COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 1995
Business Overview: The Company is the second-largest Coca-Cola bottler in the United States, engaged in the production, marketing, and distribution of carbonated and noncarbonated beverages. Approximately 90% of sales consist of products from The Coca-Cola Company. The Company operates in six principal regions across the Southeastern U.S., covering a population of approximately 12.1 million. It maintains a 50% joint venture interest in Piedmont Coca-Cola Bottling Partnership.

Key Financial Metrics (Fiscal Year 1995)

Note: Working capital deficit is primarily due to the sale of trade accounts receivable.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.2% to $761.9 million, driven by a 5% increase in franchise sales volume and a 4% increase in net selling prices.
• Profitability: Net income decreased 11.8% to $10.5 million. This decline was primarily due to a one-time after-tax extraordinary charge of $5.0 million ($0.54 per share) related to the early retirement of long-term debt.
• Cost Pressures: Costs of goods sold increased due to significant price hikes in aluminum cans and plastic resin. Selling expenses rose but at a slower rate than sales, improving the selling expense ratio from 26.3% to 25.9% of net franchise sales.
• Debt Refinancing: The Company issued $100 million in 6.85% debentures to retire approximately $87 million of higher-interest Medium-Term Notes, reducing the weighted average interest rate on the debt portfolio.
• Joint Venture Loss: The Company's share of the net loss from Piedmont Coca-Cola Bottling Partnership increased from $0.7 million in 1994 to $2.1 million in 1995, largely due to higher short-term interest rates on Piedmont's variable rate debt.

Outlook, Risks, and Management Commentary

• Management Commentary: Management successfully offset raw material cost increases through volume growth and price increases. The introduction of the 20-ounce contour bottle contributed to sales growth. Capital expenditures were $37 million in 1995, focused on manufacturing improvements and new packaging capabilities.
• Liquidity: The Company maintains a $170 million revolving credit facility (unused as of year-end) and $246 million in informal lines of credit ($22.6 million outstanding). Management believes cash flow from operations and borrowing capacity are sufficient for current operations and capital needs.
• Key Risks:
  • Supplier Dependence: Approximately 90% of sales are Coca-Cola products; the Company relies on The Coca-Cola Company for concentrates and sweeteners.
  • Raw Material Volatility: Significant exposure to aluminum and plastic resin prices, though supply agreements were entered into in late 1995 to mitigate can cost variability.
  • Interest Rate Sensitivity: Approximately 48% of the $420 million debt portfolio is subject to short-term interest rate fluctuations. A 1% rate increase would reduce net income by approximately $1.2 million.
  • Franchise Agreements: Bottle Contracts are perpetual but subject to termination for cause, including failure to meet marketing plans or financial capacity requirements.
• Legal Contingency: A lawsuit filed in 1993 seeks up to $18 million in damages regarding a severance package dispute. Management believes the claim is without merit and will not have a material adverse effect.

Investor Verification Checklist

• Debt Structure: Verify the impact of the 1995 refinancing on future interest expense and the specific terms of the new 6.85% debentures.
• Raw Material Hedging: Confirm the effectiveness of the new aluminum can supply agreements in stabilizing costs for 1996.
• Piedmont Partnership: Review the financial performance of the Piedmont joint venture, as its losses are impacting consolidated earnings.
• Working Capital: Understand the mechanics of the trade accounts receivable sale program and its impact on the reported working capital deficit.
• Dividend Policy: Note the consistent $1.00 per share dividend on Common Stock and verify sustainability given the high debt load and interest rate exposure.