The Coca-Cola Company: Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended July 3, 2015; comparisons are to periods ended June 27, 2014. Amounts are in millions except per-share data.
Business context
Coca-Cola operates a global beverage business through concentrate and finished-product operations, bottling investments, and independent bottling partners. Management cites unit-case volume as a key measure of consumer-level demand. The quarter included the June 12 close of the Monster strategic transaction and continued North American bottler refranchising.
Financial highlights
| Metric | Q2 2015 | Q2 2014 | First six months 2015 | First six months 2014 |
|---|---|---|---|---|
| Net operating revenues | $12,156 | $12,574 | $22,867 | $23,150 |
| Gross profit | $7,408 | $7,755 | $14,016 | $14,248 |
| Operating income | $2,535 | $3,170 | $4,831 | $5,546 |
| Net income attributable to Coca-Cola shareowners | $3,108 | $2,595 | $4,665 | $4,214 |
| Diluted earnings per share | $0.71 | $0.58 | $1.06 | $0.95 |
| Gross margin | 60.9% | 61.7% | 61.3% | 61.5% |
| Operating margin | 20.9% | 25.2% | 21.1% | 24.0% |
For the six months, operating cash flow was $5,118 versus $4,470; investing cash outflow was $3,756 versus $3,128; and financing cash outflow was $1,130 versus financing cash inflow of $62. Capital expenditures, net of disposals, were $1,081. Cash and cash equivalents were $8,805 at July 3. Current assets were $32,803 and current liabilities $28,852.
Total debt reported as loans and notes payable, current maturities of long-term debt, and long-term debt was approximately $44,314 at July 3, compared with $41,745 at year-end 2014. The company reported $8,090 of available credit lines and described its liquidity position as strong.
Changes versus prior period and unusual items
- Q2 revenue fell about 3%, while six-month revenue fell about 1%. Reported revenue reflected a 7% unfavorable currency impact in both periods; volume and pricing/mix were positive contributors.
- Worldwide unit-case volume rose 2% in Q2 and 1% for the first six months; concentrate sales volume increased 3% and 4%, respectively. Q2 growth included a 1% contribution to North America unit-case volume from Monster.
- Operating income declined about 20% in Q2 and 13% year to date. Operating margin contracted, with foreign exchange, structural changes and charges weighing on results.
- Net income increased despite weaker operating income, chiefly because other income included a $1,402 net gain on the Monster transaction. The gain included proceeds and asset/business exchanges; it is not a measure of recurring operating performance.
- Other significant charges included $320 for early extinguishment of debt, $380 impairment of a glacéau trademark related to the Monster transaction, $100 donated to The Coca-Cola Foundation, and $108 of Venezuelan receivable write-downs and trademark impairment during the first half. Q2 other operating charges totaled $669; first-half charges totaled $902.
Outlook, risks and contingencies
- Management said the near-term business outlook remained strong and expected substantial operating cash flow for the remainder of 2015. It expected foreign exchange to remain a headwind to revenue and operating income through year-end.
- Management expected 2015 capital expenditures of approximately $2.5–$3.0 billion, net treasury-share purchases of $2.0–$2.5 billion, and a full-year effective tax rate of 22.5%, excluding unusual or infrequent items. Acquisitions and divestitures were expected to reduce full-year revenue by 1%.
- The expanded productivity program was expected to generate an incremental $2 billion of annualized productivity and approximately $3.6 billion total annualized productivity by 2019; savings were intended to support marketing, innovation and margin expansion.
- Venezuela remains exposed to currency devaluation, limited dollar convertibility and collection risk. The company reported a combined $84 of Venezuelan net monetary assets, bottler receivables and related intangible assets, including $13 of cash; further devaluation could trigger additional losses or impairments.
- The company identified potential further impairment risk for the affected glacéau trademark if performance or macroeconomic assumptions weaken. It reported $557 of third-party guarantees, but did not consider payment probable. Management stated pending legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- How much of reported earnings growth came from the nonrecurring Monster gain, and what underlying operating and EPS trends remain after unusual items?
- Whether currency headwinds, especially in Latin America and other international markets, continue to offset volume and pricing gains.
- Progress on Monster distribution, North American refranchising, and the planned Coca-Cola Beverages Africa transaction, which was subject to regulatory approval.
- Whether productivity savings deliver the targeted reinvestment and margin benefits, and whether further trademark impairments or Venezuelan losses arise.
- Debt maturities, refinancing costs, cash availability and the implications of substantial foreign cash being treated as indefinitely reinvested.