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 30, 2002
Business Overview: The Company is the second-largest bottler of The Coca-Cola Company products in the United States, operating in eleven states primarily in the Southeast. It distributes carbonated and noncarbonated beverages, including Dasani, POWERade, and Minute Maid.

Key Financial Metrics

Note: 2001 figures are presented on a pro forma basis to reflect the consolidation of Piedmont Coca-Cola Bottling Partnership, which occurred in Q1 2002.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 8.5% in Q2 and 6.8% in H1 2002 compared to pro forma 2001 results. This was driven by a 5.4% increase in physical case volume in Q2 and a 1% increase in net selling price per unit.
• Profitability Surge: Net income more than doubled in both Q2 and H1 2002 compared to the prior year. This was significantly aided by the adoption of SFAS No. 142, which eliminated goodwill amortization, saving $3.1 million in Q2 and $6.2 million in H1.
• Interest Expense Reduction: Interest expense decreased by $3.0 million in Q2 and $6.6 million in H1 2002 due to lower average interest rates (5.6% in H1 2002 vs. 6.7% in H1 2001) and reduced debt balances.
• Working Capital: Working capital decreased to a deficit of $191.0 million at June 30, 2002, primarily due to the reclassification of $215.6 million of long-term debt to current liabilities as it matures within one year.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Capital Expenditures: The Company plans to spend between $50 million and $60 million on property, plant, and equipment in 2002, financed primarily through operating cash flow.
• Product Performance: Strong growth was reported for Dasani (41% volume increase) and POWERade (26% volume increase). Vanilla Coke was introduced in Q2 with positive initial results.
• Cost Management: The Company closed six sales distribution centers in H1 2002 to improve asset productivity and reduce costs. Pension expenses are expected to rise from $2 million in 2001 to approximately $6 million in 2002.

Risks and Contingencies

• Debt Maturities: A significant portion of debt ($215.6 million) is due within one year. The Company intends to refinance these maturities using available credit facilities and a shelf registration for up to $550 million.
• Credit Ratings: The Company must maintain investment-grade ratings from Moody's and Standard & Poor's to avoid a default trigger on its $170 million term loan agreement.
• Interest Rate Sensitivity: Approximately 48% of the debt portfolio is subject to short-term interest rate fluctuations. A 1% increase in rates would reduce net income by approximately $1.1 million annually.
• Marketing Support: While The Coca-Cola Company intends to provide marketing funding, it is not contractually obligated to do so.

Investor Verification Checklist

• Debt Refinancing: Verify the Company's ability to refinance the $215.6 million in debt maturing within 12 months given current market conditions.
• Working Capital Deficit: Assess the impact of the $191.0 million working capital deficit on short-term liquidity and operational flexibility.
• Accounting Changes: Confirm the sustainability of earnings growth after adjusting for the one-time benefit of SFAS No. 142 (elimination of goodwill amortization).
• Pension Obligations: Monitor the projected increase in pension expenses and the performance of the pension plan investments.
• Executive Sales: Note the Rule 10b5-1 trading plans for directors J. Frank Harrison, Jr. and J. Frank Harrison, III, allowing for the sale of up to 250,000 shares.