COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 26, 2004
Business Overview: The Company is the second-largest bottler of The Coca-Cola Company products in the United States, operating primarily in eleven Southeastern states. It produces, markets, and distributes carbonated and noncarbonated beverages. The Company also manages the Piedmont Coca-Cola Bottling Partnership (77.3% owned) and South Atlantic Canners, Inc. (SAC).

Key Financial Metrics

Note: All figures in thousands except per share data. Debt figures represent total debt and capital lease obligations.

Material Changes vs. Prior Period

• Revenue: Net sales decreased 1.3% in Q3 2004 due to a 3.8% decline in bottle/can volume, partially offset by a 2.5% increase in average revenue per case. For the first nine months, sales increased 2.0% driven by pricing and contract sales to other bottlers.
• Profitability: Net income dropped 55.9% in Q3 2004 compared to Q3 2003. This decline is largely attributed to a one-time favorable tax adjustment of $4.6 million in Q3 2003 (reduction of valuation allowance) which did not recur. For the nine-month period, net income decreased 28.1%.
• Cost of Sales: Increased due to higher raw material costs (aluminum cans up ~5% in Q3). A one-time $1.7 million increase in cost of sales occurred in Q2 2004 due to a change in concentrate pricing from The Coca-Cola Company.
• Operating Expenses: Selling, delivery, and administrative (S,D&A) expenses rose 3.6% for the nine months, driven by wage increases, higher employee benefits (pension and healthcare), and fuel costs. Depreciation expense decreased $4.1 million due to lower capital spending and facility closures.
• Debt: Total debt and capital lease obligations decreased to $784.5 million from $848.3 million at year-end 2003, despite the capitalization of $37.3 million in new lease obligations (corporate headquarters and new facility).

Guidance, Outlook, and Risks

• Outlook: Management anticipates capital expenditures for 2004 to range between $45 million and $55 million. Cash requirements for income taxes are expected to rise significantly in 2005 ($10M-$14M) compared to 2004 ($2M-$3M).
• Cost Pressures: The Company expects aluminum can costs to increase 4-6% in 2005 and PET bottle costs to increase over 6% in 2005. If these cannot be offset by price increases or volume growth, operating income may be impacted.
• Seasonality: Results for the third quarter are not indicative of full-year results due to seasonality; the second and third quarters typically generate higher unit sales.
• Risks: Key risks include unfavorable weather (cool weather and tropical storms impacted Q3 volume), inability to pass on raw material cost increases, changes in marketing funding support from The Coca-Cola Company, and potential credit rating downgrades affecting borrowing costs.
• Contingencies: The Company guarantees approximately $44.7 million of debt for two cooperatives. Management does not anticipate a material loss from these guarantees.

Investor Verification Checklist

• Tax Rate Volatility: Verify the sustainability of the effective tax rate, noting the 42.1% rate in 2004 vs. 19.2% in 2003, which was skewed by one-time tax adjustments in the prior year.
• Volume vs. Price Mix: Confirm the trend of declining bottle/can volume (-3.8% in Q3) and assess the Company's ability to maintain pricing power against retailer pushback.
• Raw Material Inflation: Monitor the impact of projected 2005 increases in aluminum and PET bottle costs on gross margins.
• Capital Lease Impact: Review the effect of the $37.3 million in newly capitalized leases on future depreciation and interest expense.
• Related Party Transactions: Note the significant reliance on The Coca-Cola Company for concentrate pricing and marketing funding, which recently shifted from cash support to concentrate price offsets.