COKE

Business Context and Reporting Period

Company: Coca-Cola Bottling Co. Consolidated (Coca-Cola Consolidated, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2007
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 sales typically occurring in the second and third quarters.

Key Financial Metrics

Cash Flow (YTD 2007): Net cash provided by operating activities was $60.8 million. Net cash used in investing activities was $25.2 million, primarily for capital expenditures ($30.6 million). Net cash used in financing activities was $9.0 million, driven by dividends and lease payments.

Material Changes vs. Prior Period

• Revenue: Q3 2007 net sales decreased 0.9% compared to Q3 2006, primarily due to a 29.5% drop in sales to other Coca-Cola bottlers (energy drinks), partially offset by a 2.4% increase in sales price per unit. YTD 2007 sales increased 0.5%.
• Profitability: YTD 2007 Net Income increased 47.6% to $21.6 million, driven by a 12.4% increase in operating income and a lower effective tax rate (37.7% vs. 41.1% in 2006). The tax rate improvement was largely due to an increased manufacturing deduction benefit.
• Costs: Raw material costs (aluminum cans and high fructose corn syrup) increased significantly (approx. 18% and 26% respectively YTD 2007). However, these were partially offset by increased marketing funding from The Coca-Cola Company and reduced manufacturing overhead.
• Expenses: Selling, Delivery, and Administrative (S,D&A) expenses decreased 0.8% YTD 2007, aided by a 15% reduction in property and casualty insurance costs and a gain on the sale of aircraft, partially offset by $2.6 million in restructuring expenses.

Guidance, Outlook, and Risks

• Outlook: Management anticipates overall bottle/can revenue will depend on growth in diet sparkling products, sports drinks, bottled water, tea, and energy products. They expect raw material cost increases to continue impacting cost of sales for the remainder of 2007.
• Capital Expenditures: Anticipated additions to property, plant, and equipment for fiscal 2007 are in the range of $45 million to $52 million.
• Restructuring: Total restructuring expenses are expected to be between $2.6 million and $2.8 million, with all cash expenditures occurring before the end of fiscal 2007.
• Key Risks:
  • Commodity Prices: Significant exposure to aluminum and corn syrup prices without ceiling price protection.
  • Customer Concentration: Wal-Mart (18%) and Food Lion (12%) accounted for a significant portion of bottle/can volume.
  • Supplier Dependence: Approximately 89% of volume consists of The Coca-Cola Company products; the Company relies on a single domestic supplier for aluminum cans.
  • Interest Rates: Approximately 48% of debt and capital lease obligations are subject to floating interest rates.

Investor Verification Checklist

• Raw Material Inflation: Verify the extent to which price increases for aluminum and high fructose corn syrup can be passed through to customers in future quarters.
• Marketing Funding: Confirm the sustainability of marketing funding support from The Coca-Cola Company, which significantly offsets cost of sales.
• Debt Maturity: Note the $100 million debenture maturity in November 2007 and the Company's plan to satisfy this using cash on hand and credit facilities.
• Cooperative Guarantees: Review the $43.0 million guarantee of debt and lease obligations for South Atlantic Canners and Southeastern Container cooperatives.
• Product Mix Shift: Monitor the decline in sugar sparkling beverages versus growth in still beverages and energy products to assess long-term volume trends.