the second quarter and year-to-date, respectively.
Our U.K. operating segment revenue decreased 14.0% and 21.6% in the second quarter and year-to-date, respectively, from the comparable prior year periods, primarily due to unfavorable foreign exchange fluctuations and a 2.5% decrease and a 5.8% decrease, respectively, in beverage case volume. The U.K. case volume decrease was primarily due to declines in the CSD, water and fruit drink categories offset in part by increases from the energy drink category. Average net selling price per beverage case decreased 11.8% and 16.9% for the second quarter and year-to-date, respectively, from the comparable prior year periods. Absent foreign exchange impact, U.K. revenue increased 9.8% and 3.4% in the second quarter and year-to-date, respectively, as compared to the prior year.
Our Mexico operating segment revenue decreased 41.1% and 40.2% in the second quarter and year-to-date, respectively, from the comparable prior year periods, primarily due to a 32.5% and 29.6% decrease, respectively, in beverage case volume. Mexico case volume decreased in the second quarter and year-to-date primarily due to an overall weak economy, that was further exacerbated by the impact of the H1N1 virus, softness with modern trade customers, and the continuing impact of our credit policies. Net selling price per beverage case decreased 12.9% and 15.0% for the second quarter and year-to-date, respectively, from the comparable prior year periods. Absent foreign exchange impact, Mexico revenue decreased 24.8% and 22.4% for the second quarter and year-to-date, respectively, as compared to the prior year periods.
Our RCI operating segment revenue increased 9.6% and decreased 10.0% in the second quarter and year-to-date, respectively, from the comparable prior year periods, primarily due to a 1.2% increase and 10.7% decrease, respectively, in . . .
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