Business Context and Reporting Period
Company: Coca-Cola Consolidated, Inc. (Coca-Cola Bottling Co. Consolidated)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 28, 2008
Business Overview: The Company is the second-largest Coca-Cola bottler in the United States, operating primarily in the Southeast. It produces, markets, and distributes nonalcoholic beverages, with approximately 89% of its bottle/can volume consisting of The Coca-Cola Company products. The Company operates in seven principal geographic markets covering parts of North Carolina, South Carolina, West Virginia, Alabama, Mississippi, Tennessee, Kentucky, Virginia, Pennsylvania, Georgia, and Florida.
Key Financial Metrics
| Metric | 2008 | 2007 | 2006 |
|---|---|---|---|
| Net Sales | $1,463.6 million | $1,436.0 million | $1,431.0 million |
| Gross Margin | $615.2 million (42.0%) | $621.1 million (43.3%) | $622.6 million (43.5%) |
| Income from Operations | $59.5 million | $81.9 million | $84.7 million |
| Net Income | $9.1 million | $19.9 million | $23.2 million |
| Diluted EPS (Common) | $0.99 | $2.17 | $2.55 |
| Total Debt & Capital Leases | $669.1 million | $679.1 million | $769.0 million |
| Cash & Cash Equivalents | $45.4 million | $9.9 million | $61.8 million |
| Operating Cash Flow | $96.6 million | $95.5 million | $102.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 1.9% to $1.46 billion, driven by a 3.2% increase in bottle/can sales price per unit. This was partially offset by a 0.6% decrease in bottle/can volume and a 10.4% decrease in post-mix volume.
- Profitability Decline: Net income dropped 54.2% to $9.1 million. Income from operations decreased 27.4% to $59.5 million.
- Margin Compression: Gross margin percentage declined from 43.3% in 2007 to 42.0% in 2008. This was primarily due to significant increases in raw material costs (high fructose corn syrup and plastic bottles) and a higher percentage of sales of purchased products which carry lower margins.
- One-Time Charges: 2008 results were negatively impacted by several pre-tax charges:
- $14.0 million charge to freeze liability to the Central States multi-employer pension plan and settle a strike.
- $4.6 million restructuring charge for eliminating approximately 350 positions (5% of workforce).
- $2.0 million mark-to-market charge related to fuel hedging.
- Debt Structure: Total debt and capital lease obligations decreased slightly to $669.1 million. However, $176.7 million of debt was reclassified to current liabilities due to maturities in May and July 2009.
Guidance, Outlook, and Risks
- Outlook: Management anticipates overall bottle/can sales growth will depend on diet sparkling products, sports drinks, enhanced water, tea, and energy products. The Company expects to continue facing declines in demand for sugar sparkling beverages.
- Cost Pressures: The Company expects pension expense to increase significantly in 2009 (estimated at $11.5 million) due to a decrease in the fair market value of pension plan assets in 2008. To mitigate costs, the Company announced a suspension of 401(k) matching contributions effective April 1, 2009, expected to save approximately $7 million.
- Liquidity: The Company has $200 million available under its revolving credit facility and anticipates using cash flow from operations and this facility to refinance $176.7 million in debt maturing in 2009.
- Key Risks:
- Raw Material Costs: Exposure to price volatility in aluminum, corn (sweetener), and plastic resin. A 10% increase in commodity prices could increase costs by approximately $22 million.
- Customer Concentration: Wal-Mart (19% of volume) and Food Lion (12% of volume) are significant customers; loss of either would have a material adverse effect.
- Franchise Agreements: Approximately 89% of volume is from The Coca-Cola Company. Failure to meet performance requirements under beverage agreements could result in loss of distribution rights.
- Market Conditions: Volatility in credit markets could impact the ability to refinance debt, though the Company currently believes it has sufficient capacity.
Investor Verification Checklist
- Debt Maturities: Verify the Company's ability to refinance or repay $176.7 million in debt maturing in May and July 2009.
- Pension Liability: Monitor the impact of the 2008 market decline on 2009 pension expenses and the funded status of the plan (underfunded by $72.5 million as of year-end).
- Raw Material Hedging: Assess the effectiveness of fuel and commodity hedging strategies given the volatility in oil and corn prices.
- Customer Concentration: Review any changes in sales volume or terms with Wal-Mart and Food Lion.
- Restructuring Savings: Track the realization of anticipated annual savings from the 2008 workforce reduction and reorganization.