COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 28, 2003
Business Overview: The Company is the second-largest Coca-Cola bottler in the United States, operating primarily in the Southeast across 11 states. It produces, markets, and distributes carbonated and noncarbonated beverages, with approximately 91% of sales volume derived from The Coca-Cola Company products. The Company holds perpetual Bottle Contracts and Allied Bottle Contracts granting exclusive distribution rights in its territories.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Growth: Net income increased 34.5% to $30.7 million, driven primarily by a significant reduction in the effective tax rate (19% in 2003 vs. 40% in 2002) due to favorable tax adjustments and a reduction in the valuation allowance for deferred tax assets.
• Operating Income Decline: Income from operations decreased 10.6% to $83.3 million. This was caused by a 2% decline in bottle/can volume (due to fewer new product introductions, cool weather, and economic conditions) and higher Selling, General, and Administrative (S,G&A) expenses, which rose 3.8% due to increased pension, fuel, and insurance costs.
• Interest Expense Reduction: Interest expense fell 14.7% to $41.9 million, attributed to lower average interest rates and reduced debt balances.
• Acquisition Activity: In March 2003, the Company purchased an additional 22.675% interest in Piedmont Coca-Cola Bottling Partnership for $53.5 million, increasing its ownership to 77.326%.
• Accounting Changes: The Company adopted EITF 02-16, reclassifying marketing funding support from The Coca-Cola Company from a reduction of net sales to a reduction of cost of sales.

Guidance, Outlook, and Risks

• Outlook: Management anticipates further selling price increases in 2004 to offset projected significant increases in aluminum can costs and to maintain gross margins. Capital expenditures for 2004 are expected to range between $60 million and $70 million.
• Pension Obligations: Pension expense is expected to increase by approximately $1 million in 2004. The Company anticipates contributing $23 million to $24 million to its nonunion pension plans in 2004, funded largely by proceeds from the surrender of company-owned life insurance policies.
• Key Risks:
  • Supplier Concentration: Approximately 91% of sales are Coca-Cola products; the Company relies on a single supplier for aluminum cans and two cooperatives for PET bottles.
  • Marketing Funding: The Company relies on marketing funding support from The Coca-Cola Company, which is not contractually obligated to continue at historical levels.
  • Commodity Costs: Earnings are sensitive to fluctuations in fuel and raw material costs (aluminum, plastic).
  • Weather: Sales volume is seasonal and susceptible to weather conditions.

Investor Verification Checklist

• Tax Adjustments: Verify the sustainability of the 19% effective tax rate, as it was heavily influenced by one-time adjustments to deferred tax asset valuation allowances ($9.7 million total benefit).
• Volume Trends: Monitor physical case volume trends, which declined 2% in 2003, to assess the impact of weather and competitive pressures on future revenue.
• Debt Covenants: Review the Company's ability to maintain investment-grade credit ratings (currently BBB/Baa), as a downgrade could trigger a default on its $85 million term loan.
• Pension Funding: Track the execution of the planned $23-$24 million pension contribution in 2004 and the associated cash flow from life insurance policy surrenders.
• Raw Material Costs: Assess the Company's ability to pass on increased aluminum can costs to consumers without further volume erosion.