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: June 27, 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

Margins (YTD): Gross margin percentage increased to 48.9% in 2004 from 48.5% in 2003. Operating margin was approximately 7.4% in 2004 compared to 6.6% in 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4.9% in Q2 and 3.9% YTD, driven primarily by a 5% increase in average revenue per case. Bottle/can volume declined slightly (0.3% in Q2, 0.6% YTD), though diet products and noncarbonated beverages (Dasani, PowerAde) showed growth.
• Profitability: Q2 Net Income decreased 11% to $10.6 million, largely due to a one-time $1.7 million pre-tax charge related to concentrate pricing changes and a higher effective tax rate. YTD Net Income increased 1% to $13.4 million.
• Cost of Sales: Increased due to higher raw material costs (aluminum cans, sweeteners) and a one-time $1.7 million inventory write-down in Q2 resulting from a change in how marketing funding support is applied to concentrate pricing.
• Operating Expenses: Selling, delivery, and administrative (S,D&A) expenses rose 5.1% in Q2 due to wage increases, higher fuel costs, and increased pension/healthcare expenses. Depreciation expense declined due to the reclassification of certain assets to inventory and the closure of distribution centers.
• Debt Reduction: Total debt and capital lease obligations decreased to $826.4 million from $848.3 million at year-end 2003. This decline excludes $37.3 million in new capital lease obligations recorded for corporate headquarters and a new operating facility.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company anticipates additions to property, plant, and equipment in 2004 to range between $60 million and $70 million, funded by operating cash flows and credit facilities.
• Pension Contributions: Anticipated total contributions to pension plans for 2004 are between $23 million and $24 million. The Company expects to fund a significant portion of this via the redemption of company-owned life insurance policies ($20.2 million expected in Q3).
• Cost Outlook: Management expects raw material costs (aluminum cans, PET bottles, sweeteners) to increase by approximately 5% in 2005. Aluminum can costs are also expected to rise in Q4 2004.
• Tax Outlook: The effective tax rate for the first half of 2004 was 41.0%, compared to 21.2% in 2003 (which included a $3.1 million favorable audit adjustment). The Company anticipates cash income tax payments will increase significantly in 2005.
• Risks: Key risks include the inability to offset raw material cost increases with price hikes, changes in marketing funding support from The Coca-Cola Company, fuel price volatility, and potential changes in credit ratings which could impact borrowing costs or trigger defaults on specific term loans.

Investor Verification Checklist

• Concentrate Pricing Impact: Verify the long-term impact of the May 2004 change in concentrate pricing, which converted marketing funding support into price reductions, causing a one-time $1.7 million cost increase.
• Capital Lease Accounting: Review the $37.3 million in new capital lease obligations (headquarters and new facility) and their effect on future depreciation and interest expense versus prior operating lease costs.
• Inventory Reclassification: Confirm the treatment of the $10.4 million reclassification of plastic shells and tanks from PP&E to inventory and its effect on cost of sales versus depreciation.
• Debt Covenants: Monitor the Company's investment-grade credit ratings (S&P BBB, Moody's Baa) to ensure compliance with the $40 million term loan covenant requiring investment-grade status.
• Life Insurance Proceeds: Track the timing and actual proceeds from the surrender of company-owned life insurance policies expected in Q3 2004 to fund pension contributions and debt repayment.