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 29, 2002
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.

Key Financial Metrics

Note: Debt figures include long-term debt and obligations under capital leases. 2002 results include the consolidation of Piedmont Coca-Cola Bottling Partnership, which was previously accounted for under the equity method.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 26.0% to $1.25 billion. This growth was driven by the consolidation of Piedmont (adding ~$301 million in sales), a 3.4% increase in physical case volume, and a slight increase in net selling price per unit.
• Profitability Surge: Net income more than doubled to $22.8 million. A primary driver was a $21.0 million pre-tax reduction in amortization expense due to the adoption of SFAS No. 142 (Goodwill and Other Intangible Assets), which eliminated goodwill amortization.
• Debt Reduction: Excluding the capitalization of a $41.6 million lease for a Charlotte production facility, the Company repaid approximately $66 million in debt and capital lease obligations, reducing total obligations by roughly $200 million over the past three years.
• Interest Expense: Interest expense decreased 15.0% to $49.1 million due to lower average interest rates (5.6% in 2002 vs. 6.5% in 2001) and reduced debt balances.
• Working Capital: Net working capital improved from a deficit of $123.4 million in 2001 to a positive $15.1 million in 2002, primarily due to refinancing current debt maturities into long-term notes.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Volume Growth: Management attributes volume growth to the success of Dasani bottled water (over 40% volume increase), the Fridge Pack packaging, and new product introductions like Vanilla Coke.
• Cost Pressures: The Company anticipates plastic bottle container costs to increase at a rate well above inflation in 2003. Non-health related insurance costs are expected to rise approximately 12% in 2003.
• Pension Costs: Pension expense is projected to increase to approximately $9.5 million in 2003 due to equity market weakness and reduced anticipated returns on plan assets.
• Capital Expenditures: Planned additions to property, plant, and equipment for 2003 are estimated between $70 million and $75 million.
• Interest Expense: Estimated interest expense for 2003 is approximately $43 million, a reduction of over $6 million from 2002, aided by forward rate agreements.

Risks and Contingencies

• Concentration Risk: Approximately 91% of sales are products of The Coca-Cola Company, which is the sole supplier of concentrates. The largest customer accounts for 10% of total sales volume.
• Supplier Dependence: The Company obtains all aluminum cans from one domestic supplier and all PET bottles from two cooperatives. Supply disruptions could cause shortages.
• Marketing Funding: The Company relies on marketing funding from The Coca-Cola Company. While support is expected to continue, there is no contractual obligation for future funding levels.
• Legal Proceedings: The Company is a defendant in a patent infringement lawsuit regarding plastic containers filed by North American Container, Inc. Suppliers have assumed the defense, and the Company believes it has meritorious defenses.

Investor Verification Checklist

• Piedmont Consolidation Impact: Verify the extent to which 2002 financial improvements are due to the consolidation of Piedmont versus organic growth, as this affects year-over-year comparability.
• Goodwill Amortization Cessation: Confirm the $21.0 million benefit from SFAS No. 142 adoption to understand the true operating cash flow generation versus reported net income.
• Debt Structure: Review the $41.6 million capital lease capitalized in Q1 2002 and the refinancing of $150 million in senior notes to assess future interest rate exposure and covenant compliance.
• Marketing Funding Dependency: Assess the risk associated with the $64.1 million in marketing funding support received in 2002 and the lack of contractual obligation for future support.
• Raw Material Costs: Monitor the anticipated increase in plastic bottle costs and the Company's ability to pass these costs to consumers through price increases.