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COKE > SEC Filings for COKE > Form 10-Q on 12-May-2011All Recent SEC Filings

Show all filings for COCA COLA BOTTLING CO CONSOLIDATED /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for COCA COLA BOTTLING CO CONSOLIDATED /DE/


12-May-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("M,D&A") should be read in conjunction with Coca-Cola Bottling Co. Consolidated's (the "Company") consolidated financial statements and the accompanying notes to the consolidated financial statements. M,D&A includes the following sections:
Our Business and the Nonalcoholic Beverage Industry - a general description of the Company's business and the nonalcoholic beverage industry.

Areas of Emphasis - a summary of the Company's key priorities.

Overview of Operations and Financial Condition - a summary of key information and trends concerning the financial results for the first quarter of 2011 ("Q1 2011") and changes from the first quarter of 2010 ("Q1 2010").

Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements - a discussion of accounting policies that are most important to the portrayal of the Company's financial condition and results of operations and that require critical judgments and estimates and the expected impact of new accounting pronouncements.

Results of Operations - an analysis of the Company's results of operations for Q1 2011 compared to Q1 2010.

Financial Condition - an analysis of the Company's financial condition as of the end of Q1 2011 compared to year-end 2010 and the end of Q1 2010 as presented in the consolidated financial statements.

Liquidity and Capital Resources - an analysis of capital resources, cash sources and uses, investing activities, financing activities, off-balance sheet arrangements, aggregate contractual obligations and hedging activities.

Cautionary Information Regarding Forward-Looking Statements.

The consolidated financial statements include the consolidated operations of the Company and its majority-owned subsidiaries including Piedmont Coca-Cola Bottling Partnership ("Piedmont"). The noncontrolling interest primarily consists of The Coca-Cola Company's interest in Piedmont, which was 22.7% for all periods presented.
Our Business and the Nonalcoholic Beverage Industry The Company produces, markets and distributes nonalcoholic beverages, primarily products of The Coca-Cola Company, which include some of the most recognized and popular beverage brands in the world. The Company is the largest independent bottler of products of The Coca-Cola Company in the United States, distributing these products in eleven states primarily in the Southeast. The Company also distributes several other beverage brands. These product offerings include both sparkling and still beverages. Sparkling beverages are carbonated beverages including energy products. Still beverages are noncarbonated beverages such as bottled water, tea, ready to drink coffee, enhanced water, juices and sports drinks. The Company had full year net sales of approximately $1.5 billion in 2010.
The nonalcoholic beverage market is highly competitive. The Company's competitors include bottlers and distributors of nationally and regionally advertised and marketed products and private label products. In each region in which the Company operates, between 85% and 95% of sparkling beverage sales in bottles, cans and other containers are accounted for by the Company and its principal competitors, which in each region includes the local bottler of Pepsi-Cola and, in some regions, the local bottler of Dr Pepper, Royal Crown and/or 7-Up products. The sparkling beverage category (including energy products) represents 83% of the Company's Q1 2011 bottle/can net sales.


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The principal methods of competition in the nonalcoholic beverage industry are point-of-sale merchandising, new product introductions, new vending and dispensing equipment, packaging changes, pricing, price promotions, product quality, retail space management, customer service, frequency of distribution and advertising. The Company believes it is competitive in its territories with respect to each of these methods.
Historically, operating results for the first quarter of the fiscal year have not been representative of results for the entire fiscal year. Business seasonality results primarily from higher unit sales of the Company's products in the second and third quarters versus the first and fourth quarters of the fiscal year. Fixed costs, such as depreciation expense, are not significantly impacted by business seasonality.
The Company performs its annual impairment test of franchise rights and goodwill as of the first day of the fourth quarter. During Q1 2011, the Company did not experience any triggering events or changes in circumstances that indicated the carrying amounts of the Company's franchise rights or goodwill exceeded fair values. As such, the Company has not recognized any impairments of franchise rights or goodwill.
The Coca-Cola Company acquired Coca-Cola Enterprises Inc. ("CCE") on October 2, 2010. In connection with the transaction, CCE changed its name to Coca-Cola Refreshments USA, Inc. ("CCR"), and transferred its beverage operations outside of North America to an independent third party. As a result of the transaction, the North American operations of CCE are now included in CCR. In M,D&A, references to "CCR" refer to CCR and CCE as it existed prior to the acquisition by The Coca-Cola Company. The Coca-Cola Company had a significant equity interest in CCE prior to the acquisition. In addition, the Company's primary competitors were recently acquired by their franchisor. These transactions may cause uncertainty within the Coca-Cola bottler system or adversely impact the Company and its business. At this time, it is unknown whether the transactions will have a material impact on the Company's business and financial results. Net sales by product category were as follows:

                                                              First Quarter
      In Thousands                                         2011          2010

      Bottle/can sales:
      Sparkling beverages (including energy products)   $ 243,028     $ 242,706
      Still beverages                                      48,273        41,872

      Total bottle/can sales                              291,301       284,578

      Other sales:
      Sales to other Coca-Cola bottlers                    36,100        33,661
      Post-mix and other                                   32,228        29,259

      Total other sales                                    68,328        62,920


      Total net sales                                   $ 359,629     $ 347,498

Areas of Emphasis
Key priorities for the Company include revenue management, product innovation and beverage portfolio expansion, distribution cost management and productivity. Revenue Management
Revenue management requires a strategy which reflects consideration for pricing of brands and packages within product categories and channels, highly effective working relationships with customers and disciplined fact-based


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decision-making. Revenue management has been and continues to be a key performance driver which has significant impact on the Company's results of operations.
Product Innovation and Beverage Portfolio Expansion Innovation of both new brands and packages has been and will continue to be critical to the Company's overall revenue. The Company began distributing Monster Energy drinks in certain of the Company's territories beginning in November 2008. During 2008, the Company tested the 16-ounce bottle/24-ounce bottle package in select convenience stores and introduced it companywide in 2009. New packaging introductions included the 7.5-ounce sleek can in 2010 and the 2-liter contour bottle for Coca-Cola products during 2009.
The Company has invested in its own brand portfolio with products such as Tum-E Yummies, a vitamin C enhanced flavored drink, Country Breeze tea, diet Country Breeze tea, Bean & Body, Simmer and Bazza energy tea. These brands enable the Company to participate in strong growth categories and capitalize on distribution channels that may include the Company's traditional Coca-Cola franchise territory as well as third party distributors outside the Company's traditional Coca-Cola franchise territory. While the growth prospects of Company-owned or exclusively licensed brands appear promising, the cost of developing, marketing and distributing these brands is anticipated to be significant as well.
Distribution Cost Management
Distribution costs represent the costs of transporting finished goods from Company locations to customer outlets. Total distribution costs amounted to $45.9 million and $44.9 million in Q1 2011 and Q1 2010, respectively. Over the past several years, the Company has focused on converting its distribution system from a conventional routing system to a predictive system. This conversion to a predictive system has allowed the Company to more efficiently handle increasing numbers of products. In addition, the Company has closed a number of smaller sales distribution centers over the past several years reducing its fixed warehouse-related costs.
The Company has three primary delivery systems for its current business:
bulk delivery for large supermarkets, mass merchandisers and club stores;

advanced sales delivery for convenience stores, drug stores, small supermarkets and certain on-premise accounts; and

full service delivery for its full service vending customers.

Distribution cost management will continue to be a key area of emphasis for the Company.
Productivity
A key driver in the Company's selling, delivery and administrative ("S,D&A") expense management relates to ongoing improvements in labor productivity and asset productivity.


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Overview of Operations and Financial Condition The following items affect the comparability of the financial results presented below:
Q1 2011
a $.1 million pre-tax unfavorable mark-to-market adjustment to S,D&A expenses related to the Company's 2011 fuel hedging program; and

a $.5 million pre-tax unfavorable mark-to-market adjustment to cost of sales related the Company's 2011 aluminum hedging program.

Q1 2010
a $.3 million pre-tax unfavorable mark-to-market adjustment to S,D&A expenses related to the Company's 2010 fuel hedging program;

a $.5 million pre-tax favorable mark-to-market adjustment to cost of sales related to the Company's aluminum hedging program; and

a $.5 million unfavorable adjustment to income tax expense related to the elimination of the deduction related to Medicare Part D subsidy.

The following overview provides a summary of key information concerning the Company's financial results for Q1 2011 compared to Q1 2010.

                                                  First Quarter                         %
   In Thousands (Except Per Share Data)        2011          2010         Change      Change

   Net sales                                $ 359,629     $ 347,498     $ 12,131        3.5
   Cost of sales                              210,468       200,795        9,673        4.8
   Gross margin                               149,161       146,703        2,458        1.7
   S,D&A expenses                             129,982       129,044          938        0.7
   Income from operations                      19,179        17,659        1,520        8.6
   Interest expense, net                        8,769         8,810          (41 )     (0.5 )
   Income before income taxes                  10,410         8,849        1,561       17.6
   Income tax expense                           3,941         3,714          227        6.1
   Net income                                   6,469         5,135        1,334       26.0
   Net income attributable to the Company       5,913         4,660        1,253       26.9
   Basic net income per share:
   Common Stock                             $     .64     $     .51     $    .13       25.5
   Class B Common Stock                     $     .64     $     .51     $    .13       25.5
   Diluted net income per share:
   Common Stock                             $     .64     $     .51     $    .13       25.5
   Class B Common Stock                     $     .64     $     .50     $    .14       28.0


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The Company's net sales increased 3.5% in Q1 2011 compared to Q1 2010. The increase in net sales was primarily due to a 2.2% increase in bottle/can sales price per unit. The increase in bottle/can sales price per unit was primarily due to an increase in sales price per unit in sparkling beverages and a change in product mix due to a higher percentage of still beverage sales. Still beverages have a higher sales price per unit.
Gross margin dollars increased 1.7% in Q1 2011 compared to Q1 2010. The Company's gross margin percentage decreased to 41.5% for Q1 2011 from 42.2% for Q1 2010. The decrease in gross margin percentage was primarily due to higher costs for raw materials such as plastic bottles and a change in product mix. Sales volume of still beverages, which have lower margins than sparkling beverages, increased while sparkling beverages sales volume decreased. The following inputs represent a substantial portion of the Company's total cost of goods sold: (1) sweeteners, (2) packing materials, including plastic bottles and aluminum cans, and (3) full goods purchased from other vendors. The Company anticipates that the cost of the underlying commodities related to these inputs will continue to face upward cost pressure. The Company expects gross margins to be lower throughout the remainder of 2011 compared to 2010 due to the impact of the rising commodity costs.
S,D&A expenses increased .7% in Q1 2011 from Q1 2010. The increase in S,D&A expenses in Q1 2011 from Q1 2010 was primarily attributable to increases in employee salaries including bonus and incentive expense, fuel costs and marketing expense offset partially by a decrease in property and casualty insurance expense.
Net interest expense was unchanged in Q1 2011 compared to Q1 2010. Net interest expense was unchanged as lower borrowing levels offset a higher weighted average interest rate. The Company's overall weighted average interest rate on its debt and capital lease obligations increased to 6.0% during Q1 2011 from 5.7% during Q1 2010.
Net debt and capital lease obligations were summarized as follows:

                                                      Apr. 3,       Jan. 2,       Apr. 4,
 In Thousands                                          2011          2011          2010

 Debt                                               $ 523,101     $ 523,063     $ 572,952
 Capital lease obligations                             76,871        59,261        62,170

 Total debt and capital lease obligations             599,972       582,324       635,122
 Less: Cash and cash equivalents                       33,882        49,372        52,825

 Total net debt and capital lease obligations (1)   $ 566,090     $ 532,952     $ 582,297

(1) The non-GAAP measure "Total net debt and capital lease obligations" is used to provide investors with additional information which management believes is helpful in the evaluation of the Company's capital structure and financial leverage.

Discussion of Critical Accounting Policies, Estimates and New Accounting Pronouncements
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company included in


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its Annual Report on Form 10-K for the year ended January 2, 2011 a discussion of the Company's most critical accounting policies, which are those most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
The Company did not make changes in any critical accounting policies during Q1 2011. Any changes in critical accounting policies and estimates are discussed with the Audit Committee of the Board of Directors of the Company during the quarter in which a change is made.
New Accounting Pronouncements
Recently Adopted Pronouncements
In January 2010, the Financial Accounting Standards Board issued new guidance related to the disclosures about transfers into and out of Levels 1 and 2 fair value classifications and separate disclosures about purchases, sales, issuances and settlements relating to the Level 3 fair value classification. The new guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure the fair value. The new guidance was effective for the Company in Q1 2010 except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which was effective for the Company in Q1 2011. The Company's adoption of this new guidance did not have a material impact on the Company's consolidated financial statements. Results of Operations
Q1 2011 Compared to Q1 2010
Net Sales
Net sales increased $12.1 million, or 3.5%, to $359.6 million in Q1 2011 compared to $347.5 million in Q1 2010.
The increase in net sales for Q1 2011 compared to Q1 2010 was the result of the following:

    Q1 2011            Attributable to:
 (In Millions)
$           6.1        2.2% increase in bottle/can sales price per unit primarily due to an
                       increase in sales price per unit in sparkling beverages and a change
                       in product mix due to a higher percentage of still beverages sold
                       which have a higher sales price per unit
            3.1        9.2% increase in sales price per unit of sales to other Coca-Cola
                       bottlers primarily due to an increase in sales price per unit in all
                       product categories and a change in product mix due to a higher
                       percentage of still beverage sales which have a higher sales price per
                       unit
            2.0        Increase in freight revenue
            1.1        6.3% increase in post-mix sales volume
            0.6        .2% increase in bottle/can volume primarily due to a volume increase
                       in still beverages partially offset by a volume decrease in sparkling
                       beverages
           (0.8 )      Other

$          12.1        Total increase in net sales


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In Q1 2011, the Company's bottle/can sales to retail customers accounted for 81% of the Company's total net sales. Bottle/can pricing is based on the invoice price charged to customers reduced by promotional allowances. Bottle/can net pricing per unit is impacted by the price charged per package, the volume generated in each package and the channels in which those packages are sold. The increase in the Company's bottle/can net price per unit in Q1 2011 compared to Q1 2010 was primarily due to an increase in sales price per unit in sparkling beverages and a change in product mix due to a higher percentage of still beverages sales. Still beverages have a higher sales price per unit. Product category sales volume in Q1 2011 and Q1 2010 as a percentage of total bottle/can sales volume and the percentage change by product category was as follows:

                                                              Bottle/Can Sales Volume             Bottle/Can Sales Volume
Product Category                                            Q1 2011             Q1 2010            % Increase (Decrease)
Sparkling beverages (including energy products)                 85.0 %              87.7 %                        (2.9 )
Still beverages                                                 15.0 %              12.3 %                        22.3

Total bottle/can sales volume                                  100.0 %             100.0 %                         0.2

The Company's products are sold and distributed through various channels. These channels include selling directly to retail stores and other outlets such as food markets, institutional accounts and vending machine outlets. During Q1 2011, approximately 68% of the Company's bottle/can volume was sold for future consumption, while the remaining bottle/can volume of approximately 32% was sold for immediate consumption. During Q1 2010, approximately 70% of the Company's bottle/can volume was sold for future consumption, while the remaining bottle/can volume of approximately 30% was sold for immediate consumption. The Company's largest customer, Wal-Mart Stores, Inc., accounted for approximately 20% of the Company's total bottle/can volume during Q1 2011. Wal-Mart Stores, Inc. accounted for approximately 19% of the Company's total bottle/can volume during Q1 2010. The Company's second largest customer, Food Lion, LLC, accounted for approximately 10% of the Company's total bottle/can volume during Q1 2011. Food Lion, LLC accounted for approximately 12% of the Company's total bottle/can volume during Q1 2010. All of the Company's beverage sales are to customers in the United States.
The Company recorded delivery fees in net sales of $1.8 million in both Q1 2011 and Q1 2010. These fees are used to offset a portion of the Company's delivery and handling costs.
Cost of Sales
Cost of sales includes the following: raw material costs, manufacturing labor, manufacturing overhead including depreciation expense, manufacturing warehousing costs and shipping and handling costs related to the movement of finished goods from manufacturing locations to sales distribution centers.
Cost of sales increased 4.8%, or $9.7 million, to $210.5 million in Q1 2011 compared to $200.8 million in Q1 2010.


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The increase in cost of sales for Q1 2011 compared to Q1 2010 was principally attributable to the following:

    Q1 2011            Attributable to:
 (In Millions)
$           5.0        Increase in costs of raw materials such as plastic bottles and
                       increase in percentage of purchased products which have higher per
                       unit costs
            1.8        Increase in freight cost of sales
            0.7        6.3% increase in post-mix sales volume
            0.5        Increase in cost due to the Company's aluminum hedging program
            0.3        .2% increase in bottle/can volume primarily due to a volume increase
                       in still beverages partially offset by a volume decrease in sparkling
                       beverages
            1.4        Other

$           9.7        Total increase in cost of sales

The following inputs represent a substantial portion of the Company's total cost of goods sold: (1) sweeteners, (2) packing materials, including plastic bottles and aluminum cans, and (3) full goods purchased from other vendors. The Company anticipates that the cost of the underlying commodities related to these inputs will continue to face upward cost pressure. The Company expects gross margins to be lower throughout the remainder of 2011 compared to 2010 due to the impact of the rising commodity costs.
The Company entered into an agreement (the "Incidence Pricing Agreement") with The Coca-Cola Company to test an incidence-based concentrate pricing model for 2008 for all Coca-Cola Trademark Beverages and Allied Beverages for which the Company purchases concentrate from The Coca-Cola Company. During the term of the Incidence Pricing Agreement, the pricing of the concentrates for the Coca-Cola Trademark Beverages and Allied Beverages is governed by the Incidence Pricing Agreement rather than the Cola and Allied Beverage Agreements. The concentrate price The Coca-Cola Company charges under the Incidence Pricing Agreement is impacted by a number of factors including the Company's pricing of finished products, the channels in which the finished products are sold and package mix. The Coca-Cola Company must give the Company at least 90 days written notice before changing the price the Company pays for the concentrate. The Company continues to utilize the incidence pricing model, and the Incidence Pricing Agreement has been extended through December 31, 2011 under the same terms as 2010 and 2009.
The Company relies extensively on advertising and sales promotion in the marketing of its products. The Coca-Cola Company and other beverage companies that supply concentrates, syrups and finished products to the Company make substantial marketing and advertising expenditures to promote sales in the local territories served by the Company. The Company also benefits from national advertising programs conducted by The Coca-Cola Company and other beverage companies. Certain of the marketing expenditures by The Coca-Cola Company and other beverage companies are made pursuant to annual arrangements. Although The Coca-Cola Company has advised the Company that it intends to continue to provide marketing funding support, it is not obligated to do so under the Company's Beverage Agreements. Significant decreases in marketing funding support from The Coca-Cola Company or other beverage companies could adversely impact operating results of the Company in the future.
Total marketing funding support from The Coca-Cola Company and other beverage companies, which includes direct payments to the Company and payments to customers for marketing programs, was $12.6 million for Q1 2011 compared to $12.4 million for Q1 2010.


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Gross Margin
Gross margin dollars increased 1.7%, or $2.4 million, to $149.2 million in Q1
2011 compared to $146.7 million in Q1 2010. Gross margin as a percentage of net
sales decreased to 41.5% for Q1 2011 from 42.2% for Q1 2010.
The increase in gross margin dollars for Q1 2011 compared to Q1 2010 was
primarily the result of the following:

    Q1 2011            Attributable to:
 (In Millions)
$           6.1        2.2% increase in bottle/can sales price per unit primarily due to an
                       increase in sales price per unit in sparkling beverages and a change
                       in product mix due to a higher percentage of still beverages sold
. . .
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