COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 28, 2009 (Second Quarter and First Half)
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 sparkling and still nonalcoholic beverages.

Key Financial Metrics

Note: YTD figures represent the first half of the fiscal year.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 4.6% in Q2 2009 and 2.7% YTD 2009 compared to the prior year. This was driven primarily by a decrease in bottle/can volume (9.6% in Q2, 8.4% YTD) across most categories, partially offset by price increases (3.9% in Q2, 4.5% YTD).
• Profitability Improvement YTD: While Q2 operating income declined 15.3%, YTD operating income increased 29.9% to $51.8 million. This significant YTD improvement was driven by a 6.1% reduction in Selling, Delivery, and Administrative (S,D&A) expenses and a lower effective tax rate (34.4% vs. 41.4% in 2008).
• Cost Management: S,D&A expenses decreased due to lower fuel costs, reduced salaries from a 2008 workforce reorganization (elimination of ~350 positions), and lower depreciation. However, employee benefit costs increased due to pension plan performance.
• Debt Refinancing: The Company successfully refinanced $119.3 million in maturing debentures in May 2009 using proceeds from new $110 million Senior Notes and cash on hand. In July 2009, it refinanced $57.4 million in debentures using its revolving credit facility.

Guidance, Outlook, and Risks

• Capital Expenditures: Management anticipates total additions to property, plant, and equipment for fiscal year 2009 will range between $45 million and $55 million.
• Pension Contributions: The Company expects to contribute between $8 million and $12 million to its sponsored pension plans for the remainder of 2009.
• 401(k) Suspension: Matching contributions to the 401(k) Savings Plan were suspended effective April 1, 2009, expected to reduce benefit costs by approximately $5 million for the remainder of the year.
• Key Risks:
  • Commodity Prices: Exposure to aluminum, corn, resin, and fuel prices. A 10% increase in commodity prices could increase costs by approximately $23 million over the next 12 months.
  • Customer Concentration: Wal-Mart Stores, Inc. accounted for approximately 19% of bottle/can volume and 15% of total net sales in YTD 2009.
  • Legislative Changes: Potential federal or state taxes on "sugar" beverages and restrictions on distribution in schools could negatively impact results.
  • Marketing Funding: Reliance on marketing funding support from The Coca-Cola Company, which is not contractually obligated.

Investor Verification Checklist

• Volume vs. Price Mix: Verify the sustainability of price increases given the continued decline in unit volume across sparkling and still beverage categories.
• Commodity Hedging Effectiveness: Review the impact of aluminum and fuel hedging programs on future margins, as these provided significant favorable adjustments in the current period.
• Debt Covenants: Confirm continued compliance with the $200 million revolving credit facility covenants (fixed charge coverage ratio of 1.5:1 and debt-to-operating cash flow ratio of 6.0:1).
• Pension Liability: Monitor the volatility of pension plan assets and the resulting impact on S,D&A expenses, which increased significantly in 2009 due to prior year investment performance.
• Restructuring Completion: Assess whether the anticipated annual savings from the 2008 workforce reorganization are being fully realized.