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: September 28, 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.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.9% in Q3 2008 and 1.8% YTD 2008, driven primarily by price increases (5.3% in Q3, 2.6% YTD) to offset rising costs, partially offset by volume declines in sparkling beverages and post-mix.
• Profitability Decline: Operating income dropped 68.2% in Q3 and 36.8% YTD. Net income fell 159% in Q3 (turning to a loss) and 64.5% YTD.
• Margin Compression: Gross margin percentage decreased due to higher raw material costs (aluminum, corn syrup, plastic) and increased sales of lower-margin purchased products.
• Expense Increases: Selling, Delivery, and Administrative (S,D&A) expenses rose 10.7% in Q3 and 4.6% YTD. This was significantly impacted by a $13.8 million charge to exit a multi-employer pension plan and $4.0 million in restructuring costs.
• Interest Expense: Net interest expense decreased 22.5% in Q3 and 18.7% YTD due to lower effective interest rates and reduced borrowing levels.

Guidance, Outlook, and Risks

• Restructuring: The Company initiated a reorganization in July 2008, eliminating approximately 350 positions (5% of workforce). Management anticipates annual savings of $25 million to $30 million.
• Pension Obligations: A $13.8 million charge was recorded to freeze liability to the Central States pension fund. The Company expects pension expense to increase significantly in 2009 and anticipates cash contributions of $5 million to $15 million for 2009.
• Capital Expenditures: Expected to range between $45 million and $55 million for fiscal year 2008.
• Debt Maturities: Significant debt maturities of $119.3 million (May 2009) and $57.4 million (July 2009) are scheduled. The Company plans to refinance using cash flow, its $200 million revolving credit facility, or new issuances.
• Risk Factors:
  • Commodity Prices: Exposure to price volatility in aluminum, corn, resin, and fuel. A 10% increase in commodity prices could increase costs by approximately $25 million annually.
  • Credit Markets: Volatility in capital markets could limit access to credit for refinancing maturing debt.
  • Customer Concentration: Wal-Mart and Food Lion accounted for 19% and 12% of bottle/can volume, respectively, in YTD 2008.

Investor Verification Checklist

• Pension Liability Exit: Verify the long-term cash flow impact of the $13.8 million Central States pension exit charge and the subsequent $1 million annual payments over 20 years.
• Debt Refinancing: Monitor the Company's ability to refinance the $176.7 million in debentures maturing in 2009 amidst volatile credit markets.
• Cost Pass-Through: Assess the sustainability of price increases in the face of declining volumes in core sparkling beverage categories.
• Restructuring Savings: Track the realization of the projected $25-$30 million in annual savings from the workforce reduction.
• Cooperative Guarantees: Review the financial health of South Atlantic Canners and Southeastern Container, for which the Company guarantees $42.1 million in debt.