COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 30, 2007
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's 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

Material Changes vs. Prior Period

• Revenue: Net sales increased slightly by 0.3% ($5.0 million) to $1.44 billion. This was driven by a 2.1% increase in bottle/can sales price per unit and growth in still beverage volume, partially offset by a 10.8% decrease in sales volume to other Coca-Cola bottlers (primarily due to reduced Full Throttle energy drink shipments).
• Profitability: Net income decreased 14.6% to $19.9 million. Income from operations declined 3.3% due to rising raw material costs and increased Selling, Delivery, and Administrative (S,D&A) expenses.
• Cost Pressures: Cost of sales increased 0.8% ($6.4 million). Raw material costs rose significantly, with aluminum can costs up approximately 18% and high fructose corn syrup costs up approximately 21% in 2007.
• Expenses: S,D&A expenses increased 0.3% ($1.4 million), primarily due to an 8% increase in employee compensation and an 8% increase in fuel costs. This included $2.8 million in restructuring costs related to management structure simplification.
• Liquidity: Cash and cash equivalents decreased by $52.0 million, primarily due to the repayment of $100 million in debentures in November 2007.

Guidance, Outlook, and Risks

• Outlook: Management expects raw material costs to increase in 2008, though less than in 2007, and to remain above historical averages. Capital expenditures for 2008 are projected to be between $55 million and $70 million.
• Strategic Focus: Key priorities include revenue management, product innovation (specifically in diet sparkling, sports drinks, bottled water, and energy products), and distribution cost management via the CooLift delivery system.
• Key Risks:
  • Raw Material Costs: Significant exposure to aluminum can and sweetener price volatility, with no ceiling price protection on aluminum packaging.
  • Concentration Risk: 89% of volume is Coca-Cola products; The Coca-Cola Company owns 27.2% of the stock and controls concentrate pricing.
  • Customer Concentration: Wal-Mart Stores, Inc. accounted for approximately 19% of bottle/can volume and 13% of total net sales.
  • Regulatory/Health Trends: Potential impact of legislation restricting soft drink sales in schools and shifting consumer preferences away from sugar sparkling beverages.
• Unusual Items: 2007 results included $2.8 million in pre-tax restructuring costs. 2006 results included a $4.9 million favorable tax adjustment from state settlements, which is not present in 2007.

Investor Verification Checklist

• Raw Material Hedging: Verify the extent of price protection or hedging strategies for aluminum cans and high fructose corn syrup given the 18-21% cost increases in 2007.
• Debt Maturities: Review the schedule for debt maturities, specifically the $176.7 million due in 2009, and the Company's refinancing plans.
• Marketing Funding: Assess the sustainability of marketing funding support from The Coca-Cola Company, which increased to $46.9 million in 2007 but is not contractually guaranteed.
• Restructuring Impact: Monitor the realization of efficiency gains from the 2007 restructuring plan to ensure future S,D&A expense reductions.
• Product Mix Shift: Track the growth of still beverages and energy drinks to confirm they are successfully offsetting the decline in traditional sugar sparkling beverage volume.