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: March 30, 2008
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. The first quarter is historically a low-volume season compared to the second and third quarters.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net sales remained essentially flat ($0.1 million increase) due to a 2.4% increase in bottle/can volume offset by a 12.3% decrease in sales to other bottlers.
• Profitability: The Company reported a net loss of $4.3 million in Q1 2008 compared to net income of $4.7 million in Q1 2007. This represents a 193.2% decline in net income.
• Gross Margin Compression: Gross margin dollars decreased by $11.6 million (7.6%). The margin percentage dropped 3.5% primarily due to increased raw material costs (aluminum cans, high fructose corn syrup, plastic bottles) and a shift to lower-margin purchased products.
• Operating Expenses: Selling, delivery, and administrative (S,D&A) expenses increased by $5.3 million (4.0%), driven by higher employee-related expenses ($4.0 million), fuel costs ($2.1 million), and insurance costs ($1.3 million).
• Interest Expense: Net interest expense decreased by $1.8 million (14.6%) due to lower effective interest rates (5.9% in Q1 2008 vs. 6.6% in Q1 2007) and lower borrowing levels.
• Liquidity: Cash and cash equivalents decreased significantly from $55.0 million to $9.9 million, largely due to the payment of $100 million in debentures in late 2007 and increased working capital needs.

Guidance, Outlook, and Risks

• Outlook: Management anticipates overall bottle/can sales growth will depend on continued growth in diet sparkling products, sports drinks, bottled water, enhanced water, tea, and energy products. The Company is focusing on revenue management, product innovation, and distribution cost management.
• Capital Resources: The Company has a $200 million revolving credit facility (currently unutilized) and $60 million in uncommitted lines of credit. It expects to use cash flows and these facilities to refinance debentures maturing in 2009.
• Key Risks:
  • Commodity Prices: Significant exposure to price fluctuations in aluminum, corn (high fructose corn syrup), resin (plastic bottles), and fuel. Costs for aluminum and corn syrup increased significantly in Q1 2008.
  • Customer Concentration: Wal-Mart Stores, Inc. accounted for approximately 14% of total net sales and 18% of bottle/can volume.
  • Supplier Dependence: Approximately 89% of bottle/can volume consists of The Coca-Cola Company products. The Company obtains all aluminum cans from one domestic supplier.
  • Interest Rate Risk: Approximately 43% of debt and capital lease obligations are subject to short-term interest rate changes. A 1% increase in rates would increase interest expense by approximately $3 million annually.
• Unusual Items: The Company adopted SFAS No. 158 regarding pension measurement dates in Q1 2008, resulting in a non-cash adjustment to liabilities and equity. The Company also recorded a loss at its Piedmont Coca-Cola Bottling Partnership, contributing to minority interest income.

Investor Verification Checklist

• Raw Material Cost Pass-Through: Verify the Company's ability to pass increased costs for aluminum, corn syrup, and fuel to customers through pricing adjustments without significantly impacting volume.
• Working Capital Trends: Monitor the significant increase in accounts receivable ($14.9 million increase from prior quarter) and the drawdown on lines of credit ($42.1 million outstanding) to assess liquidity pressure.
• Product Mix Shifts: Analyze the impact of the shift toward lower-margin purchased products (e.g., FUZE, smartwater) on long-term gross margin stability.
• Debt Maturity Profile: Review the schedule for debentures maturing in May and July 2009 to ensure refinancing plans are viable given current market conditions.
• Cooperative Guarantees: Assess the risk associated with the $45.4 million guarantee of debt and lease obligations for South Atlantic Canners and Southeastern Container cooperatives.