COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Second Quarter and First Half ended July 1, 2007
Business Overview: The Company is the second-largest bottler of The Coca-Cola Company products in the United States, operating primarily in the Southeast. It produces, markets, and distributes nonalcoholic beverages, including sparkling and still beverages. Results are seasonal, with higher sales typically occurring in the second and third quarters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 1.0% in Q2 2007 and 1.1% YTD 2007. Growth was driven by a 4.1% increase in sales price per unit (Q2) and 2.4% (YTD), offset by a 2.5% decrease in bottle/can volume (Q2) and 0.8% (YTD). Volume declines were primarily due to sugar sparkling beverages, partially offset by growth in water and tea.
• Profitability: Net income surged 31.6% in Q2 and 68.4% YTD. This was driven by higher gross margins, reduced Selling, Delivery, and Administrative (S,D&A) expenses, and a lower effective tax rate (38.8% YTD 2007 vs. 41.6% YTD 2006) due to an increased manufacturing deduction benefit.
• Expense Management: S,D&A expenses decreased 1.2% in Q2 and 0.9% YTD. Reductions were attributed to lower property/casualty insurance costs, decreased employee benefit expenses (due to pension plan curtailment), and gains from aircraft sales, partially offset by $2.4 million in restructuring expenses YTD.
• Liquidity: Cash and cash equivalents increased significantly to $71.1 million from $31.0 million in the prior year period, driven by operating cash flows.

Guidance, Outlook, and Risks

• Cost Pressures: Management anticipates significant increases in raw material costs for the remainder of 2007. Aluminum can costs are expected to rise 17-20%, and high fructose corn syrup costs are expected to rise 25-35% due to global demand for ethanol production.
• Capital Expenditures: The Company projects total additions to property, plant, and equipment for 2007 to be in the range of $45 million to $52 million.
• Restructuring: Total restructuring expenses are expected to range between $2.5 million and $3.5 million, with all cash expenditures anticipated before the end of the fiscal year.
• Debt Maturity: The Company plans to use cash on hand and its revolving credit facility to satisfy a $100 million debenture maturity in November 2007.
• Market Risks: Approximately 89% of bottle/can volume consists of The Coca-Cola Company products. The Company relies on a single domestic supplier for aluminum cans and two cooperatives for plastic bottles. Interest rate risk exists as approximately 48% of debt obligations are subject to floating rates.

Investor Verification Checklist

• Raw Material Hedging: Verify the extent of price protection contracts for aluminum and sweeteners given the projected 17-35% cost increases.
• Volume Trends: Monitor the continued decline in sugar sparkling beverage volume versus the growth in non-carbonated categories (water, tea, energy) to assess long-term revenue sustainability.
• Marketing Funding: Confirm the stability of marketing funding support from The Coca-Cola Company, which significantly offsets cost of sales.
• Debt Covenants: Review the financial covenants in the new $200 million revolving credit facility to ensure compliance with interest coverage and debt-to-cash flow ratios.
• Restructuring Execution: Track the realization of efficiency gains from the workforce reduction and management structure simplification initiated in February 2007.