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 29, 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. The business is seasonal, with higher unit sales typically occurring in the second and third quarters.
Key Financial Metrics
All figures in thousands, except per share data.
| Metric | Q2 2008 | Q2 2007 | YTD 2008 | YTD 2007 |
|---|---|---|---|---|
| Net Sales | $396,003 | $390,443 | $733,677 | $727,999 |
| Gross Margin | $171,880 | $169,290 | $311,798 | $320,781 |
| Gross Margin % | 43.4% | 43.4% | 42.5% | 44.1% |
| Income from Operations | $36,207 | $32,494 | $39,882 | $53,043 |
| Net Income | $15,155 | $11,691 | $10,820 | $16,342 |
| Diluted EPS (Common) | $1.65 | $1.28 | $1.18 | $1.79 |
| Cash & Equivalents | $9,323 | $71,149 (Q2 2007) | $9,323 | $71,149 (Q2 2007) |
| Total Debt & Capital Leases | $700,386 | $772,903 (Q2 2007) | $700,386 | $772,903 (Q2 2007) |
| Operating Cash Flow (YTD) | $15,045 | $29,182 | ||
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 1.4% in Q2 2008 and 0.8% YTD 2008 compared to the prior year. Growth was driven by a 1.1% (Q2) and 1.7% (YTD) increase in bottle/can volume and price increases, partially offset by a significant decline in sales to other Coca-Cola bottlers.
- Profitability: While Q2 2008 net income rose 29.6% to $15.2 million, YTD 2008 net income fell 33.8% to $10.8 million. The YTD decline was primarily due to a 24.8% drop in operating income, driven by rising raw material costs (aluminum, corn syrup, plastic) and a shift to lower-margin purchased products.
- Margin Compression: Gross margin percentage decreased from 44.1% to 42.5% YTD 2008. This was caused by increased raw material costs and higher sales of purchased products with lower margins, despite increased marketing funding support from The Coca-Cola Company.
- Expense Management: Selling, Delivery, and Administrative (S,D&A) expenses decreased 0.8% in Q2 2008 but increased 1.6% YTD 2008. The YTD increase was driven by higher fuel costs ($3.4 million) and employee-related expenses.
- Interest Expense: Net interest expense decreased 19.1% in Q2 and 16.8% YTD due to lower effective interest rates (weighted average 5.8% YTD 2008 vs. 6.6% YTD 2007) and lower borrowing levels.
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Events & Charges:
- Union Dispute: Following a work stoppage in July 2008, the Company reached a tentative agreement. It anticipates recording a charge of $13 million to $15 million in Q3 2008 related to a multi-employer pension fund withdrawal.
- Reorganization: The Company initiated a reorganization in July 2008 to eliminate approximately 350 positions (5% of workforce). It estimates pre-tax charges of $4.0 million to $5.0 million for termination benefits, with expected annual savings of $25 million to $30 million.
- Outlook: Management expects overall bottle/can sales growth to depend on diet sparkling products, sports drinks, and enhanced water. Capital expenditures for 2008 are projected to be between $45 million and $55 million.
- Risks:
- Commodity Prices: Significant exposure to aluminum, corn, resin, and fuel prices. A 10% increase in commodity costs (assuming flat volume) would impact costs by approximately $23 million.
- Interest Rate Risk: Approximately 43% of debt is subject to short-term interest rate fluctuations. A 1% increase in rates would increase interest expense by approximately $2.8 million annually.
- Concentration: Wal-Mart accounts for approximately 20% of bottle/can volume and 14% of total net sales.
- Unusual Items: A nonrecurring pre-tax credit of $2.6 million was recorded in Q2 2008 related to an adjustment in the equity investment in a plastic bottle cooperative (Southeastern Container).
Investor Verification Checklist
- Q3 Charge Impact: Verify the final amount of the $13–15 million pension fund charge and the $4–5 million restructuring charge in the upcoming Q3 filing.
- Raw Material Hedging: Assess the effectiveness of commodity hedging strategies given the volatility in aluminum and corn syrup prices.
- Debt Maturity: Confirm refinancing plans for $119.3 million in debentures maturing in May 2009 and $57.4 million maturing in July 2009.
- Marketing Funding: Monitor the level of marketing funding support from The Coca-Cola Company, as it is not contractually guaranteed and significantly impacts gross margins.
- Cooperative Guarantees: Review the financial health of South Atlantic Canners and Southeastern Container, for which the Company guarantees approximately $43.2 million in debt.